SECURITISATION NEWS AND DEVELOPMENTS

/in /by

[This page lists news and developments in International

securitisation markets – please do visit this page regularly as it

is updated almost on a daily basis.]

IMPORTANT

For all news added before 21 January, 2000, please click here 
For all news added before 9th November, please click here 
For News items added prior 3rd August, 1999, click here.

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

 

Insurance regulators review securitization developments

US insurance regulators recently reviewed the rapid pace of developments in insurance securitization. In their recent quarterly meeting in Chicago, the National Association of Insurance Commissioners reviewed one remarkable development that took place recently: index-based derivatives to hedge property/casualty risks.

 

Nissan Diesel to securitize its truck-making plant

Ailing Japanese truck maker Nissan Diesel Motor Co. will sell the land of its Ageo plant in Saitama Prefecture under sale-and-lease-back-cum-securitization deal, and thereby raise 25.5 billion yen. The deal is part of a business restructuring plan in which four of the company's main banks, including Industrial Bank of Japan are participating.

Nissan Diesel will use a profit of 22.1 billion yen from the sale to help reduce its group's 500 billion yen in interest-bearing liabilities.

The securitization deal will be preceded by a sale and lease-back – the company will transfer the 400,000-sq.-meter Ageo plant plot and an adjacent 32,000-sq.-meter unused land to a trust vehicle set up by Yasuda Trust & Banking Co. for 25.5 billion yen. Yasuda Trust & Banking will issue securities backed by beneficiary rights to the trust through a special-purpose company. The plant will be taken back on lease by Nissan Diesel which will continue to produce trucks at the Ageo plant.

Links A similar structure was recently used by NEC, Japan – click here for the news item.

 

Securitization is a buzzword in Italy

Italian securitization players are trying to use the new securitization law to the hilt. There have been several securitization deals over the past few months, and three deals in past 2 weeks.

The first notable deal is a securitization of a single-obligor sale and leaseback transaction. The obligor, Impregilo, has sold fixed assets to LeasingRoma, which in turn has leased the assets back to the obligor. The lease rentals out of this transaction have been securitized. This unrated Euro 40 million deal has been credit enhanced by a credit line of Euro 7.5 million by Banca di Roma, which is also the lead arranger of the deal. Essentially, the transaction represents securitization of fixed asset acquisition by a single obligor. The leasing company in question is owned by Banca di Roma. This will be the first securitization of a sale and leaseback deal under the 1999 Italian law.

In the second deal, Euro 36 million worth mortgage backed securities have been issued by Cassa di Risparmio di Chieti. The transaction is credit-enhanced by subordinated notes. Moody's have rated the senior notes Aaa.

In the third deal, Euro 110 million worth floating rate notes 110 EURO million, broken into Class A 20 million, and subordinated Class 90 millions have been issued by Cassa di Risparmio di Chieti. The collateral here consists of non-performing loans, which is evident in the massive subordination level. It is interesting to note that the senior class has been rated Aa2 by Moody's.

In our country profile on Italy, we have covered some recent market developments in Italy – click here to access.

HSBC Bank to issue CLO

HSBC Bank Plc claimed in a press release that its maiden CLO issue of USD 850 million scheduled to be launched in April 2000 will use the US-style master trust structure for the first time in UK. he CLO will be sold to professional investors by a special purpose vehicle, Clover Funding No. 1 plc ("Clover"). Clover will issue the CLO in the form of different classes of Floating Rate Notes due 2005 and will seek a listing for the Floating Rate Notes on the London Stock Exchange. HSBC Bank plc anticipates that the CLO will be priced and subsequently closed prior to the end of April 2000, subject to market conditions.

It is expected that the Class A notes, which will represent at least 90 per cent of the CLO, will be rated AAA by Standard & Poor's and Aaa by Moody's. It is intended that the mezzanine classes of notes will have lower ratings and the most junior class of notes will be unrated.

Links: For more on bank CLOs, click here. For more on securitization in UK, click here.

Australian MBS activity heats up with mega deals

A couple of mega MBS deals were announced this week in the Australian MBS market. St George Bank would launch $US364.5 million Crusade mortgage backed securities issue in the Australian domestic market. The issue will be lead managed by Deutsche Bank AG, with St George Bank as the sole Co-Manager. The issues includes a fixed rate bullet payment tranche on 15th October, 2002, and a floating rate tranche with an expected average life of 6.5 years. Both have been rated AAA by Standard & Poor's and Fitch IBCA.

Another mega deal, a global issuance, was launched by the Commonwealth Bank of Australia Ltd (CBA). Issued through the bank's special purpose vehicle, Medallion Trust, the deal includes a Class A1 of USD 955 million to be issued into the US and Euro markets. The Class A1 notes will be registered with the US SEC and listed on the London Stock Exchange. The issue also includes an A2 tranche and a B tranche.

Standard & Poor's has assigned preliminary ratings to the issues of AAA for Class A1 and A2, and AA for Class B.

Links : For a news report on the performance of the Australian securitization market in 1999, click here. For a generic coverage of the Australian securitization market, click here.

Study stresses need to promote property securitization in UK

A study sponsored jointly by the Investment Property Forum, the British Property Federation, the Royal Institution of Chartered Surveyors and the Corporation of London has stressed the need to promote property securitization in the UK, if necessary, by providing tax sops. The paper, titled Property Securitisation in the UK, concludes that "securitisation – trading property assets like tradeable shares – would cut transaction costs and boost trading, thus attracting capital back to property and improving the efficiency of the market and economy as a whole".

The study stresses the capital allocation in the property sector has suffered a setback due to double taxation of income arising on equity contribution. If investments are allowed to come in the form of tax efficient securitization conduits, it would duplicity of taxation, and invite capital markets to invest directly into the property segment.

If securitization were to be compared to direct property investment, then, to the extent that the income accruing to investors in such case might be a bond interest or a capital gain, securitization might be marginally tax-negative for the revenue. However, if securitization were to be compared with investing in the equity of a property company, it is a highly efficient tool as equities are subject to double taxation. [Based on a report in Financial Times, 17th March]

 

Argentinean MBS deal backed by political risk insurance

The largest MBS deal to be originated from Argentina has been backed by political risk cover provided by Zurich US. The USD 156 million bond issue is based on mortgage loans originated by Banco Hipotecario SA (BH). BH is the largest mortgage lender in Argentina and has been the pioneer in the field of mortgage securitization. The transaction, lead managed by Bear Sterns and Co. is supposed to be the largest mortgage securitization deal from the whole of Latin America.

This is also said to be the first instance of use of political risk cover for a mortgage-backed security. Political risk covers have earlier been used for future flows receivables, where political intervention has a direct bearing on the servicing of investors. In the present case, Zurich US has provided risk cover to investors against currency incovertibility and transfer owing to political reasons. The cover has enabled the senior notes to be rated A+, the highest ever rating for a Latin American MBS.

For details, refer to Zurich US Website.

Links: For more on securitization in Argentina, click here. Click here for a news item on setting up of a Fannie-mae-type body in Argentina.

 

Asian Securitization Forum launched

To promote the fast-growing business of securitization in Asia and the Pacific, securitization professionals have constituted a body called the Asian Securitization Forum. The Forum has been set up under a not-for-profit company registered in India.

The basic objective of the Forum is to provide a platform for interaction, sharing of information and propagation of securitization activity. The Forum will also lobby with regulators in different countries in the region to foster a congenial environment for securitization activity.

Headquartered in Mumbai, India, the Forum will have a region-wide presence.

Vinod Kothari, a leading securitization consultant and trainer has taken over as the Executive Director of the Forum. A Governing Body consisting of eminent securitization professionals from all over the region will be constituted soon.

Securitization is growing fast in Asia. The rate of growth in Japan has been spectacular, but in other Asian and Pacific countries, it is still facing a number of impediments. The Forum will use its collective strength to share information, focus opinion to remove environmental problems, standardize procedures, etc.

A full featured website of the Forum has also been launched at
http://www.asian-securitization.com

 

Korean company securitizes lease receivables

Korea French Banking Corp (Sogeko) has recently issued USD 81 million asset-backed securities, based on USD 40 million worth of equipment leases and term loans. Of the issuance, International Finance Corp will purchase USD 20 million worth securities, while the remaining amount will be placed in the capital market in form of floating rate notes.

The transaction is the first cross border securitization of Korean domestic assets. The deal was arranged and managed by Societe Generale Asia Ltd.

The trustee to look after the SPV will be the Seoul branch of Chase Manhattan Corp.

Links: For more on securitization in Korea, click here for our country profile. For another news item on Korean securitization, click here.

French reinsuer in largest European cat bonds issue

Scor, the French reinsurer, which is engaged in providing reinsurance coverage for Japanese and US earthquake and European windstorm risks, has mulled a USD 200 million cat bonds issue, which is believed to be the largest out of Europe so far. The cat bonds will provide the reinsurer with a retrocession cover for next 3 years.

Following the withdrawal of Australian reinsurers who provided retrocession, tapping the capital markets was considered as a good option. The price the reinsurance company pays for the cover is comparable with cover in the reinsurance market. Scor may further extend its use of catastrophe bonds, or invest in offerings by other insurers or reinsurers.

The cat bonds market, a device for putting reinsurance cover in capital markets in form of either cat bonds or cat-E-puts, continues to grow. Around 40 catastrophe bonds have been issued, providing capacity of about Dollars 3.5bn, with the US being the main area of activity. Scor's bonds were placed through Atlas Re, a reinsurer set up in Ireland for the purpose of the issue.

Links Our focused page on insurance securitization provides a large number of links on cat bonds, besides generic description. Click here.

 

FSA being taken over by French company

Financial Security Assurance (FSA), one of the leading credit enhancers in securitization deals, is being taken over by Dexia Group of Paris. FSA is engaged in providing insurance enhancement to bond issues, particularly from emerging markets, and has built a strong presence in securitization transactions.

FSA ranks in bond insurance, next to Ambac Assurance Corp., MBIA Insurance Corp., and Financial Guaranty Insurance Co., a unit of General Electric. The market share of FSA was approximately 23%.

Dexia, the acquirer, a USD 230 billion group, is engaged in asset banking and municipal credit. Dexia will pay USD 2.6 billion for the takeover.

 

Poaching antics continue
Credit Suisse raids Prudential; Prudential runs to Court

To an outsider looking it, it seems like jungle games. Credit Suisse (CSFB), which recently lost a dozen of its securitization team members, has quickly reacted. It has lured 10 persons from Prudential Securities to join it. The team it is poaching is led by Joe Donovan and Greg Richter, who are joining as managing directors and co-heads of the firm's US asset finance business. Donovan was head of asset finance at Prudential and Richter was head of trading and syndicate for all structured products there.

A later report in Financial Times of 16th March, citing Bloomberg, says that Prudential has run to the Court to seek injunction against CSFB and the individuals who left for having violated their job contracts. The suit filed by Prudential in New York State Supreme Court seeks to restrain Joe Donovan from soliciting further members of Prudential team. The application is likely to come for hearing on 24th March.

Your comments: Do you have any comment on the domino game being played by securitization investment bankers? Write your comments here or post them here.

 

Greenspan justifies revised regulatory standards for small banks in securitization

Greenspan recently spoke before a meeting of community banker and justified the revised risk-based capital adequacy requirements for small banks in securitization. Referring to the revised capital adequacy framework suggested by the BIS, Greenspan said he would not apply those complex standards to small community banks as doing so would be impractical and unnecessary. However, the Fed will continue to take a more sophisticated supervisory approach to small institutions engaging in more complex transactions such as securitization and investments in residual interest-only strips, he said.

Greenspan was addressing the Independent Community Bankers of America's convention in San Antonio, on March 8.

Greenspan's remarks become relevant in light of the recent regulatory exercise of re-drafting the norms for banks getting into securitization activities. Click here for the news item relating to the draft guidelines.

Micro loan securitization in South Africa

Mettle, a specialised finance house based in South Africa, has recently implemented a R430 million securitisation of the Unibank Group Limited ("Unibank"). The transaction represents securitization of micro loans originated by Unibank.

Micro loans are small loans extended to businesses which are not able to attain traditional funding due to lack of collateral or presentable financial statements. Thanks to Government promotion, micro finance has picked up significantly in South Africa, both among the banks and specialised finance companies. Unibank has been in micro finance since 1986.

The transaction, the first case of micro loan securitization in SA, will help Unibank achieve liquidity. The transaction is comprised of R. 300 million worth of senior notes rated AA, and the balance in form of a subordinated loan granted by Mettle, the arranger in the present case.

Besides, Unibank will also be creating a cash reserve of approx. R. 13 million. The transaction is to revolve for a certain period in that the SPV will be allowed to buy fresh micro loans instead of amoritising the principal.

Mettle has been in securitization business and has structured several transactions in the past. We have carried news report on Mettle – click here.

Links See our country profile on South Africa – click here.

 

Japan rating agency sees Asian securitization taking off

Japan Rating and Investment Information (R&I) sees securitization taking off in Asia outside of Japan. R&I says: "A securitization market in Asian markets outside Japan is starting to emerge. This year will see a further expansion, as well as diversification and deepening of the market. The background factors are that banks are moving to boost their BIS ratios and improve their asset quality, while companies are seeking to diversify fund sources. Securitization can help banks and companies to strengthen the balance sheet and create a more flexible economic structure and effective financial system. However, the development of a securitization market will require comprehensive reforms of the legal, tax, and accounting systems, and the speed of development may vary according to the country. R&I believes Korea and Hong Kong are in a comparatively strong position, while the rest of the countries may take some time to build up an adequate market infrastructure."

Securitisation will have multifarious impact on Asian capital markets. While it would have positive impact on ratings of corporates, governments and banks, banks will have leaner balance sheets. Securitization may also improve bonds markets which will be critical to reduce dependence on traditional funding sources.

The report prepared by Makoto Ikeya, Chief Analyst, goes into questions of cost-effectiveness of securitization. It admits that structures as well as the produce being new, it involves higher cost and there is a scope for reducing costs over time. "Moreover, finding investors for the subordinated part of securitization issues is difficult in Asia, even in Japan. So far, only a small group of investors such as distress funds in U.S. have made such investment in some cases", thereby requiring the originator to retain the subordinated part, reflecting upon the cost.

Full text of the report is available at www.r-i.co.jp

Links: For a general coverage on securitization markets in Asia, see our Asia page here. Also see specific country page – click here.

Office property securitization getting popular in Japan

In recent months, there have been a number of office property securitizations in Japan. On the news page on this site, we have carried some of these reports – click here for a report on supermarket chain securitization and click here for NEC's multi-billion office property securitisation.

Duff and Phelps (DCR) explains the increased activity in Japanese CMBS thus: "Property owners’ pressing need to refinance, coupled with the stabilizing supply/ demand fundamentals in Japan’s office markets (primarily the prime, Class A market in the metropolitan areas) has created much of the activity in the issuance of commercial mortgage-backed securities (CMBS). On the heels of lenders’ general unwillingness to support this sector after the "bubble" burst in 1991, the CMBS market also provides a much-needed alternative source of financing for the real estate sector."

Many of the Japanese CMBS transactions have been single-tenant properties. In other words, the cashflows from the property depend on the financial strength of the tenant. Quite a number of these transactions have been devised as sale and leasebacks where tenancy has been created on a previously owned building, for example, in the NEC transaction reported before. DCR comments about such transactions as follows: "However, most of these single/majority tenants also tend to be the owners attempting to securitize the buildings to bolster their balance sheets, and would typically (though not necessarily) have a weak financial position. Additionally, the lease structure may not be "bondable", in which case the rating of the tenant is used to determine the normalized vacancy rate and leasing costs (an investment-grade tenant implies a low vacancy rate compared to a higher vacancy rate for a sub-investment-grade tenant)."

DCR comments: Given the need of several non-real estate corporates to restructure their balance sheets (and focus on core businesses) and consequently the motivation to securitize properties, DCR expects several sale/lease-back transactions to be completed in the future (in line with the trend in the past). In addition, CMBS transactions backed by mortgages secured by office properties are also expected to provide an impetus to the further development of the CMBS market. Simultaneously, an increasing domestic investor appetite for such products should also help in the growth of the market.

Links: For more on securitization in Japan, click here. For more on securitization of commercial mortgages, click here.

 

Fitch IBCA and Duff and Phelps to merge

International rating agencies Fitch IBCA (Fitch) and and Duff & Phelps Credit Rating Co. (DCR) announced on 7th March that they have entered into a definitive merger agreement pursuant to which a subsidiary of Fitch IBCA will acquire Duff & Phelps Credit Rating Co. for $100 per share, for a total price of $528 million. Fitch is a subsidiary of FIMALAC, S.A., a diversified French operating company. The acquisition will be completed through a cash tender offer, followed by a cash merger.

The merger will create a rating company with combined annual revenues of $260 million and a staff of 1,100. Both the companies had strong capabilities in rating securitization products, with Fitch's key strengths being in the U.S. securitization markets, while DCR was stronger in international markets. The merger will allow the two to benefit by synergies, besides being stronger in both geographical presence and manpower. The two together will be able to accelerate investment in technology and Internet delivery needed to bring credit research and ratings to global markets.

Marc de Lacharrière, Chairman of Fitch, will become chairman of the new entity and has designated Robin Monro-Davies as CEO and Stephen W. Joynt as President and COO. Paul McCarthy, Chairman and CEO, and Philip Maffei, President, of Duff & Phelps will become directors of the new company. The new company will maintain major operations in London, New York, and Chicago.

 

French textiles unit to securitize stocks of wool

When the French are at it, it has to be something queer, something bold. Proving that the recent securitization of champagne bottles was not the last tango in Paris, French textiles producer Chargeurs SA announced plans to raise some Euro 300 million by securitizing stocks of wool. Reports in La Tribune said the company intended to convert a physical asset into a financial product.

The methodology of converting physical or operating assets into financial products is a new innovation in the world of securitization. Essentially partaking the legal (and accounting) character of a loan transaction, the methodology involves putting the physical stocks into the pledge of an SPV, and the SPV in turn funding itself by issue of securities to investors. The transaction is revolving in character, as the stocks sell and the proceeds are released to buy fresh stocks from the producer. The investors have a far stronger security interest than in a conventional commercial paper since the stocks are in the physical possession of the SPV which holds security interest in the stock.

 

15 years' history of US ABS shows interesting developments

Standard and Poor's (S&P) recently put up an interesting study that tracks the developments and changes in the 15 years' history of asset-backed securitization in the USA. Written by Dr. Joseph Hu, it is interesting to see how the ABS market has matured over time. Here are some of these trends

  • Lower-rated securities have become more acceptable. During the initial phases of ABS, a predominant majority of the securities were rated AAA and it was rare to come across a BBB rated security. For example, between 1985 to 1992, the proportion of BBB rated securities (based on ratings done by S&P) was just 3% while the same proportion during 1998 and 1999 was 16%. BB securities, almost NIL during the early phases, was a good 4% of the total rated securities during 1998 and 1999.
  • Methods of credit enhancement While a letter of credit or a corporate guarantee from the parent originator was the most common form of credit enhancement before, stratified cashflows became popular during the 1990s.
  • Rating resilience. The paper also demonstrates that ABS ratings have been highly resilient. Of the 3,270 long-term transactions rated over the 15-year period, only 173 transactions underwent rating changes. Of course, there were more downgrades than upgrades which is easily understandable because normally the quality of a collateral does to become better than it was originally with all the enhancements. The rating migration or frequency of downgrades was more in the A- and BBB category. In the BBB category, there were several instances of downgrades by two notches or more. This only means that though the chances of first loss increased but it was not intense enough to affect the senior classes.
  • Among the reasons for downgrading, downgrading of the creditenhancer is one of the most significant reasons.

Full text of the report is available on Standard and Poor's website : click http://www.standardandpoors.com/en_AP/web/guest/home

 

Deloitte Touche Tohmatsu rated best securitization accounting firm
Top in North America and Europe, runner up in Asia-Pacific

US-based international accounting firm Deloitte Touche Tohmatsu (DTT) was voted the best securitization accounting firm in North America as well as Europe, and runner up in Asia-Pacific. The recognition was based on votes collected by trade journal International Securitisation Report.

DTT was won these laurels for the second time in succession. Last year, it was adjudged the best firm for Europe and no awards were declared for USA.

Deloitte Touche Tohmatsu is a provider of global securitization services such as: due diligence, cash flow modeling, collateral stratification analysis, accounting and tax advice, surveillance, technology support, and financial statement audits. The group’s practitioners have worked on over 7,000 securitization transactions in over 20 countries. In anticipation of increased securitization activity throughout the world, Deloitte has established a network of seasoned professionals in 41 countries to meet the specific needs and expectations of its clients.

Vinod Kothari comments: Congratulations DTT! This site has to express sincere thanks to DTT, Marty Rosenblatt in particular, for continuing to contribute to this site. Several articles by Marty Rosenblatt and Sunil Gangwani appear on the articles section of this site, which, as I know from visitors' comments, have been very well read.

Related news : Chase was voted by the same trade journal as the best trustee for securitization – see news item below.

Basic instinct: Deutsche raids CSFB' senior team
Revenge, says the market

This was the news of the weak: Deutsche Bank is hiring a dozen members of Credit Suisse First Boston's (CSFB) senior asset-backed securitisation team in New York. Eight of the defectors, led by Jorge Calderon and Philip Weingord, have already resigned and the rest are expected to do so soon.

Financial Times 3rd March reported that this is most likely to be viewed as a revenge for CSFB poaching Deutsche's technology team a couple of years ago. The move is certainly a major blow to CSFB's securitization operations as it currently is Numero Uno in North America with about 14.5% of the markett. Deutsche, on the other hand, was at the 16th place. Deutsche is, however, number one in Europe where CSFB is at number 9.

Deutsche has announced plans to continue hiring.

At the same time, in CSFB, the exodus would probably continue. Some market commentators regarded this as the most significant departure where almost all the aspects of an investment banker's business leave in collusion. Some commentators tried to link the migration to bonus-related problems in CSFB.

Your comments please! As an industry professional, what are your views on this move? What ripples will it make? Is it likely to result into a poaching game when pay packets of securitization professionals will soar to crazy heights? Please post your views at the Discussion Forum.

 

Chase Manhattan voted as the best trustee

The Chase Manhattan Bank's Capital Markets Fiduciary Services division (CMFS) has received practitioners' acclaim as the best securitization trustee. The group has been voted as the `Best Trustee for North America', `Best Trustee for Europe' and `Runner-up Best Trustee for Asia Pacific' for 1999 by the International Securitisation Report.

With offices in 31 major cities across the globe, CMFS is a leading provider of corporate, municipal, and structured debt services to issuers, intermediaries and investors worldwide. The division has served the corporate and municipal markets for over 100 years and today provides traditional securities processing services, including trustee and agency services for corporations, municipalities and other issuers, as well as support services for a wide range of capital markets instruments. Product offerings include an array of services for structured finance products, including collateral agency, compliance testing, and analytics for collateralized bond and loan obligations. The global leader in its field, CMFS provides trust services for more than $3 trillion in principal debt.

 

Argentinean bank promoting 
Fannie-Mae-type Body

Banco Hipotecaro, Argentina's largest bank is proposing to team up with International Financial Corporation (IFC) to create a body for secondary mortgage markets in the country. The body, on the model of Fannie Mae, USA, is to be called Corporacion Financiera Hipotecaria. A real estate developer IRSA will also be joining the venture.

Fannie Mae in USA purchases mortgage loans originated by housing financiers and packages the same in fixed income securities, providing its own credit enhancement. Corporacion Financiera Hipotecaria will be capitalised with $50 million, to be provided 20% by IFC and the balance by the local partners. The company will be able to hold more than $400 million in assets. The company would operate on spreads of about 3% to 4%, by buying mortgages yielding 11% to 12%. IFC participation will ensure that the securities created by the company will have appeal to international investors too.

Links: For more on securitization in Argentina, click here. For text of securitization law in Argentina, click here.

 

Small business loans to be securitized in India

Indian Finance Minister Yashwant Sinha proposes to start securitization of small business loans. This is his proposal as a part of his Budget speech for year 2000-1, presented on 29th Feb.

In a slew of measures aimed at promoting small business finance, Minister Sinha proposed that the Small Industries Development Bank of India (SIDBI) will guarantee loans originated by commercial banks. These loans, upto a limit of Rs. 1 million, will be securitised with the credit enhancement provided by SIDBI.

The measure, if implemented, will be a welcome measure both to promote securitization markets in India as also to provide much-needed funding support to small industries, which constitute a bulk of India's industrial base.

Links: For more news items on securitisation in India, click here and here. Also see the country profile on India – click here. For a detailed article on securitization market in India, click here.

 

Securitization developing fast in Singapore

A recent Bloomberg report says that asset securitization is getting more popular as a means of selling property in Singapore, and is likely to give a boost to the fledgling bond market. Southeast Asia's largest bank, the Development Bank of Singapore has dominated the market here, having arranged about S$1.8 billion ($1.1 billion) worth of asset securitization transactions. The largest issue to be offered in the country is S$878 million ($520 million) worth of corporate bonds for DBS Land's Six Battery Road office building. 

Successful property securitizations are also setting the stage for other assets to be put to better use. For example, Overseas Union Bank, Singapore's fourth largest bank, has marketed S$1 billion ($592 million) worth of asset-backed commercial paper collateralised by longer-term bonds of a maximum maturity of 10 years. The bank said that it is currently exploring all asset classes including bonds, mortgages, property and credit card receivables. [Based on a report by Price Waterhouse Coopers]

Links: For more on securitization in Singapore, click here.

Japan government to securitize land

Japan's Ministry of Finance intends to obtain revenue worth 5 billion to 6 billion yen from national land sales under a securitization scheme. Later, this experience will be repeated to raise an expected amount of 220 billion yen from capital markets.

Reports in JIJI said the government will sell national land tracts to special-purpose companies, which in turn will then sell securities backed by relevant land plots to investors to raise funds for the construction of facilities such as condominiums and office buildings on the land.

Since the passage of the securitization law (SPC law) in Japan in Sept., 1998, a number of SPCs have already been registered. 34 SPCs have registered securities worth 1781 billion yen.

Links For more on securitization in Japan, see our country page – click here.

US bank regulators propose new rules to plug loopholes

The 4 US bank regulatory agencies: Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and Office of Thrift Supervision on 17th Feb. jointly issued a press release with which a draft of new rules to regulate securitization activities of banks were published.

The proposal by the agencies is purportedly intended to produce more consistent capital treatment for credit risks associated with exposures arising from securitization transactions. It would amend the risk-based capital requirements for asset-backed securities as well as recourse obligations and direct credit substitutes.

Public comment is requested by May 26, 2000.

In securitizations, assets such as residential and commercial mortgages, credit-card receivables and automobile loans are pooled and reconstituted into securities. Securitizations typically carve up the credit risks from underlying assets and redistribute them to different parties. Sellers of assets into a securitization may retain part of the risk of credit loss through recourse arrangements. Sellers also may arrange for a third party, such as a banking organization, to accept some of the credit risk through guarantees, referred to as direct credit substitutes.

The proposed revisions would:

  1. Assign a risk-based charge to positions in securitized transactions according to the relative credit risk of those positions, as measured by credit ratings received from nationally recognized rating agencies.
  2. Treat recourse obligations and direct credit substitutes more consistently under risk-based capital rules.
  3. Define "recourse" and revise the definition of "direct credit substitute."
  4. Permit the limited use of an institution's internal risk-rating system and other alternative approaches in determining the risk-based capital requirement for unrated direct credit substitutes associated with asset-backed commercial paper programs and other structured finance programs.
  5. Require banking organizations to hold additional risk-based capital against risks presented by the early amortization feature of revolving asset securitizations.

The agencies had earlier published the draft proposals in November 1997 [ See news report on this site – click here] . The revised guidelines incorporate the suggestions received by the agencies. In fact, the decision to relate the retained interests to the rating of the instrument is also echoed in a June 1999 proposal by the Basel Committee on Banking Supervision, which is to be finalised soon after March this year.

You can read/download the Preamble to the Agencies' statement here [PDF format] and the Regulatory draft here [PDF format] .

Do you have any comments on the Draft regulations? Please post them on the Discussion forum or write to me.

 

Securitization players in South Africa get active and profitable

Securitisation is still small business in South Africa, deterred by lack of understanding among the investors. But players in the business are reporting smart activity and profits in the recent past. Mettle, a specialised finance house, reported securitization volume of Rand 1.2 billion during past 14 months, says a report by South African Press Association.

To get an idea of the type of transactions being securitized, one of the recent transactions was the R430 million securitisation of a section of Unibanks microlending book, which was accorded an AA rating by Duff & Phelps and Fitch IBCA. In another recent deal, worth R140 million, Mettle securitised the debtors book of a South African company operating in Botswana. The securities were picked in part by local Botswana banks.

Mettle is currently negotiating securitisation deals in other developing countries, in Africa and in the Far East.

Links: Do visit our country page on South Africa which gives more details and links.

 

US banks take beating on residuary interests
to avoid regulatory flak

Accounting for retained interests by banks in the US, adopting FAS 125, continues to ensnare

 

Recommendations from BIS, still under consultative state, suggest that if the retained interest is either unrated or rated below B+, it should be completely deducted from the bank's capital. This, however, is regulatory accounting and may not be followed in the general financial statements of the bank.US banks. Recent probes by US bank regulators into the values banks have put to retained residuary interests in securitized loans have scared many, who are now writing off huge amounts on their revenue statements. Recently regulators have been chasing banks to shore up their Tier I capital as the value of retained interests. The concerns have been flared up by several instances of bank failures in the past – see stories on this site linked here.

A report in American Banker 14th Feb says that Charleston-based City Holding Co. wrote off $9.2 million in the fourth quarter against a revision of residual assets' cash-flow expectations.

This is not the only case. Community West Bancshares of Goleta, Calif., recently said it plans to write off $8 million and that it expects to report a 1999 loss of $3.8 million. Life Financial Corp. of Riverside, Calif., said on Feb. 1 that it swallowed a one-time, after-tax loss of $16.8 million in 1999 when it sold the residual assets and mortgage servicing rights remaining from mortgage-backed securities it had issued. BYL Bancorp in Orange, Calif., said it intends to leave the securitization business to escape regulatory pressures and possible new capital requirements

Links: This site has rich resources on accounting for securitization transactions – see articles by Martin Rosenblatt and others – click here. The site has reported several sensational news items on banks' accounting – click on the news item below which would carry you to other interesting links.

Korean company to securitize doubtful claims on Korean companies

Korean company Korea Asset Management Corp. (KAMCO) will securitize doubtful claims on Korean companies. KAMCO wants to become a world-class investment company by building expertise on handling distressed assets.

According to the company, the value of the world's total distressed assets is estimated at $4 trillion, including $500 billion in China, $900 billion in Japan and $1.8 trillion in Latin America and Eastern Europe. Only if 10% of this business could be handled, it would mean USD 4 billion in commission revenue.

For a starter, the company intends to buy claims of foreign banks on Daewoo group and securitize the same. According to a report in The Korea Herald 12 Feb, the foreign banks who have receivables against Daewoo will sell the same to domestic banks, from where Kamco will pick them up. Finally these claims will be securitised to be sold to local and international investors.

Links: For securitization in Korea in general, click here.

Risk securitization transgressing catastrophe

Though insurance securitization market developed to transfer catastrophe risks, it is today finding new applications and is growing beyond the catastrophe segment. Experts echoed this view at Hawksmere Alternative Risk Transfer and Financing Conference in London on Feb. 10. Experts predicted more use of different types of securitizations that provide contingent equity. New applications might include something like risks on extended warranty benefits by businesses.

On the possibility of capital markets completing eroding reinsurance markets, Bryan Joseph, an actuary with Price Waterhouse Coopers, said : "Reinsurance has quite a lot of advantages, and I don't think it will be replaced by capital markets products in its entirety. Securitization is an additive tool and an additive market, but so long as you can place your traditional reinsurance covers for less than you think that you should, people will stay in that market".

Links on insurance securitization See our devoted page – click here. This page gives several links on insurance securitization.

Another risk securitization instrument is weather risk securitization – this page too gives lot of links.

 

US IRS publishes FASIT regulations

The Inland Revenue Service (IRS) published last week draft regulations for Financial Assets (FASITs). FASITs are conduits to enable securitization of financial assets other than real estate receivables. The enabling legal provisions for FASITs were created some 4 years ago. FASITs were a non-starter all these years because the machinery provisions were yet to be created, which is what is being done now.

 

FASITs are investment conduits to invest in non-mortgage securitization transactions, like Real estate investment Trusts (REITs) invest in real estate credits. The purpose of FASIT law is to allow tax exemption to FASITs that satisfy the conditions set out in the IRS law.The proposed rules from IRS also contain an accounting angle – in that they provide for determination of gains on transfer of assets to a FASIT.

FASITs are generally able to hold only cash and cash equivalents, debt instruments (and the right to acquire such instruments), foreclosure property, interest and currency hedges (and rights to acquire such instruments) guarantees, regular interests in other FASITs, and regular interests in REMICs. However, in line with the market practices, the proposed regulations stipulate that a FASIT may hold fixed-rate debt instruments, specified floating-rate debt instruments, inflation-indexed debt instruments and credit card receivables. Additionally, FASITs may hold beneficial interests in, or coupon and principal strips created from, these types of instruments. The proposed regulations appear to exclude as a permissible asset, however, loans with contingent payments that were stripped outside of the pool.

The text of the proposed regulations can be downloaded from http://www.irs.ustreas.gov/prod/tax_regs/txts/irs-regs.htm

Euromoney article sees in frontiers in securitization

"The techniques of securitization, developed for shifting loans off your balance sheet or refinancing consumer lending, are being applied to a growing variety of tasks. The experts are marketing their box of tricks to anyone with a predictable cashflow. ", says an article in Feb. 2000 issue of Euromoney . The article reviews the development of securitization in USA and Europe and sees new innovative applications.

The article compares the US securitization market with that of Europe. The US market has been commoditised over years of practice – the issuer motivations are clear and the behavior of various asset classes is clearly understood by the investors. Mortgages, credit cards, auto loans and corporate loans are the staple diet of the US market. By contract, European market is yet to create a regularity of issuance. Europe is not primitive, but eclectic. " Investment bankers struggling for years with the absence of standard legal frameworks for securitization have developed a wide range of techniques, and without a constant flow of deals in the main categories they have sought out new and surprising places for one-off, customized securitizations", says the author.

While Europe might have originated interesting transactions as the Italian government receivables or the Rugby world-cup telecasting rights, Europeans transactions lack standardisation. Standardisation is necessary to provide investors liquidity: they can walk out of one bond and get into another without having to re-analyze the entire transaction.

The European mortgage finance product, Pfandbriefe is a prominent example of a standard mortgage financing alternative. France provided another alternative – obligations fonciers.

 

Standard and Poor's reviews US ABS market

Rating agency Standard and Poor's (S&P)recently reviewed the 1999 US asset-backed market and projected the developments in year 2000. According to the agency, total public ABS issuance, excluding home equity products, increased by about 18% from 1998 and reached US$133 billion at year end.

Commenting on the innovations in ABS market, S&P says that a new asset class emerged during the year – the auto retailer. In year 2000, the Internet could add to the supply in the ABS market and could become a fixture .

The sector to grow fast in 1999 was auto ABS with good collateral performance and increased demand for auto sales. One of the prominent auto ABS transactions in 1999 was PeopleFirst where the entire collateral was originated online. [We reported this transaction on our site – click here.]

S&P notes the increasing popularity of asset-backed commercial paper (ABCP). ABCP "conduits are being used as corporate finance tools, as investment vehicles that invest in securities for arbitrage purposes, and as a means of balance- sheet management for banks that want to offload their loans in the form of collateralized loan obligations (CLOs)" As of November 1999, ABCP accounted for nearly 40% all commercial paper in the USA.

Credit card ABS was also quite popular in 1999 as investors preferred short term liquid spread products.

In the CLO/CBO sector, the activity was mainly marked by arbitrage transactions. [Arbitrage transactions are those where the issuing banks buys loans and bonds at a higher discount, repackage them and sell them to investors making an arbitrage in the process. Where a bank securitizes its own loans, it is called a balance sheet CBO/ CLO].

According to S&P, there were fewer new asset classes in 1999 with the tobacco settlement securitization being a notable exception. [This was reported on our website – click here. ] Commenting on the new asset classes in 2000, S&P says: " The insurance/settlement niche, including lottery settlements, catastrophe bonds, and structured settlements, also should be very active in 2000. Securitization of mutual fund 12b-1 fees will also pick up speed. In addition, the market should once again see an influx of fresh new asset types."

The complete report is available on Standard and Poor's website – clickhttp://www.standardandpoors.com/en_AP/web/guest/home 

Indian government to securitize cess to fund infrastructure projects

India seems to be taking a lesson from Italy where government revenues were securitized. A report in Business Standard 9 Feb. 2000 says, quoting Planning Commission Dy Chairman K C Pant that the Task Force on Infrastructure has approved a proposal to securitize a cess on petrol and diesel that was imposed last year and the amount so raised will be used to finance infrastructure projects. Pant has been quoted as saying that a bill to empower such securitization has already been cleared by the law ministry and will be taken to cabinet for approval in 10 days.

For more on securitization in India, click here. 

European securitization grew 84% in 1999

International rating agency Moody's reported [Financial Times 8 Feb, 2000] that European ABS volumes in 1999 grew by 84% to USD 83 billion. The outstanding volume of European asset-backed securitization at end-1999 stands at USD 83 billion. With the global outstanding volume around USD 550 billion (this excludes mortgage-backed securitization), Europe accounts for about 15% of global volumes. However, since most securitization volumes are still centered in the USA, Europe accounts for more than half of non-US securitization volume.

The growth of the European market has also been helped by the easing of regulations in Italy, Spain and France. However, Moody's said legal, tax and accounting system differences between countries were still holding back the development of the market.

The past two years saw a number of the more unusual securitisations, including a œ230m bond backed by ticket sales from Tussauds Group, which comprises the world famous Madame Tussauds wax works museum and the Alton Towers theme park. Another interesting transaction was the securitization of champagne bottles [reported on this page –click here ].

More on this site – For a news report on global ABS volumes for 1999 and prospects for 2000, check here. And click here for an overview of the European securitization market. For another news report on the innovative deals expected in Europe shortly, click here.

Turkish leasing company innovates to get above-sovereign rating for onshore assets

We have earlier reported this transaction on this page – click here.  The transaction was in limelight recently as analysts claimed that this transaction could well be a benchmark for emerging market originators to breach the sovereign ceiling even in case of onshore assets.

One would easily imagine emerging market transactions being rated above the country's sovereign rating. But that is in case of offshore assets, where the receivables originate from hard currency countries, and are isolated in the country of origin itself and put beyond the regulatory reach of the originator's country. For example, if a Turkish company had receivables emanating from USA, those receivables would be assigned under New York law and put beyond the powers of the Turkish government, and hence be secure from exchange rate, convertibility and transfer risks. But this is not conceivable in case of onshore receivables, where the receivables originate within the country. Such receivables are appreciably subject to transfer and convertibility risks.

However, the securitization of receivables by Garanti Leasing amounting to USD 43 million uses an innovative device to obtain an above-sovereign rating. The transaction, managed by Rabobank NV, uses Turkish lease receivables which are assigned in favour of IFC Washington to repay a loan of USD 50 million taken by Garanti Leasing. The presumption here is that IFC is internationally recognised as a preferred lender, and Turkish government will not use its sovereign powers on payments due to IFC. Hence, the transaction avoids exchange rate, convertibility and transfer risks.

Hence, DCR has rated the issue BBB against country rating B+, and Moody's has rated the issue Baa2 against country rating of B1.

Links For securitization in Turkey in general, click here.

 

Weather risk securitisation market growing

No method has been found as yet to mitigate weather risks, but what financial jugglers are doing is to split weather into a tradeable commodity, so that the impact of an adversity is distributed to many, rather than affecting a few. The development is taking place in form of securitized weather risk, on the lines of securitization of catastrophe insurance securitization.

The weather derivatives market began in 1997 in the United States, with the European market getting under-way in 1999. The developing market is taking shape through both over-thecounter and exchange-traded vehicles. The bulk of the interest in weather derivatives to date has been from energy utilities, but market participants see the hedging instruments holding potential attractions for other industries as well.

The weather derivatives market, though based on the cat bonds technology, is a completely different concept. In the hands of an electricity company, the weather is a risk, because the potential consumption of electrical energy depends on the weather – if it too hot or too cold, the demand for air-conditioning energy goes up. Thus electricity energies faced tough business managing the risks of an unusually warm winter or cool summer.

Weather derivatives allow the originator to hedge against the risk of weather changes. Adverse weather changes are passed on the derivative holders in form of an interest remission or deferment of servicing. Typically, the weather derivatives are based on "heating degree days" or "cooling degree days"the difference between a day's average daily temperature and 65 degrees Fahrenheit-with the contracts written on the cumulative number of heating or cooling degree days over a set period.

Market participants are expecting other potential users to join weather derivatives market, such as agriculture-based industries, breweries, etc. [Based on Business Insurance Chicago, Jan 31, 2000]

Links: One of the first weather risk securitization issue, Koch Industries, was covered by our news page – click here. For a complete tabulation of catastrophe and weather derivatives issuance, click here. Also see our Insurance risk securitization page for more links and articles on risk securitization – click here.

Spanish bank to launch first ABS issue

Banco Bilbao Vizcaya Argentaria SA is proposing to launch what will be Spain first non-mortgage securitisation. It proposes to come out with Euro 1.250 billion worth bonds that will be secured by long term loans and credits to its corporate clients. The SPV, Fondo de Titulizacion de Activos BBVA-1, will issue five different types of bonds, with a maturity date of Nov 30, 2014. Each bond will have a nominal value of 200 mln eur and an annual interest rate which will vary according to the Euribor.

The Spanish securitization market is currently dominated by mortgage-backed securities.

Links: More on securitization in Spain is on our country profile on Spain where we have recently added data about Spanish securitization issues, as also an article on the Spanish securitization law – click here. Recently we carried a news item about MBS issue by regional banks in Spain – click here.

 

Global ABS issuance to grow 35% in 2000

Come the beginning of calendar year, and rating agencies are at the star-gazing exercise. We have been releasing various news items on expected growth in 2000 ABS issuance in various regions. Here is the forecast for the world as a whole. Moody's released on 7th Feb its expectations for 2000 – asset-backed issues (excluding mortgage-backed issues in USA) to grow by 35% to a record US$182 billion, on the heels of 1999's record $135 billion of new ABS deals growing by 79% over 1998 volume.

Moody's feels that banks will continue to shed assets through securitization as they look for funding alternatives, and for balance sheet and capital relief. However, in emerging markets, growth prospects will be constrained by availability and liquidity of currency swaps as the investors are mostly from outside the emerging markets who have a known preference for dollar, yen or euro denominated investments.

Moody's feels that securitization growth is still hampered by varying legal tax and accounting systems. In Europe, Italy, France and Spain have taken steps to harmonise the environment for securitizations.

 

Mutual funds in India to be allowed to invest in securitized products

Mutual funds in India are currently constrained by their inability to invest in securitisation transactions – for a technical glitch. The flaw in question is the definition of a "security" in securities laws which does not presently cover securitized transactions.

The securities regulator in India, Securities and Exchange Board of India (SEBI) is considering allowing mutual funds to invest in securitised products, according to a news report in Business Line 4 Feb., quoting SEBI official Ashok Kacker. The apex housing finance body, National Housing Bank, has been pressuring SEBI to do so, since a number of housing finance companies are on the verge of a public issuance of securitized products, either directly or through the intermediation of the Bank.

Public issuance of securitized products has not taken off in India as yet – several originators in the past have been talking about such issues and it is quite likely that year 2000 should see the inaugural MBS issue from National Housing Bank.

 

Bond Market Association survey indicates modest growth in securitization

If industry opinion is predictive, ABS market in 2000 should end up with a modest growth, indicating that securitization markets are maturing and are reaching the flat end of the S-curve of growth.

Bond Market Association, one of the most prominent industry associations in the USA, recently released data derived from a survey of the industry participants. While the industry in general expects aggressive overall economic growth during year 2000, it is less bullish on securitisation issues. This is what the survey has to say:

"Asset securitization, which has been cited in recent years' surveys as having the greatest growth potential, is still expected to grow, but not as significantly as predicted in the past. Nineteen percent of respondents expect asset securitization growth to be substantial, while just under two-thirds expect modest growth. This compares to 46% and 58% of respondents predicting substantial growth in the sector in the 1999 and 1998 surveys, respectively. The expectations are not surprising, however, as the pace of asset-backed issuance has moderated over the past few years. "

 

Japanese supermarket chain to securitize stores
First such deal in Japan

Jusco, the Japanese supermarket chain, proposes 5 of its planned stores to be securitised and thereby raise Yen 30 billion. The stores are yet to be built – in other words, securitisation will be used as a device for funding the construction of these stores.

The issue is expected to be managed by Dai-Ichi Kangyo Bank, Toyo Trust and Banking Co., Chuo Trust and Banking Co. and the governmental Development Bank of Japan. The issue wil be sold mainly to institutional investors. Jusco expects that the securitization will help it to diversify its fund-raising methods away from banks and thereby reduce interest-bearing debts on its balance sheet.

This will be the first transaction of its type for Japan where securitization of commercial properties, particularly those in construction phase, is yet to take off. But the market expects the transaction to easily lure other supermarket chains.

Links For securitisation in Japan in general, click here. For securitization of commercial mortgages, click here.

 

US bank regulators begin hearings on bank failures

US House Banking Committee Chairman Jim Leach would start hearing on Feb. 8 in the matter of recent bank failures. Securitization is cited as one of the three main factors responsible for successive failures of banks in the USA recently. The other two factors are subprime lending and frauds.

Those testifying are: Donna A. Tanoue, chairman of the Federal Deposit Insurance Corp.; John D. Hawke Jr., comptroller of the currency; Ellen Seidman, director of the Office of Thrift Supervision; and Laurence H. Meyer, Federal Reserve Board governor.

Related stories and materials on this site: First National Bank of Keystone was a prominent case of bank failure apparently triggered by accounting lapses on securitization transactions – reported here with details and related links. There were other cases too – we on this site have carried news and expressed concerns over these cases – click here for an article expressing concern on bank health being depleted by securitization, here US bank regulators cautioning originators on securitization activities. Full text of the Agencies' guidelines was placed on our site – click here to read (pdf file). The story of accounting losses due to securitisation in a Californian bank was carried here. Here is a story of another bank failure apparently caused by securitization.

For securitization of bank loans in general, click here.

 

Fitch IBCA releases 1999 overview of Australian securitization

Year 1999 witnessed a significant growth in Australian securitization, particularly due to the trend towards global issuance, inspite of a fall in volumes towards the end of the year, says rating agency Fitch IBCA in a yearly overview of Australian market. The year saw for first time issues denominated in Euros to rope in European investors. Fitch IBCA expects these trends to continue through 2000.

Noting the remarkable trends in 1999, the agency said a record number of 7 issues went offshore during the year. The year also saw first CMBS transaction with a single borrower.

On the expectations for year 2000, the agency expects the year to see more issuers going offshore to take advantage of European and US investor base. In the RMBS market, more non-conforming mortgages, with 100% loan-to-value ratios are likely to be securitised. The market should see strong growth in the CMBS segment with single borrowers. On the emerging asset classes, the agency "expects that other asset classes could also be securitised, ranging from credit card receivables, to stadium seat licensing fees, to infrastructure projects, such as toll road receipts or power generation. These transactions will appear as market conditions and investor appetite make them economically viable for securitisation."

Links: The report titled Australian Securitisation 1999 Year-end Summary is available on the Fitch IBCA website fitchibca.com -look for Info Centre – Latest Research. We recently covered a similar report on Australia by Moody's – click here. For a country profile of Securitisation activity in Australia , click here.

 

UK university securitises student rent receivables

Keele University of UK set a new path for funding by educational institutions when it raised Euro 69.4 million in bonds backed by rent receivable from students. Financial Times UK commented on this transaction in the following words: "Keele University yesterday [31st Jan, 2000] launched the first bond in Britain backed by rental income from its student accommodation. The bond … could transform the way universities fund themselves". [We have commented earlier about this transaction and other innovative applications of securitisation in Europe – click here] .

The transaction allows the University both cheaper and longer-term funds. The bonds, to mature in 30 years total maturity, were priced at 170 basis points over government securities of the same tenure. The bonds are guaranteed by Financial Securities Assurance, a monoline insurance company active in securitisation transactions.

Last year, a UK hospital raised Euro 92 million by securitisation.

Links : For more about the overall securitisation market in UK, click here.

 

Spanish banks join for MBS issue

Four Spanish regional savings banks recently launched the year’s first securitisation of prime European mortgages, with a Eu660.6m deal lead managed by Crédit Agricole Indosuez, Dresdner Kleinwort Benson and EBN Banco. Caja de Ahorros del Mediterráneo contributed 37.8% of the collateral to TDA 11; Caixa Tarragona 22.8%; Caixa Terrassa 21.5% and Caixa Manresa 18%.

The issue was broken into 3 tranches with the senior most getting Aaa rating from Moody's. The issue received very good response from mutual funds and other institutional investors from Europe.

Links: For general coverage on Spanish securitisation market, click here.

 

US MBS issuance data for 1999

The data for MBS issuance in the USA for 1999 was recently released. Classified into RMBS (agency and non-agency), CMBS and home equity loans, the data gives listing of the top 10 managers of MBS issues in the largest MBS market in the World.

 

Residential Agency Mortgage-Backed Securities

Rank

Manager

Proceeds $MM)

1

Salomon Smith Barney

$25,165

2

Lehman Brothers

25,073

3

Merrill Lynch

22,550

4

Bear Stearns

19,874

5

Credit Suisse First Boston

19,213

6

PaineWebber

18,616

7

Goldman Sachs

16,979

8

Greenwich NatWest

12,101

9

Nomura Securities

4,757

10 

Banc of America Securities

3,282 

Residential Non-Agency Mortgage-Backed Securities

113,135

 

 

 

2 

Lehman Brothers

11,430

 

3 

PaineWebber

8,294

 

4 

Merrill Lynch

6,799

 

5

Salomon Smith Barney

6,736

 

6 

Bear Stearns

6,620

 

7 

Credit Suisse First Boston

6,292

 

8 

Greenwich NatWest

5,988

 

9 

Banc of America Securities

4,903

 

10 

Morgan Stanley Dean Witter

1,455

  

Commercial Mortgage-Backed Securities
1
 
Morgan Stanley Dean Witter 
$10,591
 
2
 
Lehman Brothers              
9,307
 
3
 
Goldman Sachs                
8,983
 
4
 
Donaldson, Lufkin & Jenrette 
5,683
 
5
 
Banc of America Securities   
4,228
 
6
 
Merrill Lynch                
3,693
 
7
 
Deutsche Bank Securities     
3,373
 
8
 
First Union Capital Markets  
2,896
 
9
 
Prudential Securities        
2,808
 
10
 
Bear Stearns                 
2,759
 
Home Equity Loan Backed Securities
1
 
Lehman Brothers        
12,972
 
2
 
Merrill Lynch           
8,386
 
3
 
Prudential Securities   
7,673
 
4
 
Bear Stearns            
7,482
 
5
 
Salomon Smith Barney    
7,205
 
6
 
Banc of America Securities
 
6,441
 
7
 
Greenwich NatWest       
5,973
 
8
 
Credit Suisse First Boston
 
4,872
 
9
 
Morgan Stanley Dean Witter
 
3,510
 
10
 
PaineWebber             
2,868

Agency and Non-agency: Full credit to book manager; public issues; Source: Securities Data Co. 
CMBS: Full credit to book manager; public and private issues; Source: Commercial Mortgage Alert. 
HEL: Full credit to book manager; public and private issues; Source: Securities Data Co.

Links: For coverage on the US securitization market, see country profile on USA – click here. For coverage on RMBS in general, click here. For coverage on CMBS in general, click here.

 

Italian merchant bank ties up with US company for ABS structuring

Cofiri, the Italian state-controlled merchant bank, has signed a collaboration agreement with Bank One, the fifth largest bank in the US and one of the leading international players in asset backed securities, with around 2,000 outlets in 14 Midwest and Southwest states and numerous subsidiaries in 11 other countries.

The two will collaborate in the structuring of securitisation operations. Italian industrial and credit concerns and their European subsidiaries will benefit from the financial know-how and sophisticated security instruments.

Links: See our country profile for Italy – click here. The Italian securitization law is placed on our Laws section – click here. A very comprehensive article, in Italian, on the Italian law by Lucia Mazzocco is also on site – click here.

If you have any contribution to make about Italian securitization market, please do write to me.

Moody's expects Asian ABS volume to reach USD 2 billion

Asia's cross-border securitization issuance volume may reach US$2 billion in 2000, predicts Moody's Investors Service in its annual market outlook for the area. The volume in 1999 was USD 1.73 billion.

Moody's expects commercial mortgage-backed deals and CDOs to make up the bulk of the issuance, with many deals originating in Hong Kong, Korea, and to a lesser extent Singapore, and is on the lookout for the development of domestic ABS markets over the next 12 months.

The growth rate in 1999 was dramatic: from USD 750 million in 1998.

It is notable that the above data only includes international offerings and not domestic issuance.

Among the countries that have substantial potential for securitization, Moody's finds China as remarkable, because of its size and diverse types of asset classes.

Securitization enters the Internet era with first ABS issue sold online

Morgan Stanley heralded securitization markets into the e-commerce age with the first ABS issue being marketed online — a $526.316m credit card deal for its subsidiary Discover Financial Services. This was offered during 18th -20th January.

Incidentally, this coincides with a major e-commerce initiative by the World Bank where the Bank has offered USD 3 billion bonds on the Net. In fact, even the Fannie Mae is now offering its products online.

The Morgan Stanley Dean Witter offer was placed on the ClientLink section on its website where investors were able to lodge expressions of interest, and orders were firmed up on the same site after the deals were priced.

Analyst concerned about securitization depleting bank balance sheets

A recent article in   ABA Banking Journal [December 1999] published by the United States of America expresses concerns about the massive extent of "regulatory arbitrage" inherent in securitization transactions. Regulatory arbitrage refers to a bank trying to parcel out high grade assets, currently requiring 8% risk capital, and acquiring a small fraction of junior participation in the securitized debt, which, being much lesser than 8%, would give the bank a release of regulatory capital.

Author of this article Ed Blount, contributing editor, and Executive Director, The ASTEC Consulting Group, Inc., New York, N. Y, says that : "Securitization has become a crucial source of funding to the entire banking industry. By March 1998, Federal Reserve staffers working with the BIS committee reported that the ten largest U.S. bank holding companies had $200 billion outstanding in nonmortgage, securitized bonds-a value equal to 25% of their risk-weighted loans. A committee working paper pointed out, with unusual drama, that, "The securitization activities of these companies loom large in relation to their balance sheet exposures." Nor is the magnitude of securitization confined to U.S. banks. European regulators reported that over $40 billion in new securitized issues had been floated in 1997 by banks and nonbanks, up fivefold in Just two years.

"No one knows the total capital reduction in banks with securitized balance sheets, but BIS analysts have used succinct examples to dramatize their call for reforms. In one-example, an 8% capital charge for a bank's threemonth loans to a prime corporate account in its banking book is shown as cut to 0.25% when the same bank buys the same company's 90-day commercial paper to hold in its trading book. Quite apart from the implied threat of declining bank solvency, a release of capital on anything approaching this magnitude must have already had a profound impact on the economy through increased bank activity, since most securitizations are assumed to have resulted from regulatory arbitrage."

The article will be continued in the forthcoming issue of the Journal, and on this website, we will endeavour to bring you abstract of the next part as well.

More such reading materials : The Bank for International Settlements has produced an article that alleges regulatory capital arbitrage in securitisation transactions – click here to go to the article. We have also carried earlier on this site reference to an article in The Economistwhich made expressed similar concerns – click here to visit this item.

The class of 1999: mutual fund fee securitization

A new asset class with a substantial potential emerged in the asset-backed securitization market in 1999: securitization of fees for managing mutual funds.   Several issues of this class were noted in 1999: including the $91 million deal issued by Putnam, Lovell, deGuardiola & Thornton in July, a $200 million deal from Constellation Financial Management, via Bear, Stearns & Co. Further, BISYS Fund Service Inc. recently announced plans to embark on a series of deals in first-quarter 2000.

The typicality of these offering is that it is not the mutual fund itself which is the originator: banks buy the fees from the fund, and they in turn securitize the fees in the market. There are even potentials of a one originator buying fees from several mutual funds, pooling them together and securitizing the same.

 

Colombian coffee growers resort to securitization as sovereign ratings remain speculative

Use of securitization to pierce sovereign ratings is common in emerging market countries, particularly those with a poor country rating. As the sovereign rating of Colombia continues to be below investment grade, its coffee-exporters have to look at securitization as the means for cheaper international funding.

Federacin Nacional de Cafeteros de Colombia (Fedecafe) recently securitized its future coffee export proceeds and obtained an A- rating and priced its debt at least 200 basis points cheaper than the country's sovereign debt.

There are numerous such instances in Latin America – Mexico's Pemex, Venezuela's PDVSA and Colombia's Ecopetrol have all resorted to future flows securitization.

Fedecafe is a private, non-profit Colombian consortium that, in its capacity as national representative of the Colombian coffee growers, manages the Coffee Fund, a $1.3 billion parafiscal account that is comprised of public funds. The primary objective of the Coffee Fund is to stabilize coffee revenues in Colombia by reducing the effects of international coffee price fluctuations.

Links For more on securitization markets in Colombia, see our country profile – click here. For other Latin American countries, click the respective country pages. For general coverage on the Latin American market, click on the this page.

SECURITISATION NEWS AND DEVELOPMENTS

/in /by

[This page lists news and developments in

International securitisation markets –

please do visit this page regularly as it is

updated almost on a daily basis.]

IMPORTANT

For all news added before 25th March, please click here   
For all news added before 21 January, 2000, please click here   
For all news added before 9th November, please click here   
For News items added prior 3rd August, 1999, click here.

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

Pennsylvania electric company securitizes stranded costs

PECO Energy Company has put up USD1 billion in asset-backed transition bonds, its second securitized financing of debt in the last 14 months. Salomon Smith Barney is the lead underwriter. The AAA-rated Series transition bonds are all non-callable, fixed rate securities. The bonds are split into four classes with expected maturities ranging from 1.1 years to 9.3 years. The weighted average interest rate of the transition bonds is approximately 7.54 percent.

Prior to the present issue, PECO Energy securitized $4 billion of its recoverable stranded costs in March 1999, the largest securitization deal in the USA.

Stranded costs represent the costs incurred by electric utilities in course of their transition into competitive pricing. The issuance of transition bonds is allowed on case to case basis by electricity regulators.

Links For more on securitization by public utilities, click here.

Grab your future wealth today, via securitization of intellectual capital

A new book by Stan Davis and Christopher Meyer discusses the enticing new opportunity for musicians and magicians, preachers and performers, authors and artists: securitize your skill and get today what you can only hope to earn in future.

Titled Future Wealth (Harvard Business School Press, 201 pp., $39.95) the book is built around the famous case of securitization by David Bowie (click here for our intellectual property securitization for details). The authors, both of Ernst and Young Centre for Business Innovation in Cambridge, say that the Bowie bond deal may have more replicates in time to come. In an age where talent has become the rarest and most valuable commodity, it won't be long before high fliers from many other walks of life follow Bowie's lead by putting ownership of their abilities up for grabs.

The way intellectual property is being traded on the markets is also influenced by the most important technological event of our time: the internet. The authors assert that the rise of the Internet economy is completely rewriting all the rules governing wealth creation, and this, in turn, will dramatically change the way financial markets function in the future.

Latin America slowly cultivating securitization, says S&P

A recent write-up by Standard and Poor's [Structured Finance April 2000] reviews the growth of securitization in Latin America.

The report notes the two significant features of Latin American securitization: reliance on third party credit enhancements and development of local markets. Several Latin American issuances in the past have resorted to political risk insurance – for a news item on OPIC's political risk insurance for securitization from emerging markets, click here. These enhancements aim at reducing the sovereign risk associated with these countries. "Nevertheless, there are still hurdles to be overcome. Many major markets lack adequate information about loan perfor-mance and property values, and lenders have shown a reluctance to provide relevant information about borrowers", says the Report.

Reviewing some significant Latin American markets, the report notes that Argentina remains one of the active securitization markets, particularly for RMBS transactions. Argentinean market has a vast potential for securitization: the 10 largest private financial institutions still retain approximately US$9.037 billion in potentially securitizable assets. "However, there are challenges. Banks may be unwilling to share information about their customers with other banks. Also, because the concept of an independent trustee in Argentina is still developing, it can be difficult to find impartial third parties to represent investors," says S&P's report.

Talking about Mexico, the Mexican government housing agency, Financiamiento Bancario de la Vivienda (FOVI), received a loan from World Bank to promote RMBS securitization. FOVI has accordingly designed an inflation-adjusted mortgage securitization instrument. However, Mexican legal system still lacks the required flexibility for securitized transactions.

The report notes that in Brazil, enough securitizations are not done because the volumes are still not large enough. However, the country has allowed faster mortgage foreclosures in a bid to attract securitization investors.

Links: For a general discussion on securitization markets in Latin America, click here. Also see individual country profiles – click here.

European securitization: innovation and growth mark Q1, 2000

A report by Standard and Poor's recently reviewed European Securitization market. The securitization market is becoming the hottest debt market in Europe with increasing investor appetite.

In terms of volume, the report says the volume slid from the Q1 figure of the previous year: it is USD 14.5 billion this year, but the slide is nullified by two important factors: more deals, and more ecelectic deals. A total of 29 transactions were completed in Q1 of 2000, says Standard and Poor's.

Among one of the very innovative transactions this year was the champagne bottles securitization from France – click here for the news item on this site. Subsequently, the same technology was also used for securitization of stock of wool in France – click here. Both these transactions have used physical assets as a collateral for securities as against the traditional asset classes where receivables or financial assets back the securities.

Standard and Poor's also emphasizes the growth in standard pedestrian asset classes, as these provide the growth engine for securitization in any region. Among the traditional classes, credit card securitization issuance is still much slow in Europe as compared to the USA, but Q1 of 2000 saw Europe's largest deals so far: Royal Bank of Scotland's bumper USD1.6 billion issue sale.

RMBS transactions continue to be the mainstay of European securitization. The quarter registered USD 3.4 billion RMBS issues, with regular names such as Northern Rock PLC. However, notable activity was seen in the CMBS segment, where the first Pan-European issue by Europa One PLC, a ground-breaking US$1.345 billion securitization of assets from five European countries made its mark. Standard and Poor's expects good demand for Pan-European issues.

The report also notes activity in aircraft receivables, ABCP, and high yield CBOs.

[Note: this report is intermixed with my comments – VK]

Links: For more on securitization in Europe, see our review of Europe – click here. Also see individual country pages – click here.

China enters MBS age

Permits China Construction Bank to issue MBS

Financial Times of 25th April reported that the Peoples Bank of China has for the first time permitted issuance of mortgage-backed securities in the country. People's Bank of China, the central bank, had given permission to the China Construction Bank (CCB), one of the "big four" state banks, to start offering mortgage-backed debts.

From a financial policy perspective, permission for mortgage-backed securities opens the door to the idea of recapitalising China's badly impaired bank assets by issuing various types of securities. Non-performing loans in China's state banks account for around 25 per cent of the total.

Besides, mortgage-securitization as a means of promoting housing finance has long been needed in China. Hong Kong is well recognized as the hub of securitization activity. On the other hand, China is yet to initiate the instrument, though the country faces an acute shortgage of housing.

Earlier on of our pages on this site on this site, we have reported the intended securitization in China, which means the deal has been hanging for a very long time.

Links: For more on securitization in China, see our country page – click here.

 

 Banca di Roma in Italy's biggest securitization of non-performing loans

Banca di Roma of Italy recently launched a massive securitization transaction which includes the largest parceling out of non-performing loans in Italy so far. The Euro 1.7 billion transaction was reported in Il Sole 24 Ore on 14th April.

The four tranches offer partly consists of non-performing loans held by Banca di Roma and its subsidiary Mediocredito di Roma. Of the 4 tranches, class A and class B valued at Euro 850 million, which have been placed on the market. Classes C and D have been retained by the originator

This securitisation deal, named "Trevi 2", is Italy's biggest on-performing loan transfer. Lead manager for A and B tranches are ABN Amro and BNP-Paribas with Banca di Roma as Senior Co-Lead Manager. Classes A and B have been placed with a wide range of European investors. Class C, presently retained by the bank, will be listed at Luxembourg. Class D notes, also retained, will be collateralised by high-grade bonds.

Class A of Euro 650 million, with expected average Life: 3.5 years carries Euribor 6 months + 110 bps, and may be rated AA. Class A is also supported by liquidity line provided by ABN Amro.

Class B of Euro 200 million has expected average Life: 5.4 years and carries Euribor 6 months + 210 bps. This may be rated A-.

Thanks to Mr. Paolo Binarelli of Crops 'n Commodities for contributing this news as also number of other news items relating to Italy. Paolo has been a great help and would be eager to discuss Italian securitization with those interested – his e-mail id is cnc_uniroma1@yahoo.it

Securitization accounting: more accounts go more wrong

Even while the Financial Accounting Standards Board is re-writing the accounting standard for securitizations, there are more instances of imaginary assets on securitization being written down or written off.

American Banker of 18th April reports that Community West Bancshares of Goleta, California, was forced by bank regulators to revise its accounts for 1998 and 1999 to correct the values recorded for retained assets on securitised loans. The 1998 accounts of the bank initially showed a profit of USD 2.9 million, which was revised down to USD 0.45 million, that is, down 85%, after correct values of assets arising out of securitization were recorded.

Then again, in 1999, the bank showed a loss of USD 1.65 million for the same reason.

While reporting impairment of securitization assets is becoming more frequent, however, form 10-K filed by Conseco Finance recently beats the record. Here are some excerpts from the statement:



"During 1999 and early 2000 the Company reevaluated its interest-only securities and servicing rights, including the underlying assumptions, in light of loss experience exceeding previous expectations. The principal change in the revised assumptions resulting from this process was an increase in expected future credit losses …. We recognized a $554.3 million impairment charge ($349.2 million after tax) in 1999 to reduce the book value of the interest-only securities and servicing rights.

During the second quarter of 1998, prepayments on securitized loan contracts continued to exceed expectations and management concluded that such prepayments were likely to continue to be higher than expected in future periods as well. As a result of these developments, we concluded that the value of the interest-only securities and servicing rights had been impaired, and we determined a new value using current assumptions. …

In 1997, we conducted a review of the systems, financial modeling and assumptions used in the valuation of our interest-only securities. …We recognized a $190.0 million impairment charge in 1997 …."

Links:

  • Martin Rosenblatt's articles on gain-on-sale accounting are very thoughtful – click here to go to our articles page. Look for articles under Accounting issues.
  • Here is another interesting article on New Century Financial website – click here.

Poaching continues in European markets

Some time back, US securitization markets were rocked by concerted exodus of securitization teams from one player to the other. Now, it is Europe. On 14th April, Merrill Lynch & Co. reported having hired seven members of Deustche Bank AG's structured finance team in London. Michael Donahue will join as managing director, while David Mandel, Michael Jinn, Justin Fox, Rolf Steffens and Teimuraz Barbakadze will join as directors. Andrew Jarmolkiewicz will become a vice president.

Even as this news was still hot, on 17th April, Financial Timesreported that Credit Suisse First Boston, the investment bank, has poached a team of at least 10 from BNP Paribas to boost its European securitisation business. The top-rated team includes Maarten Stegwee and Adrian Carr in London.

Earlier news reported on this site – click here and here.

Do you have any views on this matter – write to me and we will be happy publishing your views.

Japanese government to sell land by securitization

Earlier on this site, we have reported the move by the Japanese govt. to securitize idle land owned by it – click here. The govt. has now identified land for this purpose. Reports in Asia Pulse of 18th April said the Govt. has selected 14 earmarked properties for sale to investors. This will mark the first time state-owned land will be securitized.

The properties, which include a former housing site for civil servants in Tokyo, will bring in an estimated total of about 10 billion yen (USD 95.87 million) through the deals.

The government plans to open competitive bidding to the public in late May.

Italian bankers contemplate securitization exchange

One of our list members from Italy (see below) has provided us this news feed. The Italian Bankers’ Association (ABI) is working on a very interesting project. Its goal is to create an organized financial market for securitisable assets in which asset owners can sell their assets, and buyers, as financial institutions, can buy either directly or as structured products. ABI believes that with the rapid popularity of securitization in Italy, such a forum will have tremendous scope. A listed and organized financial market for such assets will bring more standardization to the assets themselves and more guarantees for investors. Organized market also implies rated and healthier securities in the marketplace.

It is notable that Italian banks have been particularly vehement in sacking off their non-performing loans – see our country profile on Italyfor more details and news items.

ABI, however, is of the strong view that bankers should look at securitization not merely as a cleaning tool but as a funding instrument.

In the meantime, at a conference organised by Business International in Rome on 31st March, Moody’s forecast a great 2000 for Italian securitisation market: up to Euro12 billion, up and almost doubling from euro 6.5 billion in 1999.

[We are grateful to Mr. Paolo Binarelli of Crops 'n Commodities for feeding us with this news. We appreciate his continued support to disseminating important developments taking place in Italy.]

 Predatory loan practices may put securitization trustees to problems

A recent piece in American Banker 12th April says that consumer lawyers and other interest groups can put securitization trustees and investors into problems on account of predatory loan practices of the originators. "A spate of threats over the indirect financing of so-called predatory mortgage loans is the latest volley in a two-decade-long legal war that has put the financial community increasingly on the defensive. By brandishing Truth-in-Lending, fair-housing and anti-racketeering laws as hammers against large financial companies that buy, securitize, or help finance abusive loans, trial lawyers are applying a strategy many experts trace back to a 1980 law that made banks potentially liable for clients' environmental cleanup costs."

Predatory loan practices include unfair or illegal lending activities such as excessive origination fees, prepayment penalties, loan packing, that is, pricing of independent add-on services with a loan, loan flipping, that is, rescheduling of a loan such that it increases the profits of the lender, etc.

Evidently, predatory lending practices, more common in sub-prime lending and home-equity segments, might create legal problems for even the assignee of the loans, that is, the SPV and the trustee for the SPV. By implication, even the investors who buy such loans might be implicated. Under the US Home Owner Equity Protection Act, the assignee or buyer of a mortgage is also liable for the originators' offences. Based on these provisions, on Feb. 16, 2000, a plaintiff won a decision in a Pennsylvania bankruptcy court against the trustee for the securitization and the holder of a loan after the originator went out of business. The plaintiff, sought to rescind the loan, which was originated by Money-Line Mortgage and assigned to CityScape Corp. CityScape had filed for Chapter 11.

There have been more such cases, and a few of them successful. In December 1999 a group of investors in California sued Bank One Corp. and SunTrust Banks Inc. over their role as trustees for securities issued by First Lenders Indemnity Corp. The investors were claiming the banks should be held responsible for losses on what they said was a Ponzi scheme orchestrated by a man who had been convicted of bank fraud.

In another case, Bankers Trust Corp., which has since been bought by Deutsche Bank AG, has been named as a defendant in a class action against Delta Financial Corp. for its role as an underwriter for the subprime lender.

Do you have any comments or experience in the matter? Do write back – we will be happy to publish your comments here.

Insurance securitization optimistic on use of protected cell companies

Insurance securitization community is optimistic that protected cell companies, a new concept that avoids setting up of an SPV for securitization of insurance risk, will make things easier, faster and cheaper.

 

Links: Click here for an article by John E Langlois on protected cell companiesThe current approach in securitizations is to set up special purpose vehicles in tax haven jurisdictions that provide reinsurance cover to the insurance company and in turn transform the insurance risk into a capital market product.

On the other hand, if protected cell companies are used, there will be no need to set up SPVs for each transaction, as one cell company can have several cells in it and each cell can do a securitization transaction. The basic idea is not to proliferate legal entities.

Protected cell companies, it may be noted, can be used in asset securitization applications

Guernsey has already enacted a protected cell legislation. Some of the US states such as Illinois, Rhode Island and South Carolina have also passed protected cell laws. In fact, the National Association of Insurance Commissioners has also passed a model protected cell companies law. The concept has not been put to use as such but insurance market practitioners expect it would be lapped up by securitisers in due course.

 Greece drafting securitization laws

A report appearing in Asset-backed Alert recently says that the Greek government is working with three investment banks to draft a securitization measure that could become law by late summer. Obviously enough the Greek Govt. has drawn a cue from Italy.

Earlier this month, a Greek government agency called IKA hired National Bank of Greece, Paribas and Salomon Smith Barney to help draft legislation allowing for securitization of USD 1.9 billion of overdue social security payments. If the measures pass, the social security deal could hit the European market late this year or early in 2001.

The Finance Ministry is already planning to follow up the IKA transaction with a 1 billion-euro securitization of the country's future lottery receivables. Some of the proceeds of the lottery deal would be used to pay costs associated with Athens hosting the 2004 summer Olympics. A number of other departments of the Greek government are rumored to be interested in securitizing state-guaranteed mortgages and other receivables.

To date, securitization has been a non-starter in Greece. In 1997, Bear Stearns attempted to craft a series of mortgage-backed issues for National Mortgage Bank of Greece, but legal obstacles thwarted that effort.

Links: For more on securitization in Greece, click here.  

Index-based risk securitization marks new trend in insurance risk transfer

Cat bonds or other securitized risk products, which seek to transfer an event risk to capital market investors have been around for some time (see our detailed risk securitization page) but insurance markets are coming under increasing influence of capital market devices. Quite close to index-based derivatives in capital markets, recently, a new device of risk transfer was tried by American Re – risk transfer based on an index of insurance industry losses.

In a usual cat bonds issuance, the insurance company transfers risk to losses to be suffered by it on a specified trigger event. However, index-based risk transfer device works on a different basis – here, the risk transfer is based on an index of losses suffered by the insurance industry, not by a specific insurer. The recent issuance by American Re, called Modeled Index-linked Securities or ModILS, is based on Risk Management Solutions' CAT, that is, an index of catastrophe loss value and is powered by the company's Insurance Risk Assessment System (IRAS).

Apart from the basic difference that a normal catbond investor buys the risk of the particular investor whereas a ModILS investor buys the losses of the insurance industry as a whole, ModILS also have another interesting feature. A normal cat bond investor waits for a long time, sometimes years based on the insured event, before he comes to know whether he has lost his money. ModILS, on the other hand, is based on an index movement, and hence returns a loss determination in only 60 days. For this reason, cat bonds are very dificult to sell after some time, except as a heavy discount.

The first ModILS product is a $812 million bond issued by Gold Eagle Capital Limited, a Bermuda-based SPV.

How does the index, IRAS,  actually work? IRASis a complex application that takes variables from a number of different sources, including the National Hurricane Center, US Geological Service and RMS's database of insured exposures and calculates losses for events such as a hurricane or earthquake.  IRAS comes up with an industry loss estimate based on that data. Depending on the extent of the predicted losses, bond payments may be triggered. 
 

Australian MBS trade at better spreads than US MBS

A recent article in Investment Dealers' Digest [3rd April] regards Australian MBS as " prized by a coterie of investors as being perhaps the best quality mortgage securitizations available anywhere". Yet, Australian MBS trade at spreads higher than the US or UK counterparts. Australian MBS still "trades well above U.S. and U.K. mortgage deals and is barely trading through U.S. home-equity loan deals. According to Merrill Lynch & Co., Australian three-year MBS in mid-1999 traded at more than 30 basis points over LIBOR, compared with three-year U.S. credit card deals, for example, which traded at about 15 bps over LIBOR in the same period. Further, Australian six-year MBS in January 2000 traded at least 10 bps higher than comparable deals from Europe or the U.K. And Australian deals still have higher launch spreads than any international competitor and show no signs of tiering between issuers."

What accounts for the high quality of Australian MBS? It is the unique mortgage insurance system, dating back 35 years, which provides a strong level of coverage that makes defaults a rarity and gives lenders the freedom to offer a diverse array of product.

The insurance system, known as Lender's Mortgage Insurance, protects lenders from losses on residential properties, thus allowing lenders to move into offering up to 100% loan-to-value mortgages with the security that the entire venture is insured. As a result, Australian deals require little credit enhancement. Further, delinquencies are quite rare in Australia–less than 1%, according to S&P.

Links For more on securitization in general in Australia, click here.

India's securities regulator allows mutual funds to invest in mortgage-backed securities

India's investing institutions, who have been accustomed of living in a all-that-is-not-allowed-is-prohibited syndrome, got a green signal on 7th April to invest in mortgage-backed securities when the Securities and Exchange Board of India (SEBI) allowed mutual funds to invest in mortgage-backed securities. A Board meeting of the SEBI decided to amend mutual fund regulations to this effect. Click here for the full text of the Press Release. The proposal was being talked about for a long time – click here for an earlier report on this site.

Several MBS offers in India appear to be waiting in the wings. Apex housing finance institution, National Housing Bank, has time and again announced its proposed pilot securitization- click here for a news report on this site. Urban infrastructure finance company HUDCO has also been vehemently talking about securitization.

It is not sure whether this was the notification that was blocking the way of securitization deals happening in India, but certainly, the environment in turning positive on securitizations. Recently, a study group of the Reserve Bank of India submitted report on regulatory measures required for development of securitisation market –click herefor a report.

Vinod Kothari comments: Where letters rule the law, meaning takes a backseat. As Justice Krishna Iyer said: grammar is a good guide to meaning, but bad master to dictate. Evidently, mutual funds are formed to invest in securities, and securitization issues of all sorts result into creation of "securities" – so, in the first place, why should there have been any room for a confusion at all? Why was an amendment required to allow mutual funds to invest in MBS, while the fact is that they invest in all sorts of unquoted debt instruments which are no more than securitized loans? And the bigger question is: the present amendment allows mutual funds to invest in mortgage-backed securities. By implication, it does not, therefore, allow mutual funds to invest in other asset-backed securities, say, lease receivables backed securities?

A regulatory regime that depends too much on letter-work takes away every time it poses like giving – so the power to invest in MBS is given, and the power to invest in other ABS is taken back!

Telecom receivables securitization in India

A report in Financial Express of 3rd April said Global Tele-Systems Ltd has mopped up Rs 1.3 billion (approx USD 32 million) by securitising the receivables of its consumer telecom business to a special purpose vehicle christened Integrated Call Management Centre.

Finance company Tata Finance is the sole investor to the deal and will pick up the pass-through certificates issued by the SPV. The deal, struck last week, has been structured in such a way so as to enable the originator to receive funds from Tata Finance on an upfront basis. The spin-off of assets to the SPV marks GTL's exit from the consumer telecom business managed by the subscriber end terminal (SET) group of the company. Securitising the assets will result in savings of Rs 22 crore in interest costs to the software application and e-commerce service provider.

GTL plans to utilise the proceeds from this deal for developing business-to-business (B2B) applications and for future e-commerce acquisitions.

Vinod Kothari comments: This would probably be the first case of future flows securitization in India. Domestic future flows deals might legally be closer to lending than transfer, particularly in common law countries, but where the framework from which the income would flow is identifiable, such deals make lot of sense. Lot of eclectic future flows deals are likely from emerging markets. [Thanks for Victor Cherian for the news feed.]

Pegasus Aviation securitizes aircraft lease receivables

Pegasus Aviation Inc., the world's largest privately held commercial aircraft lessor, has raised USD 938 million by securitization of aircraft lease receivables for 28 commercial jet aircraft. The weighted average initial lease term remaining in the portfolio is approximately six years, while the weighted average initial age of the aircraft is approximately 7.5 years. Air Canada, Aeromexico, China Southern, GRUPO TACA, KLM and TWA are among the 22 airlines on four continents to become lessees.

Founded in 1988, Pegasus Aviation Inc. has become one of the top-tier operating lessors by delivering high-specification commercial passenger and cargo jet aircraft to the global airline industry. With more than 200 passenger and freighter aircraft on lease to 60 different airlines worldwide, Pegasus owns one of the largest fleets within the leasing industry.

Links: For more on securitization of aircraft leases or aircraft receivables, click here.

Korean leasing company securitizes receivables

Hong Kong office of Credit Lyonnais recently (31st March) closed the KDBC Leasing Receivables notes of USD 144.356 million in three tranches. The notes are backed by dollar-denominated equipment lease receivables of Korean obligors originated by KDB Capital Corporation in Seoul, Korea. The senior tranche of USD 101.0 million was offered to investors across Asia, Europe and the US while the remaining subordinated tranches were held by KDB Capital Corporation. The coupon on the senior notes was indexed to 3-month Libor with a margin of 140bps and an issue price of par. The Senior Notes have an average life of approximately 1.05 years with an expected final maturity of 2 years. The Senior Notes are rated Baa2/BBB by Moody's and Duff and Phelps.

KDBC is the largest leasing company in South Korea and is majority owned by Korean Development Bank, one of the largest government owned financial institution in South Korea

Sole arranger and lead manager is CREDIT LYONNAIS. Co-lead manager is Deutsche Bank. Co-manager is Bayerische Hypo-und Vereinsbank AG. Mandated in early December 1999, the transaction is one of the fastest completed ABS deals in ex-Japan Asia with both efficient pricing and credit enhancement. [This news was contributed by Gregory Park, Head of Securitization Group at Credit Lyonnais, Hong Kong, and was embellished by a Press Release of DCR, Hong Kong].

Links: For more on securitization in Korea, click here. For more news on securitization of lease receivables in Korea, click here.

IFC to buy equity in South African mortgage securitizer

IFC Washington's increasing involvement in development of mortgage securitization in developing markets became evident when it recently agreed to buy a 10% equity stake in South Africa's first home loans securitization vehicle, SA Home Loans. IFC Press Release of 3rd April announced the signing of such agreement.

Home loan finance in South Africa has traditionally been the domain of large retail banks. However, SA Home Loans is now purchasing existing home loans which it then securitizes by packaging them into a discrete pool of investment assets. Each pool is then credit rated and sold to investors, such as pension funds, mutual funds, and insurance companies. The process eventually aims at reducing the cost of housing finance to borrowers.

Other shareholders of SA Home Loans are Peregrine Holdings of South Africa, International Bank of Southern Africa (a joint venture of Dresdner Bank and Banque Nationale de Paris) as well as executives of SA Home Loans.

Important links: IFC recently agreed to join a securitization vehicle in Argentina – click here for the news item.

For more on securitization activity in South Africa, click here. This page also provides links to further material on securitization.

The website of Sotta Securitization has lot of details on South African securitization.

Also do not forget to see the details of two forthcoming training events on securitization in South African – click here.

 

Reverse mortgage securitization to get a boost

Recent regulatory measures by the US Department of Housing and Urban Development 
 

What are reverse mortgages

An interesting concept, a reverse mortgage allows an elderly person to earn a kind of a pension on the value of his/her house- the pension may continue till the "borrower" dies. As against a typical mortgage, here the mortgage financier pays money month after month -that is why the word "reverse" mortgage. Read more about reverse mortgages at this page. 

(HUD) might restore the interest in reverse mortgage securitization. The HUD has amended the origination-fee guidelines for its Home Equity Conversion Mortgage – another name for what the market calls reverse mortgages – and fixed a cap on the fee that lenders can charge.

Under the change, lenders will be able to charge new borrowers an origination fee not exceeding the greater of $2,000 or 2% of the FHA "maximum claim amount" (an amount that ranges based on the location of the property). Until now, borrowers could be charged an origination fee of any size.

The regulatory change may also propel the growing niche of securitization of reverse mortgage loans. The FHA insures 90% of all reverse- mortgage products, making it an ideal candidate for securitization. Currently, almost the entire volume of FHA-insured reverse mortgages are bought by Fannie Mae.

Links: See our page on reverse mortgage securitization – click here.

 

CMBS losing its lustre

The following is an extract from Wall Street Journal of 29th March:

"The need for commercial mortgage-backed securities has fallen dramatically after ten years of strong demand, leading to widespread expectations of an industry showdown as players compete for less business. As companies struggle to attract business, some are making high-risk decisions. Barry Reiner, real-estate financier for First Union Corp. noted: "There are a lot of people taking big bets and originating loans that don't make sense today on the hope that the market comes back their way." However, as sales continue to decline, the big question within the industry is who will decide to stay in the business. Closures and staff reductions have already begun and there is mounting speculation within the industry that most investment banks will decide to pull out of the business. Others believe the CMBS industry will consolidate along the same lines as the single-family home mortgage securitization sector did in the 1980s. The lack of business has been good for real-estate owners and borrowers, however, who have been taking advantage of the strong competition among underwriters. "

Links For more on CMBS transactions, click here.

Telecom revenues securitization planned in Italy

First in Europe involving telephone revenues

Telecom Italia is planning to raise at least USD 3.88 billion through what will be the first securitization program in Europe involving revenues from telephone calls. The transaction will be accomplished by a master trust which will issue bonds guaranteed by cashflows from call-charges to commercial and retail customers. The bonds might be stratified in several classes.

The deal will allow the highly-geared company to issue new debt with a high credit rating and cut its cost of borrowing. The issue is expected in summer and will be targeted at European investors.

It is likely that Telecom Italia will try to broaden its investor base to North America and Japan in subsequent deals. A report in Financial Times of 29th March said the market expects details about the deal in the current week.

Links: The Italian market has recently been buzzing with securitization -read more news, more articles and features in our country page on Italy – click here. There are links to articles, full text of Italian law and a host of other resources – perhaps the largest collection of material on Italian securitization in English and Italian.

Mexican consumer finance company to securitize receivables

Mexican specialty retailer and consumer financier Grupo Elektra S.A. de C.V. announced that its Elektrafin finance arm planned to securitize Ps. 350 million in accounts receivable through an offer of Ordinary Participation Certificates denominated in inflation indexed units of account. This is Elektra's sixth portfolio securitization carried out through the Mexican Stock Exchange. In line with the short maturity of the receivables, the transaction will revolve for 3 years after which it will be amortised in the 4th year. The issue will be placed by GBM Casa de Bolsa.

Grupo Elektra is Latin America's largest consumer finance outfit. The transaction has been assigned AAA rating (local) by Fitch IBCA. The company will utilize the funds to replace short-term debt.

Links: For more on securitization in Mexico, click here. This link also provides several articles on securitization in Mexico.

 

OPIC to be more aggressive in insuring emerging market securitization deals

The Overseas Private Investment Corporation (OPIC), a self-sustaining US government agency that sells political risk insurance, project finance and investment funds to American businesses expanding into emerging markets, announced recently that it will develop "bold and innovative" ways to apply its financing and insurance products to housing markets in developing countries. OPIC will take a leadership role in a sector which demands bold steps, declared OPIC President and CEO George Munoz, who pledged that housing now will be one of the agency's top two priority sectors. Securitization is on the top of OPIC-suggested models for development of housing finance.

OPIC is. Societas is an independent, nonprofit organization that provides research, education, and technical assistance services for all aspects of international real estate finance.

Links: For news report on political risk insurance for an Argentinean mortgage securitization, click here. For another news report on political risk insurance by OPIC for emerging market transactions, click here.

Spanish mortgage bank to securitize mortgages

Banesto SA, a subsidiary of Banco Santander Central Hispano (BSCH), is gong for a mortgage securitization deal of Euros 759 million involving first and prime mortgages. The transaction will consist of the credits being acquired by SPV fund, which will pay Banesto the corresponding value and then issues bonds guaranteed by these credits. The issue will be in two tranches: the amounts of each individual tranche has not been decided.

The issue will be placed to institutional investors. The issue will be handled by BSCH Titulizacion de Activos.

This will be the second securitization program for Banesto – its first one was worth 759m euros, and took place in July 1999.

Links: For more on securitization market in Spain, do visit our country page – click here. This link also provides a spreadsheet on securitization transactions so far concluded in Spain.

US regulators call for more disclosures on bank securitizations

Federal Reserve Bank of New York President William J. McDonough has called for more disclosures by banks about capital, risk concentrations, and transactions involving recourse such as asset securitizations. Asset securitization among other things has been on the top of the regulators' agenda recently following the failure of several US banks on alleged overvaluation of retained securitization interests.

McDonough said that "knowing a company's appetite for risk and its approach to, and methodologies for, managing risk is essential to understanding the risks of being a shareholder, a creditor, or a counterparty."

These remarks were made in a meeting hosted by the Monetary Authority of Singapore.

Securitization disclosures have been taken seriously by US regulators who recently issued revised guidelines for banks into securitization – click here for the news report and the text of the guidelines. Singapore has also indicated seriousness – the Monetary Authority recently issued guidelines for securitization – see here.

Brazilian company to securitize oil sales

A Brazilian company is making aggressive use of securitization, as a part of a slew of funding measures, to raise huge amount of cheaper debt repayable over longer maturities. .

Petrobras, Brazil's oil company, intends to securitise its future sales of oil outside Brazil, raising as much as $500m. The deal is a part of aggressive funding plans of the company to raise some USD 9.5 billion through different sources including sale and leaseback transactions. Petrobas is one of the largest oil companies in Brazil producing some 1.4 million barrels of oil every year.

Securitization of future flows by exporters has been used to raise cheaper overseas funding, by piercing the sovereign rating.

Links For more on securitization markets in Brazil, see our country profile – click here.


SECURITISATION NEWS AND DEVELOPMENTS

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

Deutsche Bank comes out with a slew of securitization deals

During May and June, Deutsche Bank came out with a series of securitization or synthetic CLOs aimed at managing its balance sheet size and releasing its capital.

During May, 2000, the Bank launched a global CLO, which is a leveraged synthetic CLO transaction. The Euro 280million of bonds convey the bottom layer of risk on Euro 2 billion of loans originated by Deutsche Bank's Luxembourg branch. The upper layer of risk is protected by a credit default swap. The portfolio covers some 124 loans to 94 obligors, with an average rating is in the triple-B band.

Besides the above, the Bank's New York office is marketing the second Blue Stripe transaction – a leveraged, synthetic structure that will reference USD 3billion of loans from the bank's global banking division. The pool comprises around 300 companies, of which around half are in the US and the rest spread around the world. The transaction will offer around USD 450 million of bonds.

In Europe, Deutsche is preparing to launch its second CAST securitisation, backed by Euro 4 billion of loans to German companies from its corporate and real estate division. The CAST structure does not use an SPV.

French Consumer credit companies love to securitize

Securitization is the in-thing for consumer credit companies in France as they find this to be a convenient route to diversify their resources, free up their capital and gain liquidity. A report in Les Echos 29th June says that Finaref (of the PPR group) and Cofidis (3 Suisses), the French consumer credit companies, have announced the launch of securitisation operations.

Another consumer finance company called Cetelem is believed to be the leader in the sector and has been securitizing since June 1990. Today it has amount of securitised credit outstanding at FFr 13 billion.

Other companies that have used securitization are Credit Lyonnais, Societe Generale, Banques Populaires, and Diac (on car loans).

Links For more on securitization in France, click on our country profile.

Agencies oppose US regulators' capital adequacy proposals

Mortgage securitization agencies Freddie Mae and Fannie Mae are opposed to the regulators' proposal to require capital against securitized products based on their credit rating, irrespective of their parentage. The proposal, circulated by bank and thrift agencies regulators in the US, seeks to allocate risk weightage based on ratings, while under the current practice, agency-backed securities have an advantage over private label securitizations. A report in American Banker of 30th June says that "Fannie Mae and Freddie Mac are up in arms over a proposed rule that could reduce investors' demand for their mortgage-backed securities, but Wall Street and private mortgage-backed issuers favor it."

The agencies' response was by way of comments on the proposed regulations, for which the last date for comments was June 7.

In its comments, Fannie Mae has said that, though it supports the proposal's attempt to align regulatory capital more closely with transaction risk, the rule does not account for the credit risk differences between AA and AAA securities. Fannie recommended that its own securities and AAA-rated corporate bonds be assigned lower credit risk weightings than AA-rated bonds.

Fannie also said regulators should keep in mind that private-label MBS currently require a higher risk weighting because mortgages carry higher interest rate risk. It recommended that the rule require that securities with long-duration collateral, such as fixed-rate mortgages and manufactured housing, carry higher risk weights than those with shorter-duration collateral, such as credit card debt.

Inspite of these comments, it is quite likely that the proposed regulation would be implemented, as it is broadly in line with the recommendations of the Bank for International Settlements.

Fitch reviews European securitization: expects record volumes for 2000

Though the volume to date in Europe is lesser than last year, rating agency Fitch expects a record issuance this year. European new issuance volume totaled USD 24 billion to 15th June.

40% of the market issuance is still concentrated in residential mortgage transactions, while mortgage lenders are faced with a shrinking primary deposit market. Innovative mortgage products are being brought into the market. One innovation, recently securitized, is a flexible mortgage plan where the borrower has the option to prepay instalments, which would then be held by the lender as a line of credit to be redrawn when needed, thus giving the borrower almost a cash-credit kind of facility. Mortgage lenders from Spain, Germany, Ireland and the Netherlands have also been active in securitization, and given the fact that most of them are securitizing for the first time, there is a strong likelihood of sustained growth.

Fitch also expects mortgage originators from Portugal, Austria, Greece, and the Nordic countries to enter securitization markets.

UK is still the largest securitization market to date. The market break up by country for year 2000 to 15th June shows the following market shares: Ireland 1% Italy 9% Multi 9% France 2% Germany 13% Portugal 1% Netherlands 4% Spain 11% Switzerland 3% UK 47%.

Going by asset-type, the break up is as follows: CMBS 18% RMBS 40% Nonperforming Loans 8% ABS 13% CDO 17% Whole Business 4%.

J P Morgan launching index for credit derivatives

This may well be a historical step towards commoditisation of credit. J P Morgan will be launching, on Wednesday, 29th June, the first index for credit derivatives.

More of this news item can be seen on our credit derivatives website – click here.

Pay scales for insurance securitisation pros hit new highs

It pays, and pays bountifully, to be an insurance securitization professional, as the pay scales for this sector have just gone berserk. A report in Financial Times of 24th June says that demand for new skills has driven salaries in the insurance sector up to levels never seen before.

Professionals specialising in alternative risk transfers such as cat bonds and insurance-linked securities and derivatives are being offered annual pay packets of GBP 300000 in London.

The reasons for this sharp upsurge are not difficult to understand. Insurance securitisation is a new innovation and is being seen as a new challenge by the insurance companies. This market innovation has created a strong demand for analysts, actuaries, statisticians, risk modellers and research and development staff. It has attracted specialists from both the capital and insurance markets. It has also brought the insurance and investment banking sectors into competition as banks set up specialist insurance derivatives units.

Swiss company launches synthetic securitization

Swiss companyUBS AG is to launch a synthetic securitisation transaction called Helvetic Asset Trust, which securitises part of the risks attached to Swiss corporate loans and turns them into tradable instruments. UBS will securitise part of the credit risks attached to a SFR 2.5 bln portfolio of loans to Swiss small and medium-sized enterprises.

It is the first transaction in the domestic capital market involving the transfer to the capital market not of the credit itself, but of the loan loss risks alone.

Notes Synthetic securitization is a kind of a credit derivative that combines financing with transfer of credit risks.Generally carried in form of credit linked notes, the investors in such notes agree on a compensation to the originator should specified credit events take place. For more on credit derivatives including credit linked notes, click on Vinod Kothari's Credit Derivatives site – click here.

UK's largest port operator proposes property securitization

Associated British Ports, UK's largest port operator, is mulling securitization of a portion of its multifarious properties. Associated British Ports is UK's largest port operator and holds plentiful properties. If the company is able to encash its properties through securitisation, it would be a major restructuring of its finances.

The company holds apporox USD 760 million worth of commercial properties.

Securitisation is just beginning to hit UK's maritime industry. Last year, Wightlink, the Isle of Wight ferry specialist, became the first UK maritime company to issue securitised bonds when it raised Pounds 135m.

Outside the water transport segment, securitisation has been used for liquidating shopping complexes, pubs and various other commercial properties. Recently, Bupa, a healthcare group, raised GBP 235 million by securitising future revenue from care homes.

Links For more on securitisation in general in UK, click on our UK country page.

Pullman completes securitisation of Isley Brothers' music securitisation

David Pullman of Pullman Company specialising in music royalty securitisation has completed another eight figure Pullman Bond(TM) music royalty securitization with Rudolph Isley, Ronald Isley and the estate of O'Kelley Isley. This transaction was announced around September last year [see news report on this site – click here, but was held up in legal hassles including a bidding war organized by singer Michael Bolton and a lawsuit launched by EMI Music Publishing who wished to buy the catalogue. The Isley and Pullman team also won an approximately $7 million copyright infringement case against Michael Bolton for "Love is a Wonderful Thing," an Isley hit song from the 60's

David Pullman [click here for David Pullman's website] is specialised in music royalty securitization. He made international news when he securitized David Bowie's music tapes, with a USD 55 million offering. Since then, his company has issued Holland Dozier Holland (Motown Hitmachine) Bonds, Ashford & Simpson Bonds and James Brown Bonds.

The Isley Pullman Bond(TM) transaction was rated at the single A level by two nationally recognized rating agencies. Rudolph Isley and Ronald Isley are the founders, creators and 100% owners of the Isley Brothers catalogue and co-owners of the estate of O'Kelley Isley, the third founder and equal member of their companies Three Boys Music Corp. and Triple Three Music.

Link For more on intellectual property securitization, click here.

Summitomo Corp proposes firm to securitise e-commerce credits

E-commerce is soon becoming a phenomenon, and so there would be opportunities to handle e-commerce credits, which presumably will have significant differences from usual business credits. Realising this, Summitomo Corp. with its affiliated companies (Sumitomo Bank, Sumitomo Trust and Banking Co., Sumitomo Marine and Fire Insurance Co. and Sumisho Lease Co) has proposed to set up a specialised company to buy and securitise e-commerce credits.

Tentatively to be named Digital Nonbank, the company will shoulder risks that clients face in business-to-business electronic transactions by offering securitization services for sales credits involved. The joint company will be capitalized at about 100 million yen.

Sumitomo Corp., a general trading house, will be in charge of building a credit assessment system and Sumitomo Bank will provide fund settlement functions. Sumitomo Trust will offer expertise in securitization services, while Sumitomo Marine will provide credit functions. Sumisho Lease will offer a database. Digital Nonbank will take over sales credits from clients with fees that will vary according to risks involved and sell the credits in the form of securities with high credit ratings.

The new company aims at handling 1.5 trillion yen worth of sales credits a year in five years.

Korea to promote bank CDOs to boost credit supply

In a bid to ease the flow of credit to companies badly affected by present credit squeeze, Korean financial supervisor the Financial Supervisory Service will resort to securitization of bank loans by collateralised debt obligations (CDOs). A report in the Korea Heraldof 20 June says that the supervisor will streamline procedures for issuance of CDOs and remove bottlenecks.

One of the measures proposed is to cut the time involved in filing of registration statements etc. so as to allow originating banks to make use of the money raisedy by securitisation within 2-3 days as against the present system which takes about 15 days. Besides, the supervisor is also expected to clear issuance of asset-backed commercial paper.

Links: For more on securitization in Korea, see our country page – click here. For text o the Korean law on securitization, click on our laws page – click here. For more on CDOs, see our section on bank loan securitization – click here.

Japanese insurer to improve solvency ratio by securitisation

Japan's largest life insurer, Nippon Life Insurance Co., is planning a major increase in its solvency ratio by securitization. The transaction could not be understood properly, but press reports suggest that the insurer will raise Yen 180 billion by securitising its future flows. The transaction is being marketed by Nomura Securities, and Sumitomo Bank. Policyholders of Nippon would need to approve the scheme which is scheduled for July 4.

The fixed-rate securities are expected to have maturities of three to five years, according to Daiwa. Sumitomo's involvement will be in the marketing of the securities. The transaction will require the approval of the Financial Supervisory Agency. For Nippon Life, the infusion of cash will bolster what is the equivalent of a capital balance, although it is not legally called capital because the company is a mutual insurer.

Nippon Life's solvency ratio, the measure of policy liabilities to assets held, was 1,095.8% as of March, vs. a minimum safe level designated by regulators of 200%.

Swedish bank securitises housing mortgages

Swedish bank SEB is to raise EUR 1 billion through securitization of a part its housing mortgage loans to SPV Osprey Mortgage Securities Limited. The transaction will achieve off-balance sheet treatment for SEB and lead to more effective utilisation of capital by the bank.

In Swedish securitisation market, SEB is a forerunner with regard to securitization and has carried out several such transactions previously.

The bonds are being placed on the Euro market through SEB Debt Capital Markets and Goldman Sachs International. The bonds have been given the highest rating by the Fitch IBCA, Moody's and Standard & Poor's rating institutes.

Links For more on securitisation in Sweden, refer to our country page – click here.

Bankers actively buying risk securitisation products

Bankers, who are busy transferring their own balance sheet risks to others, are actively picking up securitised risk transactions. A risk securitisation transaction implies one where the originator transfers risk, such as insurance risk, weather risk or the like, through securitisation conduits over to capital market investors. See for details our page on risk securitisation.

A recent article in American Banker 26th May says that investment bankers such as Citigroup's Salomon Brothers, Chase Securities, and Credit Suisse First Boston are actively marketing securitised risk products, and investing banks are eagerly picking up these portfolios.

Yet another article in the Financial Times 6th June by Gerry Dickinson ("Insurance finds a blend of innovation and tradition") traces the history of evolution of insurance. Talking about securitisation of insurance products, the author feels "risk securitisations are likely to expand in the future and companies may, to some extent, switch from bond-based to equity-based instruments – the greater risk appetite of equity markets makes them a natural bearer of corporate risks. Since the mid-1990s, the cost of insurance and reinsurance has been below its long-term economic cost, mainly because of market oversupply. Thus the cost of risk securitisation products has appeared high when compared to that of underpriced insurance and reinsurance contracts. A more appropriate balance between risk securitisation and conventional insurance will come about when insurance markets rise to their natural economic level, as the cycle in insurance prices corrects itself."

Links Our page on insurance risk securitisation carries lot of resources and a large number of links on the topic. Also see our page on weather risk securitization.

Japanese accounting body proposes accounting norms for securitization

A report in JIJI press 1 June says Japanese Institute of Certified Public Accountants has drawn up accounting guidelines for real estate securitization out of concern that companies have been removing bad assets from their balance sheets inappropriately. Understandably, the concern is triggered by the spate of commercial real estate securitization in Japan as also banks passing on bad loans to securitisation SPVs.

One of the prime features of the proposal is that if the originator buys back or retains 5% or interest in the securitised receivables, the transaction will not be recorded as off-the-balance sheet. The sames applies to assets sold with repurchase agreement.

A subsidiary's purchase of asset-backed securities also amounts to buying by the parent.

The association will seek public comments on the guidelines until June 30 and hopes to adopt them from Aug. 1.

Link to the JICPA website for full text

The Institute wrote as follows, saying that they do not have an English text of the proposed guidelines but they do have a Japanese text: In response to your request, we would like to inform you of how to address Japanese version as follows; Firstly, please click 「ニュース・フラッシュ」 on the top page of our home page and please click the following sign of html document on top page of next stage. http://www.hp.jicpa.or.jp/ and then click one which would you like to at next stage, http://www.hp.jicpa.or.jp/ 

Can some one help to translate the substance of the new Guidelines?

Your comments: Do you have comments on these guidelines? Do you have more knowledge/ full text of the proposed guidelines? Do write and we will appreciate your contribution.

Canary Wharf gets clean liquidity through securitisation

UK property owner Canary Wharf has used securitization not merely as a device of selling out cashflows, but also obtaining a sort of an on-tap liquidity facility, similar in effect to a bank credit. The GBP 475 million issue was announced towards end of May.

Canary Wharf, owner of prime commercial properties close to City of London, let out mostly to large banks and investment bankers, issued notes in several tranches: A1 notes rated AAA totaling £240.0 million, A2 notes also rated AAA Eur102.5 million, class B bonds rated AA totaling £85.0 million, class C notes rated A totaling £45.0 million and class D notes rated BBB totaling £45.0 million. However, the most interesting feature of the issuance is the R bonds, tranched as R1 and R2, both totaling £ 250 million, which will initially be bought back by the issuer, but will be available for issuance at any time. The R bonds will serve as a kind of ready liquity for the Canary Wharf for fresh property acquisitions or development.

The transaction structure involves a loan taken by the property owning subsidiaries of Canary Wharf. The loan will be given by a specially-created lending SPV, which will acquire as security for the repayment of the loan fixed and floating charge over the properties owned by the companies. The loan receivables will then be assigned to the issuing SPV, which in turn will issue notes to the investors. The issuer has also arranged for a liquidity facility to cover shortfall in payments.

More on this transaction: A detailed pre-sale report on the transaction and the rating given by Standard and Poor's is available on the latter's website. Click : www.standardandpoors.com/ratings. Under Presale Reports, select Structured Finance, then Commercial Mortgage-Backed Securities.

Pakistan innovates multi-issuer securitization instrument

This effort may surely be helpful for smaller leasing companies in Pakistan which may not, of themselves, have the critical mass required for stand-alone securitization. Though full details of the instrument were not available, this seems like a multi-issuer securitized note.

According a news item in Business Recorder, the instrument has been developed by a brokerage house called AMZ Securities. Christened multi-issuer term finance certificate, the idea is essentially to acquire receivables originated by several leasing companies, and issue bonds or term finance certificate backed thereby.

Vinod Kothari comments: multi-issuer securitizations are common in several countries: for emerging markets where securitization of receivables originated by a single issuer may not make economic sense, it is an excellent device. Economies apart, the concept also represents pooling of risks and hence is more attractive to investors.

Links Pakistan has issued rules about securitization quite some time back, but in its present state of politico-economic instability, not much has really happened. For more on securitization market in Pakistan, refer to our country page – click here. For text of securitization rules in Pakistan, refer to securitization laws page – click here.

South African bank securitizes credit card receivables

Firstrand Bank, one of South Africa's big four banks, recently securitized its dollar-denominated receivables from credit card usage. Credit Suisse First Boston helped to successfully place the issue with a range of European institutional investors. The offer is structured in two tranches. MBIA, an international financial guarantee company, provided external credit enhancement.

Standard & Poors, Moodys and FitchIBCA have assigned triple-a ratings to the certificates, pending the review of final documentation by the rating agencies. The certificates are issued by FirstRand 2000-A Receivables Trust with maturities of July 2004 and 2007 respectively. The certificates are secured by future claims that FirstRand will have on future Visa and MasterCard income. FirstRand indicated its great satisfaction with the terms of the issue and stated that this issue would be the first of several international fund-raising exercises.

Vinod Kothari comments: I am fresh with the experience of interacting with a number of South African securitization professionals in course of the two workshops we offered there. There is a great deal of interest in South Africa when it comes to securitization. However, the law, drafted much before there was any securitization activity in the country, is highly inflexible and is certainly bereft of the developments that have taken place recently. The kind of restrictions that are commonly found in regulatory statements of bank regulators seem to be part of the law itself, which means what is normally rejected as off-balance sheet securitization for RAP is just not permitted in South Africa. Besides, tax and stamp duty implications are not at all clear. The country is sitting on a huge potential for domestic as well as cross border securitization, but the regulators need to update their laws.

Links: For more on securitization in South Africa, see our country page – click here.

Auto major Fiat in major securitization deal

Italian car maker Fiat is launching a major securitization deal. Under the transaction, Fita will raise over Euro 1 billion by securitizing performing credits granted by it linked to the purchase of its cars.

The transaction is believed to be the largest on performing credits in Europe, and is being carried out on the retail portfolio of Fiat Sava. Euro Capital Structures will be the structuring adviser. Euro Capital Structures was created by Fiat with Italian bank Unicredito Italiano.

Credit rating agency Standard & Poors Securities Inc has awarded a preliminary AAA rating to the Euro 1,084bn offer.

Links and comments: The Italian securitization market has gathered tremendous pace and interest. For more on securitization in Italy, refer to our country page – click here. Much of the success owes to the Italian securitisation law – click here for text of the Italian law.

US bank regulators propose revised reporting for securitization

US bank regulators have proposed revised reporting statements from banks. A proposal in this regard was issued on 1st June for comments. The revised report seeks details of securitization activity by banks.

Apparently triggered by several instances of malpractices recently, the revised reporting format asks as many as 80 new questions on securitization activity of banks.

Here is the extract from the proposal:

"Under this proposal, banks involved in securitization and asset sale activities would report quarter-end (or year-to-date) data for seven loan categories similar to the manner in which they report their loan portfolios. These data would cover 1-4 family residential loans, home equity lines, credit card receivables, auto loans, other consumer loans, commercial and industrial loans, and all other loans. For each loan category, banks would report: (1) The outstanding principal balance of assets sold and securitized with recourse or seller-provided credit enhancements, (2) the maximum amount of credit exposure arising from recourse or credit enhancements to securitization structures (separately for those sponsored by the reporting bank and those sponsored by other institutions), (3) the past due amounts and charge-offs and recoveries on the underlying securitized assets, (4) the amount of any commitments to provide liquidity to the securitization structures, (5) the outstanding principal balance of assets sold with recourse or seller-provided credit enhancements that have not been securitized, and (6) the maximum amount of credit exposure arising from assets sold with recourse or seller-provided credit enhancements that have not been securitized. A limited amount of information would also be collected on bank credit exposures to asset-backed commercial paper conduits.

For the home equity line, credit card receivable, and the commercial and industrial loan categories, banks would also report the amount of any ownership (or seller's) interests in securitizations that are carried as securities and the past due amounts and charge-offs and recoveries on the assets underlying these seller's interests. The agencies request comment on whether these proposed items for ownership (or seller's) interests in securitizations should also include seller's interests not in security form that continue to be carried as loans on the balance sheet or whether information on these non-security seller's interests should be collected separately. Expanding the proposal to incorporate data on seller's interests that are not in security form would provide the agencies a complete picture of this element of banks' securitization activities. The agencies also request comment on whether banks are engaging in transactions in which they retain ownership (or seller's) interests in asset securitizations that involve loans outside of the three categories included in the proposal (i.e., home equity lines, credit card receivables, and commercial and industrial loans).

In addition, the agencies request comment on the manner in which banks' internal management reports capture information on asset securitization activities. In particular, do bank management reports primarily furnish information on the basis of whether the bank provides recourse or credit enhancements (which is the basis upon which proposed Schedule RC-S is structured, consistent with the agencies' risk-based capital requirements) or do these reports primarily furnish information on the basis of whether the bank performs the servicing on the underlying assets? "

For the text of the proposed reporting format, click on this link:
http://www.fdic.gov/news/news/financial/2000/fil0035.html

In securitization market, change is the only constant, says Citibank's securitization head

Al Hageman, Citibank's Global Securitization Head recently wrote a sort of a memoir of his 2 decade-long association with the securitization market [Investment Dealers' Digest May 22, 2000]. Recounting the developments that have taken place in this market segment over these years, Hageman says that the only constant in the market is change. Over last 2 decades motivations of the originators coming into securitization have changed significantly from pure funding to risk management. Hageman thinks securitization would continue to evolve into a purer form of risk transfer. Here is a small extract from Hageman's write up:

"Another thing that has changed during the last 20 years is the motivation for companies to secure this type of financing. For the most part, what began as a way to provide off-balance sheet financing has evolved into a vehicle that is increasingly used to transfer real risk and create economic capital. This will continue to become the growing focus. When we started, most of our clients were old-line industrial firms with some sort of term receivables that were easy to isolate. The realization in the mid-'80s that nearly ANY type of business- airlines, auto makers, credit card processors, etc.-could participate in this type of financing was probably the single most important intellectual development over the past 20 years of this business.

This leap forward was made possible by two very important developments: 1) Technology: A major breakthrough in this business occurred when, thanks to technological developments, we obtained the ability to track and value a company's receivables on a daily basis. This in turn enabled us to create AAA securities at significantly lower costs. Suddenly the walls that had limited potential securitizers came down, making nearly every large corporate or financial company a prospect for this type of financing. 2) Capital markets replaced bank funding: The ability to structure issues with investment-grade ratings enabled us to distribute in both the commercial paper and term markets. Today, global investors can now correctly value the diversified risk that an ABS transactor brings.

So what lies ahead? For starters, the innovation will surely continue-new assets, new distributions and new geographies. As the markets evolve into the 21st century and companies' financing needs and revenue models evolve, so too will the market for asset-backed securities. This business will continue to evolve toward a purer transfer of risk. And the mechanisms for doing this will continue to become more sophisticated as we find new ways to isolate different elements of risk and package it in a way that is appealing and useful to both funded and synthetic investors."

ABS activity picks up in Singapore with two recent deals

Singapore's ABS market saw some activity recently with two ABS transactions to hit the markets. Some pros believe that these two deals are the first case of domestic rated securitizations to originate from Singapore.

The originators are Diners Club, Singapore and Development Credit Bank Singapore.

Diners Club raised S$100m with a revolving securitisation of credit card receivables, arranged by ABN Amro in the US asset backed commercial paper (ABCP) market. DBS Bank created a $2bn domestic short term note programme to parcel highly rated loans and bonds on its balance sheet. Diners Club's deal is the first securitisation of consumer assets in Singapore, and the first time that a Singaporean transaction has been placed through a US conduit.

On the other hand, Development Bank of Singapore has been an active player in securitisation for quite some time. Recently it created a S$2bn domestic short term note programme to parcel highly rated loans and bonds off its balance sheet.

Links: For more on the general developments in Singaorean securitisation market, do visit our country page – click here. Also, for the text of the regulatory statement of the Monetary Authority of Singapore, do visit our Securitisation Laws page.

US ABS activity likely to drop: first half 2000 shows dismal performance

The first half year of the new millennium has obviously not augured well for the ABS markets. For the first time in last 5 years, there is likely to be a sharp drop in new issuance. The first half of 1999 saw some USD 130 billion worth of new issuance, while this year's half-way total, though uptil the first week of June, 2000, is only USD 91.9 billion. It is unlikely that the half year total will be anywhere near the last year's figures.

US ABS market has been registering positive growth rates year after year, but this year is exceptionally bad.

There has also been substantially repositioning of the intermediaries. This half year will see Salomon Smith Barney at the top of the league, up from second best position last year. Credit Suisse First Boston, topper last year, is likely to be at the third position.

Securitization one of the most notable aspects of financial evolution: Henry Kaufman

Henry Kaufman recently came out with his latest book: On Money and Markets: A Wall Street Memoir where he regards securitization of credits as one of the most notable developments in financial evolution, but also highlights the need for regulation.

Kaufman, who headed research in Salomon Brothers in 1970s and 1980s is respected by Wall Street for his incisive and experienced analysis of market developments. Kaufman was in thick of the machinations of Wall Street for over two decades. Known widely as the guru of economic and financial forecasting, Kaufman was believed to be a person who moved the markets particularly when it came to predicting interest rate movements.

Kaufman's book above reviews Wall Street's evolution over last two to three decades. Talking about evolution of financial markets, Kaufman regards securitisation of credit –the conversion of nonmarketable assets, such as credit-card receivables or mortgage obligations, into marketable assets that can be priced to market and traded, as one of the most significant developments. The trend has created a bewildering array of derivative instruments that have fueled what Kaufman believes to be a dangerous explosion of credit. He says that economic conditions have favored the growth of these derivatives but that no one knows how they will perform in an economic downturn or what their broader economic consequences will be.

Hence, Kaufman sees an urgent need for regulatory and supervisory reform at home and abroad, as financial innovation and global integration outpace an already obsolete regulatory structure. He exposes shortcomings of the Federal Reserve and offers proposals for reforming international regulation, including the reorganization of the International Monetary Fund and the World Bank into a “Board of Overseers of Major Institutions and Markets.''

Kaufman's 388 page book has been published by McGraw Hill.

JP Morgan refines its Sequils model

In the first week of May, JP Morgan London launched the 4th of its innovative Sequils program for loan securitisation. This time, the structure was further refined to attract risk-averse investors.

What is the Sequils structure The Sequils structure was first used in April 99 by JP Morgan. The basic innovation here was that JP Morgan securitised a portfolio of BB- and B+ loans, backed them up by its own credit swap, transferred the credit swap to the investors through a separate SPV, and thereby, separated the funding and the credit risk on the loan portfolio into two separate pools of investors. The interesting structure used two SPVs, one for the funding of the portfolio, and the other for the securitisation of the credit risk in the loan portfolio.

The first SPV, called Sequils, bought from the originator a portfolio of loans worth USD 712.5 million. The loans were rated BB- to B+. The portfolio was backed by a credit swap provided by Morgan Guarantee Trust. As a result, the notes issued by Sequils were rated AA.

On the other hand, Morgan Guarantee Trust bought credit swap from another SPV, called MINCs. MINCS was capitalised with USD 114 million worth notes. The proceeds were invested in AAA rated securities. Thus, investors were protected against loss of principal as their principal was fully backed by AAA rated investments. At the same time, MINCS had provided a credit swap to Morgan Guarantee Trust which was 6 times its capital. Therefore, the yield on the notes issued by MINCS was enhanced to the extent of 6 times of the credit swap premium over LIBOR. As a result, the securities issued by MINCS were rated BBB.

In sum, a portfolio of BB- to B+ loans was repackaged into AA and BBB notes.

This classical innovation has been used by JP Morgan recently in a USD 565 million securitisation. The structure is almost the same as in the original Sequils-Mincs deal, with the added attraction that the notes issued by Sequils are stratified, so that some of the tranches have got AAA rating.

Indian banking panel suggests draft securitisation law

An expert committee set up by the Government to look into changes required in the banking laws has suggested wide-ranging modifications in the legal framework. Besides, the panel has also suggested a draft securitisation law. Headed by former Solicitor General of India, Mr. T.R. Andhyarujina, the Committee submited its report on 10th May.

Apparently, the draft law has also suggested amendments to the Income-tax law to facilitate securitisation transactions.

In another recent development in India, the Parliament amended the constitutional law of the National Housing Bank, India's apex housing finance institution, to permit the Bank to securitise the portfolio of mortgages that it might acquire. This way, the Bank, currently a fund-based refinancier of mortgage loans, could slowly change its character into a Fannie-Mae kind of body facilitating securitisation.

The first securitisation of RMBS in India may be out shortly: with the legislative changes in place, National Housing Bank may acquire and securitise a portfolio of housing loans originated by HDFC.

For more on securitisation in India, click on India page.

Predatory lending continues to bother securitisation deals

The issue of predatory lending practices by loan originators, and its impact on subsequent securitization of such loans, continues to bother securitization transactions. On this page, we had recently covered this problem briefly – click here to see.

American Banker on 15th May carried a story quoting US govt. officials who warned capital markets against encouraging predatory lending by banks. In the third of five joint regional forums on predatory lending, the government officials said large Wall Street firms should be held accountable for the terms of loans that go into securitized pools. Andrew Cuomo, secretary of Housing and Urban Development is reported to have said that it would not be enough for securitisation firms to contend that they were not aware of the lending practices.

In a related development, New York bank regulators are reportedly working on measures to prevent banks from getting into predatory lending practices. American Banker of 16th May reports that New York State regulators are writing guidelines to help banks steer clear of packaging and selling predatory mortgage loans to investors. If required, the regulators will work in tandem with the SEC to ensure that investment banks are also covered.

Investment banks are under fire for assisting the fast growth of a subprime lending market. According to data published by Moody's, about $100 billion of the roughly $240 billion in outstanding subprime mortgage loans have been securitised.

In the meantime, in early May, charges have been filed against Lehman Brothers as an underwriter for the alleged predatory loan practices of First Alliance Mortgage Co., whose portfolio was securitised. First Alliance filed for protection under Chapter 11 in March this year. The loan practices of the company came for public criticism including under popular TV programs in the US. Lehman was reportedly running a fairly large conduit operation with First Alliance, resembling the structures set up by subprime players ContiFinancial or Amresco.

Singapore pledges to promote securitization

The Monetary Authority of Singapore (MAS)on 2 May 2000 announced several decisions relating to debt securities including government securities. Second finance minister Lim Hng Kiang, who announced these measures on behalf of the MAS also outlines the Government's proposal to create securitization market in the country.

Mr. Lim talked of the impact of the e-revolution on bond markets world over and said Asian markets could not remain untouched by these developments. Talking of measures to broaden and deepen debt market activities in Singapore, he proposed the development of asset-backed securitization in Singapore, and in particular the promotion of mortgage-backed securities and the setting up of a mortgage corporation. He said: "The rapid advances in electronic-bond technologies have led to a proliferation of e-bond trading systems in US and Europe. Asian bond markets, while still in relatively nascent stages of development, would not be immune to the e-revolution. Proprietary bond distribution and trading systems in US and Europe will soon find their way to Asia, and it is important for Asian market participants to anticipate these developments."

Singaporean securitization market is still in its infancy. There have been very few securitization transactions in the country still, despite of a common law framework generally receptive to securitizations.

Links On our site, we have a general market overview of securitization in Singapore – click here. We also have the text of the regulatory guidelines of the MAS – click here.

Do banks need fundamental relook at their profit models?

The age of securitization meant at least one significant change in bank's profit models: the customer was seen as a commodity, created today, and packaged and sold tomorrow. The age of the internet has brought in a new way of looking at values based on relationships: the very thing that securitization demolishes. Does this mean banks need to revisit their fundamental profit models?

A recent article in American Banker 1st May said investors are questioning banks' basic profit model. Quoting an analyst, the report said that the banking "industry's standard business model of the past decade is being rejected by investors because it is strikingly at odds with the practices of Internet companies, which are the market's darlings".

Citing several reasons, the report says that securitization of mortgages and other loans may be fine for the balance sheet but has the effect of separating the institution from the customer, who often sees only the name of the servicer. Cross-selling opportunities are lost. By contrast, technology companies like AOL and Yahoo are willing to even carry on seemingly unprofitable businesses at the prospects of making profits by cross selling opportunities in future.

Comments : If this issue forces you to think, may be you can contribute a line or two. We will be too happy to carry your contribution on this site.

Bank of Scotland applies revolving model to mortgage securitization

Bank of Scotland in late April launched a new securitization deal with revolver structure, normally used in credit card and consumer loans securitization, to the mortgage market. The Euro 745 million deal broke new ground by offering most of its AAA notes with legal maturities much shorter than the lifetime of the underlying mortgages.

The revolving structure uses excess collateral placed in the SPV. The bank has assigned some 23,700 mortgages, worth Euro 1.731bn, in a trust, with the beneficial interest shared between the originator and the investors. Since the amount of assets is far greater than the notes, principal collections over a short period are sufficient to redeem a bullet note. When principal payments are not being accumulated to pay off a tranche of notes, they flow back to Bank of Scotland, and can be replaced with new mortgages. Conceptually, the deal also tides over a difficulty of mortgage-backed transactions – that of lower weighted average maturities because of a fast-depleting outstanding principal, but opting for bullet payments.

The multi-tranched transaction has first three which are dollar soft bullets – a USD 208 million 3 year tranche, a USD 200 million five year tranche, and a USD 200 million seven year tranche. Each has a legal maturity two or three years after the expected redemption.

Links : For more on revolving structure, see our section devoted to credit card securitization – click here.

SECURITISATION NEWS AND DEVELOPMENTS – JULY AND AUGUST, 2000

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IMPORTANT

For all news for Sept., 2000, please click here 
For all news for May and June, 2000, please click here 
For all news added before May, 2000, please click here 
For all news added before 25th March, please click here   
For all news added before 21 January, 2000, please click here   
For all news added before 9th November, please click here   
For News items added prior 3rd August, 1999, click here.

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

Teething troubles bother Italy's government dues securitization

Call it teething troubles or the infirmities of infancy. Or call it bureaucratic bungling, but unconfirmed reports suggest that the much-publicized government dues securitisation from Italy – the securitization of social security contributions by INPS – is fraught with some initial collection problems, and it seems that the first tranche due in Jan 2001 may not be paid in time. Click here to read about the INPS securitization.

Reports from market operators suggest that the deal's performance is disappointing at the point where it is feared that series 1 will not be called in January 2001 due to cash shortfall. Market operators stress that such an event would have a very negative domino effect on series 2 and 3. There are reports from the fiduciary in Italy suggest that during the first 8 months the appointed collectors (concessionari) didn't collect any funds at all, as the governement had not set the commissions for their remuneration. The seller INPS, however, did collect some funds.

Links For more about securitisation in Italy click here. For more about securitisation of government revenues, click here.

Bowie Bond not a Pullman innovation, holds court

David Pullman, who has all along been claiming as the innovator of the bonds secured on David Bowie's music royalty, called Bowie Bonds, suffered a major setback when the New York Supreme Court held that it was the Rascoff/Zysblat Organization which actually developed the product and Pullman's erstwhile employer was only employed as a marketing agent for the bond. Pullman claimed, among other things, that he and not Bowie business managers R.Z.O. created the concept of the Bowie Bond, and only he had the rights to utilize trade secrets derived from the transaction. In her ruling, New York State Supreme Court Justice Beatrice Shainswit stated, "Neither the Pullman Group nor Pullman developed, or ever owned this alleged intellectual property." Notwithstanding Pullman's relentless advertising as creator of the bonds, he was unable to show any evidence to support his claims. Documents presented clearly established that R.Z.O. were the creators of the Bowie Bond concept. R.Z.O. then retained Pullman's employer Gruntal & Co (and later Fahnestock & Co.) to act as placement agent for this, first ever, securitization.

In response to other documents presented to the Court, Justice Shainswit further states that "Pullman concedes that his role…was as an employee hired to work on structured assets." She continues, "The Complaint is dismissed in it's entirety against all defendants" and the Court, "finds the … claims to be without merit."

This loss to Pullman comes on the heels of the United States Patent and Trademark Office's refusal to allow Pullman use of or representation that the "Bowie Bond" mark is a trademark of his or of The Pullman Group.

Links: For more on securitization of music royalty and other intellectual property, see here.

Securitization of leased assets in Brazil
First case of rated existing-asset securitisation

MSF Holding, a Brazilian equipment leasing company has raised USD 80 million by securitisation of equipment leases and loans in a deal which is supposed to be the first existing and "hard" asset securitisation in the country. DVI, a Pennsylvania-based medical equipment finance company has a majority stake in the leasing company. Other partners in it include the Netherlands Development Finance Corporation, Philadelphia International Equities and the International Finance Corporation, the private sector financing arm of the World Bank.

The transaction is regarded by industry professionals to be an important milestone for securitisation in Brazil. Brazilian market is currently dominated by future flows securitisations.

Deutsche Banc Alex. Brown acted as sole bookrunner and joint underwriter with Credit Suisse First Boston.

Links Do visit our country profile on Brazil.

Provident Financial to dump gain-on-sale accounting

US company Provident Financial Group, Inc. announced that effective the third quarter, the company will change the accounting of its securitizations in order to discontinue the use of gain-on-sale accounting. Henceforth, the company will account for the securitizations of loans as secured financings.

The company commented that while the performance of its residual assets has been excellent, other companies utilizing securitization structures requiring gain-on-sale accounting have experienced problems and consequently, the market has penalized all companies using gain-on-sale accounting. Although gain-on-sale accounting is in compliance with GAAP, the investment community has clearly signaled its dissatisfaction with this accounting method and the company believes that this sentiment has been factored into its stock price.

Additionally, the newly proposed regulatory guidelines regarding securitization activity discourages the use of gain-on-sale accounting by limiting the amount of residual assets that can be included as part of its regulatory capital.

Do you think the recent regulatory changes will prompt more companies to switch over from gain-on-sale to secured loan accounting? Write your views.

See the Chat archives (index page) for chat on gain on sale accounting.

Portugese consumer finance companies kick-start securitization

Portugal witnessed some activity in asset-backed securitization recently as Banco Portugues de Negocios securitized consumer credit receivables of its three subsidiaries raising Euro 200 million. The receivables include those arising from credit contracts, leases and long term rentals. The underlying assets mostly include cars, and to some extent other equipment and consumer goods.

The offering was arranged by Credit Suisse First Boston. The transaction included a AA tranche (Euro 180 million), A tranche (Euro 10 million) and BBB class (Euro 10 million) received very good response inviting 1 1/2 times oversubscription, from 20 investors in 8 countries. The transaction was priced at spreads ranging from 45bp to 175 bp.

Portugese passed a securitization law towards late last year. The first MBS transaction under the new law might emerge sometime this year.

Links: For more on securitization in Portugal, see our country page – click here. For text of securitization law in Portugal, click here.

Morgan Stanley acquires Italian bank to gain more space in securitization market

Morgan Stanley Dean Witter's (MSDW) bid to acquire Italian bank Credito Fondiario & Industriale SpA (Fonspa) has received assent of more than 40% signalling that the takeover will be completed. After takeover, MSDW will redirect the company into securitization business.

The Rome-based bank would be acquired from Italian banking group Comit-UniCredito, following a number of failed attempts to sell Fonspa and disastrous results in 1999, Comit and UniCredito.

MSDW's stress on increasing its presence in the European securitization market is easily understandable. The investment banker easily leads innovative asset classes such as whole business revenues securitization, non-performing loans, etc. It has been active in several Italian securitizations.

Hong Kong mortgage corporation now offers mortgage insurance cover

Hong Kong Mortgage Corporation, the mortgage securitization conduit in Hong Kong set up on the lines of Fannie Mae, would now offer an expanded insurance cover for mortgages. A press release of the Corporation dated 17th August said that the new product that will provide insurance cover for mortgage loans with loan-to-value (LTV) ratio of up to 90%. Following the approval of the product by the HKMC Board on 27 July, the HKMC has signed the reinsurance agreements with the Approved Re-insurers and has briefed the staff of the participating banks on the eligibility criteria and the processing procedures.

A total of 44 banks will take part in the expanded Mortgage Insurance Programme to provide the 90% LTV product. Starting from 18 August, interested homebuyers may contact any one of the participating banks to apply for mortgage loans with loan-to-value ratio up to 90%.

Securitization professionals regard this new step as benevolent for the domestic asset securitization market in Hong Kong. Hong Kong, regarded by many as the mecca of Asian securitization (minus Japan), is essentially focused on cross-border transactions.

Links: See our page on Hong Kong – click here.

Korean NPL securitization obscures NPL problem
Standard and Poor's comment on Kamco transaction

Rating agency Standard and Poort's (S&P) recently commented on the Korean non-performing loans securitization. S&P says that the headlong rush to securitize nonperforming assets among Korean banks and investment trust companies may be obscuring lingering asset-quality problems at Korea's financial institutions. There is a scanty effort to transfer the burden of the non-performing loans, as the ultimate risk is stil being retained with the originating banks.

Korean restructuring agency Kamco had recently done Korea's first offshore securitization of non-performing loans. Click here for the story on this site. See here transcript of a chat on Kamco transaction here.

In the Kamco transaction, the originating banks that have sold their NPLs to Kamco have an obligation to buy back the same as Kamco has a put option. Besides, the Korean Development Bank has given a substantial put option to investors in the bonds, which, as is apparent from Fitch-IBCA's rating report, has been responsible for the rating of the bonds at par with the rating of KDB.

S&P in its comment says that while Korea's rapid acceptance of structured issuance can be applauded on the whole, financial institutions continue to hold a significant portion of their mountain of bad debt in the form of subordinated notes, even after the debt is securitized. This could rather aggravate the bad debt problem in the country, as banks would only disguise their bad loans while still carrying the brunt.

The report says: "The primary motivation behind these transactions is to sweep nonperforming assets out the door, and off financial institutions' balance sheets. In light of the very poor quality of distressed assets in Korea, however, these securitizations require substantial credit support in the form of large tranches of subordinated notes: the W22.9 trillion of issuance as of June 2000 includes roughly W8.05 trillion worth of subordinated tranches, which have a lesser claim on the underlying assets and as a result carry more risk. These junior notes, usually repurchased by banks or ITCs, are backed by essentially insolvent assets, and as such are less likely to be repaid. In short, securitizations involving large subordinated tranches are leaving financial institutions holding on to the worst of their bad assets."

Links See our special page on securitization on non-performing loans – click here.

Japanese department store securitization opens up new avenues

Seibu Department Stores recently completed the largest ever commercial mortgage backed securitisation in Japan of Yen 108.1billion. The Store securitized its flagship property in Western Tokyo on the Ikebukuro station, which serves about 3m passengers every day. The store belongs to the Seiyo Kankyo Kaihatsu group, a property developer that collapsed last month with Y550bn in liabilities

The methodology is a simple sale and leaseback device: the company will transfer the store in Tokyo to a special purpose vehicle set up by Yasuda Trust and Banking. This vehicle will lease the store back to Seibu, and issue Y78.1bn of bonds guaranteed by the revenues.

Commercial mortgage-backed securitization has been attracting great interest in Japan. Offices, market complexes, multi-storied buildings, vacant land, etc. have been securitized using simple sale and leaseback to other complex devices, basically drawing upon the value of the property not so much the cashflows therefrom. The Japanese authorities expect securitization to enable Japanese corporations to repair their balance sheets by raising money on the back of their property assets and future income.

Links For more on securitization in Japan, see our Japan page.

Regulators propose higher capital for riskier interest in securitizations

US bank regulators might propose higher capital requirements for securitization originator who retain either a subordinated interest in their securitized portfolio, or interest-only strip, cash collateral, or other interests which carry more than a proportionate risk in the underlying collateral. The Federal Deposit Insurance Corporation proposed these new rules on Monday this week. The proposal would require banks to hold $1 of capital for each $1 of residual interests – that is, 100% capital, in pools of high-risk securitized loans. However, these assets could account for no more than 25% of Tier 1 capital

100% capital, as proposed in the rules, is equivalent to a straight reduction from capital, or a loss of capital.

The current proposal picks up where interagency guidelines issued in December left off; those guidelines urged banks to limit their residuals but did not specify any limits. For news report on these guidelines, click here.

According to FDIC staff, the proposal would address certain residual interests that have generated supervisory concern and resulted in large losses–those that are structured to absorb more than a pro rata share of credit loss related to the securitized assets through subordination provisions or other credit enhancement techniques. Residual interests include subordinated security interests, receivables in cash collateral accounts, interest-only strips receivables, as well as any other assets that provide credit protection to securitizations. According to the FDIC, these residual interests can expose an institution to a larger than pro rata share of credit risk and generally are unrated or below investment grade instruments that serve as "first-loss" credit support for the senior tranches of a securitization.

The fact that the proposal is triggered by recent bank failures attributable to illusory securitization interest accounting is quite obvious. See, for example, the following extracts from a speech of FDIC chairman Donna Tanouen before a meeting of State Bank Supervisors on 12th May, 2000:

"You may recall that both First National Bank of Keystone and Pacific Thrift and Loan engaged in a significant level of asset securitization. Both grew quickly — using the ability to record immediate earnings from their securitization activities, thus growing their capital accounts. In both situations, the financial institutions retained an interest in the securitizations they sold. The legal structure of the transactions greatly affected the realizable value of the residual assets. Both retained first loss positions. And both maintained a concentration of residual assets.

In both of these cases, the external valuation models were inadequate and neglected to incorporate actual performance versus original assumptions. The banks' residual interests were subsequently determined to have significantly less value and are worth mere pennies on the dollar. So their reported capital levels were completely illusory.

Because of these failures – and because of concerns arising from subsequent examinations of other institutions with similar residual interests – the Federal regulators last December issued guidance on what institutions holding retained interests as capital should do to avoid exposure to loss. It requires that the recorded value of these assets must be objectively supported, using reasonable assumptions. And the guidance also requires that residual interests that are not well supported be classified as "Loss" — and not counted by the regulators as capital. That guidance was a good – and necessary — first step. But it is not sufficient to completely address the issue.

Other changes are needed to ensure that institutions will hold adequate capital to cover the risk inherent in residual interests — and to discourage institutions from holding excessive concentrations. So, in December, we also said that we were thinking about limiting – or eliminating – residual interests that could be recognized in regulatory capital.

We are working toward issuing for public comment in the not-too-distant future a joint proposal to toughen the capital requirements for those institutions holding these highly volatile assets. It is anticipated the proposal would require that "dollar-for-dollar" capital be held against the value of residual interests resulting from securitization – and would cap the amount of residual assets a bank can hold for regulatory capital. Why? Because today, we have a number of institutions on our problem list precisely because of this issue. And because we have a good number of other institutions – that are not on our problem list – but that do hold more residual interests in securitized assets than we believe is prudent.

I'm asking you today to support this effort. And to work with us to develop a sensible proposal and to make sure that the reported value of residual interests reflects reality and does not represent an undue concentration." [ full text on https://www.fdic.gov/ ]

FDIC issues final rule re. securitization revocation

The US Federal Deposit Insurance Corporation issued 11th August a final rule regarding its resolve not to revoke transfer of assets involved in securitization. See report below for a background of this move – click here.

The final rule states as follows:

"360.6 (b) The FDIC shall not, by exercise of its authority to disaffirm or repudiate contracts under 12 U.S.C. 1821(e), reclaim, recover, or recharacterize as property of the institution or the receivership any financial assets transferred by an insured depository institution in connection with a securitization or participation, provided that such transfer meets all conditions for sale accounting treatment under generally accepted accounting principles, other than the ‘‘legal isolation’’ condition as it applies to institutions for which the FDIC may be appointed as conservator or receiver, which is addressed by this section.

(c) Paragraph (b) of this section shall not apply unless the insured depository institution received adequate consideration for the transfer of financial assets at the time of the transfer, and the documentation effecting the transfer of financial assets reflects the intent of the parties to treat the transaction as a sale, and not as a secured borrowing, for accounting purposes.

(d) Paragraph (b) of this section shall not be construed as waiving, limiting, or otherwise affecting the power of the FDIC, as conservator or receiver, to disaffirm or repudiate any agreement imposing continuing obligations or duties upon the insured depository institution in conservatorship or receivership.

(e) Paragraph (b) of this section shall not be construed as waiving, limiting or otherwise affecting the rights or powers of the FDIC to take any action or to exercise any power not specifically limited by this section, including, but not limited to, any rights, powers or remedies of the FDIC regarding transfers taken in contemplation of the institution’s insolvency or with the intent to hinder, delay, or defraud the institution or the creditors of such institution, or that is a fraudulent transfer under applicable law.

(f) The FDIC shall not seek to avoid an otherwise legally enforceable securitization agreement or participation agreement executed by an insured depository institution solely because such agreement does not meet the ‘‘contemporaneous’’ requirement of sections 11(d)(9), 11(n)(4)(I), and 13(e) of the Federal Deposit Insurance Act (12 U.S.C. 1821(d)(9), (n)(4)(I), 1823(e)."

Decline in ABS volumes a sign of maturity, says analyst Volumes expected to grow in second half

An article in Investment Dealers' Digest 7th August says that the decline in ABS volumes in the first half of 2000 is a sign of maturing markets. ABS volumes which have been growing relentlessly for last 15 years declined some 9% during first half of 2000 – we carried a report on this – click here.

The article says that market players attribute the decline in volumes to consolidation taking place: for example, in home-equity lending, one-time independents like The Money Store Inc. and Green Tree Financial Corp. have been gobbled up by large financial service companies. Smaller once have disappeared: leaving, in result, lesser number of participants. Some large players like Citibank have not come out with a single securitization this half year, for which upwardly mobile interest rates may be the reason.

Market players expect the third quarter to be quite positive. As it is, there are number of mega deals doing rounds during August. However, the article stresses that with consolidation leaving lesser players in the marketplace, there will be lesser incentive for players to grow fast, and hence, reduced need for securitization.

In the process, a number of securitization specialists are looking at growth pockets outside the US such as Europe and emerging markets where securitization still continues to hold strong potential.

FDIC resolves not to rewind securitization transfers

The US Federal Deposit Insurance Corporation (FDIC) on 27th July last resolved not to revoke securitization contracts where assets were sold by one insured bank to another insured person. A report in American Banker 10th August says the final rule in this regard is likely to be published on 11th August. The rule will clarify that FDIC will not revoke securitization transfers, other than exceptional cases such as those involving fraud, or those that did not follow proper accounting standards.

The relevance of the above proposed rule arises in the context of bankruptcy of a bank that has securitised its assets. Under law, FDIC is entitled to accept appointment as a receiver or conservator of a failed depository institution that is insured by it. If it does, it has the power to ask for a judicial stay of all contracts or revoke all transfers. In the context of securitisation, this would mean that if it so chooses, the FDIC may annul a transfer of assets that took place to an SPV, and thus reinstate within the depository institution that assets transferred by it.

As a matter of credence to securitization transactions, the FDIC has already proposed some rules: some of these are resolutions of the FDIC and some are rulings laid by Courts such as Supreme court ruling inD’Oench, Duhme & Co. v. FDIC.

The present proposed rule will minimize the gray areas relating to securitizations using true sale method by FDIC-insured depository institutions.

Important: See final rule report above.

Dai Chi proposes mega securitization

According to reports in Jiji press, Dai-ichi Mutual Life Insurance Co. will securitize about Yen 240 billion worth of its housing loan assets late this month.

The transaction is expected to be one of the largest-ever securitization of mortgage-backed assets. The insurer will use the proceeds for reinvestment in corporate bonds in an effort to boost portfolio flexibility to better deal with interest rate fluctuations.

Morgan Stanley prices second Japanese NPL securitization

Morgan Stanley Dean Witter (MSDW) on 8th August launched and priced Japan's largest securitisation of non-performing real estate loans, which is the second Japanese NPL securitization by MSDW. We had carried on this site news about the first securitization of Japanese NPLs by MSDW – click here. The last deal was Yen 21 billion.

The present issue of Yen 31 billion is based on a portfolio of non-performing loans backed by 441 properties bought by MSDW from Japanese financial institutions. Using an SPV called International Credit Recovery – Japan II, the transaction has been broken into 4 tranches: Class A Floating-Rate Structured Notes ¥ 20,billion, due August 2005; Class B Floating-Rate Structured Notes ¥ 5,5 billion due August 2005, Class C Floating-Rate Structured Notes ¥ 4. 5 billion due August 2005 Class D Floating-Rate Structured Notes ¥ 1 billion due August 2005.

The MSDW deal has been regarded by analysts as indicating a rapidly growing potential for profits in Japan. Japanese banks are cash strapped and would be more than willing to sell off their illiquid property portfolios. The totak amount of the potential could be as high as USD 46 billion.

MSDW is supposed to have got 2 times oversubscription for the issue from investors in US, Japan and Europe. After the MSDW transaction, other investment banks – both domestic and foreign – are also understood to be interested in Japan's real estate securitisation market.

Links – See also our page on securitization of non-performing loans – click here. The page gives link to Edward Altman's article on this site on Japanese NPL securitisation.

Securitization retained interest write down acconts for Delta's losses

Delta Finance Corp. reported a loss of USD 3.5 million for the second quarter. The company sought to explain the loss as arising out of write down of residual interests in securitization transactions, forced by rising rates of interest.

Besides, reflecting the uncertainty surrounding the magnitude of potential interest rate increases by the Federal Reserve, asset-backed investors demanded wider spreads over treasuries than we have historically experienced on newly issued asset-backed securities. In addition, during the recent period of sharply rising interest rates (prompted by concerns that the Federal Reserve would raise short-term interest rates, which it eventually did), the Company, like most subprime lending institutions, was unable to raise interest rates on new originations fast enough to offset its increased funding costs.

We have carried stories on this site before about securitization accounting – see below. If you have any thoughts to contribute on this, do write back.

Banker's Trust is the top securitization trustee

Bankers Trust, a unit of Deutsche Bank, was the top trustee for asset-backed and mortgage-backed issues during the first half of 2000. Banker's Trust seized this position after a gap of nearly 2 years. Banker's Trust was at third place last year, behind Bank of New York and Bank One. Deutsche Bank had acquired Bankers Trust in June 1999.

Bankers Trust got trustee assignments on 57 deals totaling USD 30.9 billion during the first half of 2000, commanding a 19.9% share of the market.

During the first half of 2000, Bank of New York finished at the second position with Bank One following. Others are Chase Manhattan at fourth, Wells Fargo number five.

Vagaries of securitization accounting: several firms report huge write downs

Recent financial results of several US securitization originators show huge write downs on account of retained interests or gains on securitization transactions, raising a question as to whether something is seriously wrong with FAS 125.

Take Amresco Inc for instance. The financials for the quarter ended 30th June show a USD 70 million write-down on home equity retained interests, besides losses on several other retained interests or impairment in securitization-related assets, adding up to a loss of USD 93.6 million for the quarter.

In the case of Advanta Corp., the Office of the Comptroller of Currency forced it to do a massive write down on retained interests in securitization transactions. Owing to an agreement Advanta reached with the OCC, its second-quarter pro forma operating profit of 65 cents per diluted share was wiped out; and it is now reporting a net loss of $7.64 a share. The agreement provides that the retained interests be calculated based on an 18% discount rate on the interest-only strip and subordinated trust assets, a 15% discount rate on the contractual mortgage servicing rights, a prepayment rate that represents the average prepayment experience for the six months ended February 29, 2000 and cumulative loss rates as a percentage of original principal balance of 6% on closed end mortgage loans and 8% for HELOC (open end) mortgage loans. The net impact of these write downs is to hit the profit statement by at least USD 201 million.

Chat on securitization accounting Very soon, we are planning to have a chat on the contentious issue of gain-on-sale accounting. Would you like to participate? Do you have a celebrity to suggest for the chat? Do write .

Links There are several articles on accounting for securitization – get them on our articles section. Click here.

Japanese accounting body finalises securitization accounting guidelines

Japanese accounting body Japanese Institute of Certified Public Accountants finalised accounting guidelines for securitization transactions last Monday. It has enforced a stricter accounting rule that is intended to prevent companies from putting off the books their bad assets, even though they retain significant interests in such assets.

The final guidelines come after a draft proposal was published in June. On this site, we carried this news – click here, along with a link to the Japanese text of the proposal. In its final guidelines, the Institute caps the originators' retained interests to 5 %, beyond which the assets sold will not be put off the books. The industry had demand the cap to be extended to 10%, which was rejected. However, the Institute has postponed the introduction of the new rule until April 2001, rather than August 2000 as initially proposed. As a transitional measure good through April 2001, it allows companies to purchase up to 10 pct of asset-backed securities.

ANZ and others spice up Australian securitization

ANZ Banking Group this week closed a USD 232.6 million securitization of housing loan mortgages. The issue will comprise both senior and junior notes, expected to be rated AAA and AA-minus respectively by Standard & Poor's Corp. The bank officials did not see much cost saving in the transaction, but it was more for capital efficiency. This apart, the bank sees larger funding pools available this way in time to come.

The transaction will be lead managed by ANZ Investment Bank while Deutsche Bank AG and Macquarie Bank have been appointed lead managers.

As per another report in Australian Financial Review 3 August, ANZ has emerged as Australia's largest home lender as it wrote 25 per cent of all new home loans in Australia, followed by Westpac Banking Corporation Limited 22 per cent, National Australia Bank Limited 14.4 per cent and Commonwealth Bank of Australia Limited 12.8 per cent.

In Australia, most of the mortgage financiers, with the exception of a few such as National Australia Bank Ltd, are engaged in securitization.

As per yet another report, Wide Bay Capricorn Building Society Limited recently issued $A200 million in mortgage backed securities, with its underlying collateral having the highest loan-to-value ratio seen in the market, at 102.2 per cent. The first tranche of this transaction was rated AAA.

Links: For more on securitization in Australia, visit our country page – for reports, articles, text of regulatory statement, etc. – click here

Abbey National's mega mortgage securitization a trendsetter in European securitization

Abbey National's recent mega issuance of GBP 2.25 billion mortgage backed securities marks a new milestone in the market development in Europe. Market analysts say that the Abbey mega deal is not triggered by capital adequacy considerations as with most CLOs originating from Europe. Rather, it establishes that mortgage funding and securitisation is a worthy business by itself.

Mega deals of this size are not very common in Europe, but the Abbey deal gives a good hint of the vast potential of money flowing into Europe, if MBS issuers could open up the gates to European mortgage market.

The Abbey National deal used the master trust structure which Citibank/Salomon Smith Barney devised for Bank of Scotland. The device carves out soft bullet bonds out of long maturity mortgages is seen as a breakthrough in mortgage securitisation. The master trust structure requires a much higher volume of assets being transferred into the trust: Abbey in the present case transferred GBP 6.2 billion worth mortgages into Holmes Trust, the SPV.

The structure used in the transactions is briefly as follows: Abbey the originator transfers the mortgages to a trust company which holds it in trust for both the originator and the SPV 1, in their relative shares. The shares would change over time based on extent of funding raised by the originator. SPV 1 receives an intercompany advance from SPV 2, and agrees to repay this advance in periodicities exactly matching with those of the Notes issued by SPV 2. With the advance it receives, SPV 1 buys the proportionate share of the mortgages held by the trust company.

Abbey holds a mortgage portfolio of about GBP 65 billion, of which approximately 7% would have been securitised, in 4 deals including the present one.

Brazilian company securitises export receivables

Samarco Mineracao, the Brazian iron ore exporter, recently closed a USD 135.5 million securitization of export receivables. The deal was completed by BNP Paribas and Banco BBA.

The securitisation is Samarco's second. Earlier, in 1995, the company had securitized export receivables with US insurance companies, pension funds and a Japanese leasing company. The 1995 deal had no SPV as 6 specific export receivables were sold to separate investors.

The present transaction involves a master trust set up in New York, and is classed into 3 tranches. The first tranche of USD 33.5 million has been exchanged against notes from the previous securitization. The second and the third tranche of USD 32 million and USD 70 million respectively have an average life of 2.8 years and mature in May 2005, and are rated BBB- by Fitch.

Tranche two pays 300bp over three month Libor and tranche three has a coupon of 10.04%, corresponding to 350bp over Treasuries at pricing.

The right to the receivables is transferred first to a Cayman SPV and then to the master trust through two back-to-back receivables sale agreements. Customers have been asked to make payments direct to an account at Bank of New York. So far, customers representing 78% of the eligible exports (and 99% of those in single-A and higher rated countries) had agreed to do so.

Links: For more on securitization in Brazil, see our country page -click here.

Securitization: the new mantra of dot com companies

Having taken Wall Street equities by storm, dot com companies are now looking at securitization markets. According to an article in Investment Dealers' Digest of 31st July, a slew of internet companies have approached rating agencies with securitization proposals during the last few months. Companies that have been floating the idea include Gateway Inc., Dell Computer Corp., Mindspring (now part of EarthLink Inc.), Gobi, Inc. and DirectWeb, etc.

The possible securitization flows for ISP companies would be the fees these companies receive from internet users. Rating companies are concerned that the rate of mortality is far very high among internet companies and the fees stream itself is contingent upon the operations and services of the ISP.

While there might be problems in such securitisation, it is clear that such deals are on the radar screens of securitization professionals.

Korean financial reconstruction agency securitizes non performing loans
The transaction is the first in Asia, minus Japan

The Korea Asset Management Corporation (KAMCO), a special vehicle for restructuring the financial sector, has successfully placed USD 367 million of asset-backed securities to international investors. This is the first case of securitization of non-performing loans in Asia, other than Japan.

The offering was co-managed by Deutsche Securities and UBS Warburg, and was priced at 6- month London Inter-Bank Offered Rate plus 200 basis points with a 8.5-year maturity.

The bonds are secured by a pool of $419 million of bad loans purchased by the KAMCO from banks, largely including loans to financially ailing companies. The transaction rides piggy-back on the credit rating of Korea Development Bank whihc has provided a 30 percent credit facility, as also provided bulk of the put options which together account for some 60% of the face value of the bonds.

The offering was rated Baa2 by Moody's and BBB+ by Fitch IBCA.

The interesting and heartening feature in the offering is that investor interest was evinced by not only securitization specialists but also by investors new to the asset-backed sector but familiar with Korean bank credits.

Related links: See our specialised section on non-performing loans.For a very detailed article on securitization of non-performing loans in Japan, click here. For news report on Morgan Stanley's first securitization of non-performing loans in Japan, click here. For securitization of non-performing loans in Italy, click here. We also held a chat on the Kamco transaction – see the transcript of the chat here. See above for a comment on Standard and Poor's on the transaction.

Florida jury's tobacco ruling may jeopardise securitization deals

The recent ruling by a Florida jury that made headlines all over the world may be little less damaging for tobacco securitizations than cigarette smoking is. The jury had held last week that tobacco companies in the US owe USD 145 billion in damages to smokers.

The ruling might cause its impact on securitization transactions where certain of the States had sold their right to receive the tobacco settlement money against upfront cash. The settlement receivables refer to the USD 206 billion settlement that 46 of the US states and counties made with big tobacco companies in 1998, under which the tobacco companies are to pay damages over next 25 years in lieu of the States not litigatinng against the companies. For details about the settlement, click here.

Some of these governments have already securitized their receivables, for example, New York. However, the terms of the settlement provide that if the cigarette companies go bankrupt, they will not be liable to pay any damages any further. That is where the Florida ruling may create a problem – if the tobacco companies are required to pay the punitive damages as ordered, it is very likely that they will go bankrupt.

To get a perspective of the amount ordered in damages, if the USD 145 billion in damages were to be paid in 10 dollar bills, the bills placed end to end would circle the earth 17 times ! Or if the damages were to be paid in 100 dollar bills, the total amount would weigh some 1480 tons, and a stack of the bills would go 10 miles high !

The Florida verdict is currently in appeal.

Links For more on securitization of tobacco receivables, see our section on securitization of government revenues.

Pressure grows for withdrawal of government support to Fannie and Freddie

As pressure continues to mount to reconsider the Federal government's support to Fannie Mae and Freddie Mac, the government appointed a special task force of the House Budget Committee to consider issues relating to financial risk, safety and soundness surrounding the two securitization agencies.

The major issues being discussed by the task force are:

  1. Whether to eliminate the government's conditional credit lines to both entities
  2. Whether to limit, as with other classes of securities, how much of these issues a bank can hold in a portfolio
  3. Whether to consolidate the regulatory authority for Fannie, Freddie and the Federal Home Loan Bank System.

Fannie Mae (formerly known as Federal National Mortgage Association) and Freddie Mac (formerly known as Federal Home Loan Mortgage Corporation) are two of the three agencies created by the US government for promotion of secondary markets in mortgages. Fannie Mae is the largest mortgage securitization agency in the world, and is admired as the role model for many other countries.

Fannie Mae was set up way back in 1938, but it got into mortgage securitization business only after 1968, when the government split the agency into two separate entities: Ginnie Mae (Government National Mortgage Association) and Fannie Mae. Ginnie Mae was the actual originator of securitizations, but over time, Fannie Mae, which become a publicly owned company in 1970 became far more active. See our country page on USA for relative market shares of the agencies.

Freddie Mac also started life as a fully owned government agency, but was turned into a publicly owned company in 1989 under the Financial Institutions Reform Recovery and Enforcement Act.

The securities issued by the two agencies are not legally guaranteed by the Federal govt., but the market attaches a quasi-governmental backing to the agency securities. The agency securities also receive preferential treatment for banks holding them – see our earlier report on this issue.

Besides, the government has also extended a line of credit to the two agencies, though it is miniscule: a USD 2.5 billion line of credit as against approx USD 2 trillion of Fannie Mae and Freddie Mac securities outstanding.

Reports indicate that Under Treasury Secretary Gensler supports the view that the government should withdraw the preferential treatment to the agency securities for banks, as also the line of credit.

Links For links to the websites of the agencies, see our links page.

CMBS: S&P analyses reasons for delinquency

In a recent quarterly review of commercial mortgage-backed securities in the United States, rating agency Standard and Poor's reviewed the reasons for delinquency in this segment.

As of May 2000 the total amount delinquent was $708.6 million on a base of $92.2 billion of rated CMBS transactions. Going into the reasons for delinquency in larger of these mortgages, concentration in the mortgage portfolio seems to be one of the prominent reasons. S&P observes as under:

"As a result of this analysis, certain risk-based conclusions can be affirmed. First, borrower and property operator/lessee concentrations pose quantifiable additional credit risk. Second, certain property types, generally outside of multifamily, office, retail, and industrial, have borne the impact of bankrupt operators, lessees, and borrowers. Although hotel loans are apparent in three of the transactions, they were not all limited service. Consequently, the five transactions listed above [not listed here] can attribute their high delinquent balances directly to the weakening of health care and certain single-tenant, stand-alone retail properties. Limited-service and full-service hotels continue to suffer from competitive pressures. Thirdly, real estate values can protect against tenant or borrower problems.

Even though some of the previously mentioned delinquencies are large, not all transactions were downgraded because property values were considered to be adequate relative to loan balances. For example, even if Service Merchandise goes out of business, the appraisals of the stores are in excess of the loan balances. Even though diversified CMBS transactions continue to perform well, those pool transactions with little or no exposure to either nursing homes, single-tenant retail, or limited-service hotels should continue to benefit from the strong, if not slowing, economy and their strong credit characteristics. "

Nomura to try whole-business securitisation for Malaysian wafer plant

Nomura is known for innovation in securitisation – it perfected a whole-business or operating-revenues securitisation methodology in Europe. Now for the first time, this methos would be tried to fund Malaysia's first silicon wafer plant, which would raise USD 180 million approx. through bonds backed by sales revenues of wafers.

The hi-tech plant based in Kuching, Malaysia, has been initially financed by syndicated bank credit, and would be refinanced by securitisation once sufficient production was under way.

In Europe, Nomura is credited with securitising operating revenues of a French champagne maker, in a transaction that made headlines world-over. Click here for more on this transaction.

Nomura has also been associated with several securitisation of pub revenues in the UK.

What is operating business securitisation: Unlike asset-backed securitisation, operating receivables securitisation captures the entire revenues of a business based on its past operations. Generally, the SPV will have some trapping of the receivables either by a control on the sales or production. For example, in the case of champagne bottles securitisation, the SPV was given physical pledge of the entire stock of bottles at different stages of production.

Links For more on securitisation in Malaysia, click here.

Second securitization of all-Net loans

PeopleFirst.com, the the first Internet finance company to securitise loans generated exclusively over the Net early last year [click here for our news item] has closed its second offering of securitised loans originated fully on the Net. The present transaction is exclusively via the Internet. This transaction is more than double the size of the first offering, is backed by similar credit quality automobile and motorcycle loans. Prudential Securities and Barclays Capital are the manager and co-manager respectively of this offering.

The transaction was composed of four classes of asset-backed notes which are rated Triple-A by Standard & Poor's and Moody's Investor Service Inc. The notes are credit-enhanced by a bond insurance policy from Financial Security Assurance Inc.

PeopleFirst is the first Internet company to offer loans for the purchase of vehicles from individuals. Through an exclusive agreement with Mail Boxes Etc., PeopleFirst is able to provide customers with a convenient way for completing a private-party transaction.

S&P reviews developments in Latin American securitisation

International rating agency Standard and Poor's recently reviwed Latin American securitization. The special report titled Securitization in Latin America: Growth in Story Times was carried in the July 2000 issue of Structured Finance.

According to the report, "over the past three years, a combination of changes in the region’s regulatory systems and a deeper understanding of securitization by regulators and key participants has caused a sizable increase in the number and types of existing asset-backed transactions."

The report expects that "in the near term, investors will continue to reinvest their capital in Latin America. As a result, the securitization market will grow in amount and in asset types. Issuers will continue issuing future flow transactions to lower their financing costs relative to those of corporate issues. However, the issuing market must adapt to different economic and financial scenarios such as recurrent volatility and political instability. The market must also cater to the demands imposed by international investors, who will be more selective and choose only transactions with very solid structures. Multilateral institu-tion guaranties, such as the IFC and IADB, and companies pro-viding insurance against credit or political risk will provide their services to help the region’s companies and banks mitigate sovereign risks.".

The report contains country-specific developments. We have incorporated Standard and Poor's comments in the country profiles. See the following country pages for details:

Cagamas has helped Malaysian mortgage market, says CEO

Cagamas (National Mortgage Corporation – www.cagamas.com.my), the Malaysian secondary mortgage market agency, was created by the govt. in 1986 and has since then been engaged in buying housing loans from banks and housing finance companies, and issuing bonds secured thereon. Cagamas CEO Tan Wai Kuen recently wrote in Banker's Journal, a publication of Institut-Bank-Bank-Malaysia on the securitisation experience in Malaysia.

For development of a securitisation market in Malaysia, there is a need to remove the various obstacles that are hindering its progress, apart from convincing loan originators to change the perception of their role from financier to loans servicer, says Tan.

Cagamas performed the vital role of providing liquidity to financial institutions by purchasing their mortgage portfolio and ensuring continuous supply of mortgage funds. As such, Cagamas, as a special vehicle to provide liquidity, had contributed towards the easy availability of housing loans offered by financial institutions. to have access to medium and long-term funds which matched the tenure of their long-term housing loan assets more closely than their traditional source of funds, that is, deposits which were primarily of less than one-year tenure.

The success of Cagamas speaks for itself – banks and housing financiers in Malaysia today lend for anywhere between 15 to 30 years, while before, the tenures were much smaller. The spreads have also substantially come down. In totality, this made housing more affordable.

Cagamas has also contributed towards developing a market for private debt securities.

Vinod Kothari comments: I have been able to interact with several key professionals in Malaysian securitisation market in course of the workshop I did there. Apart from mortgage loans, both commercial and residential, Malaysian banks did not seem to be immediately interested to securitise, as reducing the balance sheet size was not one of their immediate priorities. Rather, they are more keen to retain the assets on the balance sheet, and they fear that with introduction of IAS 39, banks would be required to put assets off the books if they securitise. Besides, debt instruments are not very marketable, since the prime rates as well as the spreads are very low. In my view, what would interest Malaysian banks more would be a synthetic securitisation or a credit derivative instrument, with the promise of a higher return for the investors, and risk reduction for the originating banks.

Malaysian central bank is currently finalising prudential norms for securitisation – this site will publish the prudential norms soon as they are finalised.

Links For more on securitisation in Malaysia, click here.

New capital rules to boost ABS demand; create more pressure for securitization know-how, says KPMG

Accounting and consulting firm KPMG feels that proposed capital adequacy rules of Federal bank regulators will boost demand for asset-backed securities, but banks will have to beef up their expertise and overhaul their systems. The new capital rules seek to align risk weightage for securitized products to their ratings, in line with BIS proposals. For related stories on this site, click here .

KPMG observes that with the passage of the regulatory proposal by year end, the market will find more and more banks buying asset-backed securities instead of Treasury bills. ABS have a higher incremental return than Treasuries, but banks have minimized their asset-backed securities holdings because federal regulations currently have higher capital requirements. Those capital requirements would be greatly lowered if changes, proposed by the federal regulatory agencies are approved.

However, in the new era of rating-based capital controls, banks will be required to put stress on asset evaluation skills. There is hardly any need to evaluate risks while buying treasuries, but not the same when it comes to asset-backed securities. Consequently, banks will have to hire specialists with ABS experience and spend on systems and trading platforms.

For another story, on a different note, as to why mortgage-market agencies are opposed to the proposed rules, click here.

Market players oppose US FASIT rules

US market players are not happy with the propsed FASIT rules that were formed by the US inland revenue service some time back. [See related story on this website and a link to the full text of the proposed regulations here.] FASITs are conduits created for securitisation of financial assets other than those based on real estate – they were proposed on the same lines as REITs but have been a non-starter from the very time proposed more than 4 years ago.

Some time ago, the Bond Markets Association sent a letter to the IRS asking it to revise its proposed Fasit ruling, which would tax the gains of issuers based on an artificial formula instead of a market price. The Association complains that FASITs have been severely underutilised in the past (only 3 deals have been done so far) because of uncertain tax structure. According to the proposed regulations, taxation of gains is to be done based on an index of gains announced by Federal register.

Most market practitioners do not think of FASITs as a viable option for asset-backed securities. An article in International Financial Law Review May 2000 by Charles M Adelman [New FASIT regulations pose hurdles for securitization industry] also exposes the problems in the proposed FASIT norms. This article also carries a detailed explanation of FASIT rules.

South African conduit to securitise IT supplier's future receivables

Mettle [http://www.mettle.net] , a specilised finance house based in South Africa, has finalised a R200m securitisation deal with Siltek, the information technology supply-chain group, reports Business Day 12th July.

The transaction involves transfer of Siltek's trade receivables to an SPV set up and controlled by Mettle -Xavier Trading – which will purchase on an ongoing basis trade receivables fo Siltek created over a period. Senior notes in the deal for three years maturity have been acquired by Rand Merchant Bank.

According to Mettle officials, this is one of the first trade receivables future flow transactions to be concluded in South Africa. And it is one of the first times that a major SA bank has taken up the senior debt tranche in its totality. The deal highlights the increasing acceptability of securitised notes with banks, a feature which should augur well for the South African securitisation market.

Duff and Phelps has reportedly given a AAA rating for the deal.

Links For more on securitisation in South Africa, click here.

Bermuda protected cell legislation on track

Protected cell legislation, which will make it easy to float a single SPV for multiple securitization transactions, is on track in Bermuda. The law is expected to be introduced later this year. The law, titled The Segregated Accounts Act 2000 has been submitted to the minister of finance for approval after more than a dozen drafts. The minister will introduce the legislation into the Parliamentary agenda before year's end.

A protected cell company is a special corporate structure which allows a company to have several protected cells within the company, so that a single company can act have several subsets of assets and liabilities within itself, each protected from the claims of creditors of other cells. We have briefly explained the concept of protected cell companies earlier on this website – click here. Also Click here for an article by John E Langlois on protected cell companiesThe

Bermuda is currently allowing formation of protected cell companies, but under specific acts of parliament. This is a costly and time taking process, but a number of market participants are prepared to go this route rather than wait for the specific law to be enacted. The NAIC in the USA is also in favour of a protected cell legislation in the USA.

NHB triggers India's first RMBS transaction

National Housing Bank (NHB), India's premier housing refinance body, signed up with HDFC and LIC Housing Finance for acquisition of a section of the portfolio of the latter two, and its securitization. HDFC has sold of Rs. 895 million worth loans, and LIC Housing Finance Rs. 475 million.

Officials of NHB, HDFC and LIC Housing Finance have been working on the transaction for over 3 years now. In the process, several legal and quasi-legal snags had to be cleared, including, importantly, an amendment of the NHB's constitutional law that limited its sphere of activities.

The securitisation process will be a simple pass through operation, but stratified into class A and class B. The senior class, rated AAA by Crisil, will be offered by way of private placement in the market, while the junior one will be bought back by the originators. Class A securities will be listed on the National Stock Exchange.

SBI Capital Markets and ICICI Securities are co-managers for the issue. The coupon is yet to be fixed.

It is expected that soon, the Reserve Bank of India will formalise the capital adequacy norms for securitised products.

Vinod Kothari comments: Agency-backed pass throughs in the USA are presently assigned a lower risk weightage for capital adequacy purposes, but it is proposed that the risk weightage will now be changed to be relative to the rating of the instrument.

Belgian bank comes out with largest synthetic CLO ever

Brussels-based KBC Banking & Insurance Holding Company unit KBC Bank NV [http://www.kbc.com] announced having placed a Euro 4.3 billion issue securitizing its international loan portfolio. The issue is regarded as the largest synthetic CLO so far.

Synthetic CLOS become very popular, particularly among European banks, as they provide capital relief without having to go through hassles of true sales and assignments, issues over which most European laws are not all that clear. We have covered synthetic CLOs on our bank loan securitization page.

The issue is in two parts: a Euro 3.952 billion privately placed credit default swap representing the most senior portion of the credit risk and a 4-tranche issue of asset-backed bonds representing the first 8.1 pct of the credit risk

KBC's first CLO, Orion Commercial Loan Master Trust, was a USD 1.5 billion true sale transaction backed by US corporate loans and lead managed by Lehman Brothers in April 1999. Lehman is the co-manager in the present transaction too. KBC has securitised mortgages in the past, and reportedly holds further securitization proposals up its sleeves.

Links For more on synthetic securitization, click here. For a website dedicated to credit derivatives, click here. For more on securitization in Belgium, click here. The Belgium page was last revised 6th July, 2000.

US securitization volumes drop sharply

First half of the first year of the new millennium reflects slowed activity in securitization, something that has happened for the first time after 5 years. It is not securitization alone, but it seems as if Wall Street is putting brakes on all kinds of underwriting and issuance activity.

Issuance of collateralized securities were adversely impacted by rising interest rates. Issuance of mortgage-backed securities fell by better than 61 percent in the first half of 2000 as only $73.5 billion in deals were completed compared to over $186 billion in the year-earlier period. Similarly, asset-backed deal volume dropped though by not as great a magnitude. ABS volume totaled $129 billion in the first six months of the year compared to $141 billion in the first half of 1999.

Do you think year 2000 will end up with lower volumes than last year? Do write your views either at the discussion forum or to me.

UNCITRAL meeting in New York to discuss model securitization law

The 33rd Session of UNCITRAL is currently meeting in New York to discuss the model law on assignment of trade receivables which, when finalised and ratified by different countries, will standardise the law on securitisation in cross border transactions.

Uncitral (United Nations Commission on International Trade Law) has proposed the draft of a model law on assignment of receivables in cross border transactions. The draft model is on our site –click here. The draft has been discussed in several meetings in the past too.

Assignment of receivables is a key legal step in securitization transactions. The law relating to securitization differs from country to country, but the biggest difficulty is faced in Civil law countries where assignments require notification of obligors, sometimes, even their prior consent. It is due to these legal difficulties that some of the banks these days are finding it easier to do on-balance-sheet securitization in form of synthetic CLOs – click here to go to our site on bank securitization.

UNCITRAL was formed in 1966, and since then, it has finalised model laws for several trade related matters, the most prominent among which is the arbitration and intellectual property laws, which have been adopted by several countries.

French bank comes out with CBO

A report in La Tribune of 3rd July says that Natexis Banques Populaires, the French bank, has launched its first securitisationoperation on a portfolio of bonds mostly issued by US companies. This operation co-arranged with Lehman Brothers uses a synthetic structure to remove the credit risks on the bonds without removing the bonds from the balance sheet.

The transaction, which is reference on a portfolio of USD 412.5 million, involves two credit default swaps jointly guaranteeing the cover of the bond portfolio. The first, described as senior, represents 89.2 per cent of the total portfolio, and has been concluded with a banking counterpart. The second is subordinated in risk to the first, is on 10.8 per cent of the amount, and has been concluded with Natix Plc.

Links: Synthetic securitization is becoming increasingly popular among banks – click for a write up on synthetic securitization on our site – click here. For a write up on securitization market in France, click here.

SECURITISATION NEWS AND DEVELOPMENTS – Sept.- Oct., 2000

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For all news for November and December, 2000, please click here 
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Read on for chronological listing of events, most recent on top:

FASB issues implementation guide to FAS 140

The Financial Accounting Standards Board on 27th Oct. put up on its site a preliminary draft of an implementation guide to the new accounting standard on securitisation, FAS 140. FAS 140 replaces the existing accounting standard FAS 125 – see news item below.

The FASB states: "The FASB staff is preparing a new Special Report, A Guide to Implementation of Statement 140 on Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: Questions and Answers, That report will be an updated version of its earlier Special Report about Statement 125, the third edition of which was published in July 1999. A draft of the updated Special Report is provided here for information and comment". The FASB has invited comments on the draft of the guide by Nov., 20 and hopes to come out with the final version of the implementation guide in December.

Text of the draft implementation guide is available on FASB site at:
http://www.rutgers.edu/

Among other issues being analysed, the draft of the implementation guide provides that if the originator retains a clean up call option with regard to a portion of the portfolio transferred, then sale accounting will precluded only in respect of that portion for which the call option is retained. In other words, the sale accounting will still be applicable on the portfolio, minus the portion subject to the clean up call.

Martin Rosenblatt, a leading expert on securitization accounting, comments: "Issuers who have abandoned gain on sale accounting by increasing the optional call from a 10% cleanup call to a 20% call will have to go back to the drawing board.". Martin's comment relates to the securitisers opting out of gain-on-sale accounting by retaining clean up calls in excess of 10%.

Thrifts supervisor cautions against investment in risky CLO tranches

In a memo dated 23rd October, the Office of Thrift Supervision cautioned savings associations against investments in riskier tranches of CLOs and other structured offerings.

Focusing on investments in non-standard or unrated investments such as residual securities in CLOs, the regulator states: "The lowest priority tranche, or the residual interest tranche, is generally not rated. It is typically subordinated not only to senior tranches, but also to expenses of the issuing trust. These residual tranches are typically difficult to value and are illiquid investments by themselves. To make the residual tranche more marketable, the CLO issuer or trustee may swap the residual interest tranche for certificates guaranteed by a AAA-rated counterparty as to the principal amount at maturity (generally up to 12 years).

"While the swap creates a guarantee of the full principal at maturity, the amount guaranteed must be discounted to its present value if terminated early. In that respect, the guaranteed portion of the security is similar to a zero-coupon Treasury bond. Therefore, the credit support provided by the guarantor may cover less than 50% of the face amount of the certificate at purchase. Unlike zero-coupon bonds, however, these certificates are generally sold at par. Investors must rely on the performance of the reference asset (the residual tranche in this case) to return the remaining portion of their investment and provide any yield. The performance of the reference asset is not, however, guaranteed. Therefore, these investments are not, and should not be considered, fully rated.

"Apparently, the motivation to purchase such certificates is the high yield projected if the CLO collateral pool (and thereby the reference asset) performs well. However, there is no guarantee of residual cash flows, and the certificates will not be in default if no cash flows are paid to the investors. These investments are speculative, and are clearly not intended to hedge interest rate risk or credit risk. Based on discussions with ratings agencies, and the lack of supporting cash flow analysis, it is difficult to assess the likelihood that a particular return could be achieved on these investments. In essence, an institution should not be misled by split ratings where only a part of the security is either guaranteed or rated investment grade."

Mortgage securitisation fails to yield results in South Africa

A report in Business Day of 20th Oct. says the government is not happy at the fact that the government's securitisation initiatives have failed to yield any results, particularly in terms of making funds available to the lower-end of the market. The government through National Housing Finance Corporation had promoted Gateway Home Loans to buy housing loans from the market and to securitise the same.

However, during the first year of its operations, Gateway failed to buy any loans, says the report. Gateway has not been able to convince banks and housing lenders to sell their portfolios to it. Gateway feels that unless there is a primary market in housing loans, there is no scope for creating a secondary market.

Government has been struggling to find a way around banks reluctance to take on the risk and costs associated with lending into the lower end of the market. The banks counter that this segment of the market is unattractive to them due to retrenchments and the high risk of default.

Unemployment and retrenchment continue to dog the lower end of the housing market in the country.

Vinod Kothari comments: Initiatives to promote housing finance internationally come in form of a package of measures: strong mortgage foreclosure laws, a congenial and cost effective securitisation market, and generally active debt market. Based on my interactions, it seems the mortgage foreclosure procedure in South Africa needs to be strengthened. Obviously enough, housing needs cannot wait till development, and thereby, employment, picks up.

Developments in Italian securitisation

Rating agency Standard and Poor's is optimistic about development of Italian securitisation market, as per an article in the October issue of Structured Finance. The article summarises deliberations at a recent conference in Milan.

One positive legislative development in the offing is a new Notary Law which will shorten the time currently being taken in foreclosure of mortgages. In Italy, the foreclosure process may take anywhere between 4 to 7 years while 2 years is the European average. Speedier recovery process backed by strong legal framework obviously promote securitisations.

An area where securitisation in Italy is bound to grow is lease securitisation. Leasing is quite strong in Italy, particularly in the field of automobiles. Leasing companies would realise that releasing capital via securitisation is the sure shot way to growth, and hence better rating.

Links For more on securitisation in Italy, click here.

Securitisation rules in Malaysia by year-end

The securities regulator in Malaysia, Securities Commission (SC) has proposed to come out with securitisation rules by the end of the year. Malaysian newspaper Business Times quotes the SC chairman Ali Tan Sri Abdul Kadir as saying that commission has established a consultative committee comprising market professionals to find what is required to facilitate the process and submit recommendations to the Government. The process is almost reaching its end now.

Vinod Kothari comments: Securitisation market in Malaysia is virtually non-existent save for the bonds issued by Cagamas, the Govt.-sponsored body for secondary market in mortgages. As a matter of fact, the debt market for private securities itself is very dull in the country. Banks and financial intermediaries do not face strong pressures on capital adequacy: hence, there is no urgency to push for off balance sheet financing.

Nevertheless, as the country's legal position on securitisation is far from clear, a set of rules will help the market to grow.

Links For more on securitisation in Malaysia, click on our country page here.

Europe likely to have record issuance in 2000

European markets are going high on securitization. It is clear that year 2000 will go down in history as a year of record issuance, even while the US market will most likely close with a substantial negative growth [as we analyse in another story].

Till the end of third quarter, Europe has already recorded USD 60 billion of issuance, which is already ahead of 1998's total issuance and is close to USD 72 billion of issuance in 1999. With at least USD 25 billion worth issuance in the pipeline, there are firm indications of year 2000 volume being the highest so far.

One of the bold-going European types is synthetic securitisation, a device that does not put the assets off the balance sheets but gives the originator cover against risk, thus obviating "true sale" concerns. [For more on synthetic securitisation, see our page here.] Synthetic securitisations were originally well-accepted in Germany, but now they seem to have a much wider acceptance all over Europe.

Christopher O'Leary in a recent article in The Investment Dealers' Digest notes that "what will most define the openness of the European securitization market is whether government-sponsored deals from the likes of Italy and Spain will be accepted by investors. European governments have tried to offer deals in the past, to indifferent reception. Should the upcoming government deals price well, however, players believe that will be a sign that the European investor base is hungry enough to tackle anything on the menu."

Credit quality of US ABS depletes

There have been almost 122 downgrades by rating agencies in the US ABS market in the first half of 2000, as against few upgrades, reflecting a trend that began in 1997.

Rating agency Moody's in a report notes that one of the major reasons for the downgrades is the downgrading of some popular credit enhancers. For example, the rating of Conseco Finance Corp. went down in April 2000 resulting in downgrades of 59 subordinated tranches that were guaranteed by Conseco and backed by manufactured housing and home equity loans.

But credit enhancer downgrade is not the only reason: poor asset performance also resulted in over 40% of the downgrades that occurred in the first half.

Moody's is not exactly optimistic about teh future downgrades: it expects that the future will see more downgrades during the next economic downturn. More so in case of poor quality or subprime assets, but higher quality assets-backed deals may also be affected.

Since the market's inception in 1986, there have been 320 upgrades affecting $16.8 billion in ABS and 480 downgrades covering $47.4 billion.

The aboe is based on a report of Moody's titled “Rating Changes in the U.S. Asset-Backed Securities Market: 2000 First Half Update”

Citibank's recent credit card ABS marks a new innovation

Citibank is the originator of the largest bank credit card portfolio in the United States and has been a frequent entrant in the securitisation market. However, after remaining out of the securitisation market for nearly a year, in September, it came out with a USD 2.8 billion credit card ABS.

Using a vehicle called Citibank Credit Card Issuance Trust,

The innovative part of the structure is that it allows Citibank to issue subordinated notes, without having to issue senior notes. The natural sequence in any structured offering is to have a junior class to make the senior class senior. Rating agency Standard and Poor's notes in a Press Release that issuing subordinate notes not tied to any senior debt gives Citibank flexibility in the type of debt it can issue and allows it to capitalize on current market conditions. Additionally, Citibank has added flexibility to issue ABS paper in the size, maturity, and coupon terms that will enable Citibank to meet investors' demands quickly.

This is not the first time Citibank has introduced a revolutionary structure into the credit card securitization market. In 1995, Citibank established a unique structure under its trademarked Dakota Program. Other credit card issuers have since replicated this structure, which allows the issuance of extendible notes with terms similar to the note issuance in the commercial paper market.

Links For more on securitisation of credit cards, see our page here.

Cat bonds volume down, but Fitch is optimistic

In year 2000, activity in the catastrophe-linked bond market has been slower than last year, and also slower than predictions made before. But Michael J. Barry of Fitch [article in the National Underwriter newsletter, 9th Oct., 2000] is optimistic. In year 2000, till the third quarter, only five syndicated deals have been brought to market. The 5 deals are

  • Atlas Re: a three-tranche $200 million offering (rated "triple-B," "triple-B-minus," and "B-minus") that provided 3-year protection for the sponsor, SCOR, a French reinsurer, against U.S. and Japanese earthquake and European windstorm.
  • NeHi Inc.: a $41.5 million offering (rated "double-B") that provided 3-year protection for the sponsor, Vesta Fire Insurance Corp. in Birmingham, Ala., against Northeast U.S. hurricanes and Hawaii hurricanes and tropical storms.
  • Residential Re 2000, the latest of four deals sponsored by San Antonio, Texas-based USAA;
  • Alpha Wind 2000, sponsored by Arrow Re in Bermuda;
  • and Seismic Ltd, sponsored by Lehman Re in Bermuda.

There were 9 syndicated deals in year 1999.

Michael Berry sees positive trends developing in the catastrophe-bond marketplace that should have a favorable impact on issuance levels. One of the major motivations in cat bonds issuance has been pricing. If pricing in traditional reinsurance markets is fine enough, there is not enough of motivation in securitisation. Fitch sees the prices hardening of late.

The cat bond issuance is also correlated with the capacity levels of traditional insurance providers. This could be another reason for increased activity in the cat bonds field. Third, the heavy level of consolidation in the reinsurance arena has left the major players with limited counterparty choices. Michael Berry feesl that the market has matured considerably since its early days, with deals being structured to the liking of a more savvy, better educated investor base. "There has been a noticeable trend towards model-indexed and parametric deals", he says.

Michael Berry's article makes a very interesting – we highly recommend it.

Links For more on cat bonds, do refer to our page on risk securitisation,where you will find links to more news items and articles.

Japanese earthquake not likely to affect cat bond investors

International rating agency Fitch does not see any need to review the rating of cat bonds issued by Parametric Re, Ltd., Concentric Ltd. and Circle Maihama Ltd as a result of the recent earthquake in Japan, as per a press release of Fitch.

On Friday, Oct. 6, 2000, an earthquake with an estimated magnitude of 7.3 (according to the Japan Meteorological Agency) occurred in the western Tottori region of Japan. The epicenter of the earthquake is approximately 315 miles southwest of Tokyo.

Cat bonds provide reinsurance cover to insurance companies against losses due to catastrophe events. As per terms of these bond issues, if the losses faced by the insurance companies based on certain parameters lead to a trigger event, the bond holders would suffer a loss of interest, or loss of principal, or both. As per initial analysis by Fitch, it does not appear that losses to any of the parametric earthquake bonds rated by Fitch would be triggered by the event.

However, the rating agency will continue to monitor the development of losses to determine if those bonds are impacted.

Links For more on cat bonds, please see our page on risk securitisation – click here.

FAS 140 on securitization accounting issued

The US Financial Accounting Standards Board (FASB) has issued a new accounting standard on securitizationg accouting, FAS 140 which replaces the existing accounting standard FAS 125. The new accounting standard was issued on 3rd October.

Most of the provisions of Statement 125 were carried forward to Statement 140 without reconsideration, and some were changed only in minor ways. It is effective for transfers after March 31, 2001. It is effective for disclosures about securitizations and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000.

Vinod Kothari comments: The revised statement continues to adopt the "financial components approach" that allows various fractions of a securitization transaction being itemized and valued independent of each other, retaining only those which are retained by the originator. The basic gain on sale accounting and removal of asset accounting, though subject matter of intensive criticism by investors and equity analysts, has not been changed. The statement provides more detailed guidance than before on isolation, qualifying SPVs, conditions that constrain a transferee, conditions for an entity to be a qualifying SPE, accounting for transfers of partial interests, measurement of retained interests, servicing of financial assets, securitizations, transfers of sales-type and direct financing lease receivables, securities lending transactions, repurchase agreements including "dollar rolls," "wash sales," loan syndications and participations, risk participations in banker's acceptances, factoring arrangements, transfers of receivables with recourse, and extinguishments of liabilities, etc.

With its 364 paras, the new standard is 1 1/2 times as heavy as the existing one.

German RMBS market deepening

International rating agency Standard & Poor's say in a report that the German residential mortgage-backed securities (RMBS) market has significantly deepened in 2000 backed by lenders increasingly striving for efficient balance-sheet management.

Apart from additional issuances by traditional players, a large number of first-time issuers have additionally entered the market and the industry expects them to retap it again now that a framework is in place. Unlike other European RMBS sectors, the German transactions more typically use synthetic structures rather than true sales because of the benefits they accrue to the originator. As German lenders use securitization for balance-sheet management, the synthetic approach is much more practical, says an S&P official. Notwithstanding the slowdown in the mortgage lending sector this year, it is expected that originators still have large stocks of mortgage loans that can be securitized. This is one of the positive features of German mortgage portfolios as the pool seasoning in the transactions is typically higher than other countries, such as the U.K.

Links For more materials and links on German securitization, visit our country page – click here. For more on synthetic securitisation, see our page here.

FAS 125 being replaced by FAS 140

The US accounting standards setter Financial Accounting Standards Board (FASB) met on 13th Sept. and intends to issue a final accounting standard on securitisations as statement no. 140 to supersede FAS 125 by the end of september. Highly informed sources say that the effective date for the new expanded disclosures will be December 2000 for calendar year-end companies and the effective date for the rest of the provisions will be delayed three months from the exposure draft proposed date– it will be effective for transactions occurring after march 31, 2001.

Significant statement FAS 125 is a crucial accounting standard for securitisations – accounting being a key issue in securitisation, FAS 125 affects not only the accounting treatment for securitisations but the very economics and motivations of issuers. Technically FAS 125 is applicable for US companies, but practically it affects securitisation accounting world-over. Canadian accounting standard setter has expressly stated that it would almost replicate the revised FAS standard. International Accounting Standards Committee has also followed the FAS approach as far as securitisation accounting is concerned.

What the new standard might contain: Going by the exposure draft previously circulated and the comment letters and previous discussions of the Board, it is likely that the revised standard will carry important provisions dealing with the following:

  • Will the financial components approach be changed?: It seems unlikely that the Board will shift its approach from the present financial components approach to control or linked presentation approach. It is notable that in March 29, 2000 meeting, the Board "decided not to adopt any of several constituent suggestions that would have reduced gain recognized on securitizations in which the transferor retains subordinated interests".
  • Enhanced disclosures: Very likely, the FAS 140 will enhance disclosure requirements on the lines proposed in the Exposure draft.
  • Qualifying SPV: This issue has engaged a lot of attention in course of deliberations in the past and it seems that the new statement will contain voluminous details on what the SPV may do and may not. Consolidation issue is also likely to be clearer.

Earlier related stories on our site:

We will get you more on FAS 140 – follow stories on this page regularly. Do you have any views or suggestions in the matter? Do write them.

European banks join ABCP bandwagon

More and more European banks are joining the ABCP bandwagon as banks try to retain their customers. The banks woo their customers off their own balance sheets and over to their conduits selling asset-backed paper.

To wit, the outstanding asset-backed commercial paper in European conduits totaled USD 61 billion by end-March, 2000. This increased approximately 280% from USD 22 billion asset-backed commercial paper outstandings in 1997.

Recently, three European banks announced formation of ABCP conduits – Landesbank Baden-Wurttemberg (USD 1 billion), Norddeutsche Landesbank (USD 1 billion) and , Skandinaviska Enskilda Banken (USD 2 billion).

Links: For more on ABCP, click here.

Risk transfer securitization to be high growth business, says S&P

International rating agency Standard & Poor's Richard Gugliada said transfer of risk by the device of securitisation will continue to be the mainstay of securitisation business in time to come. Thus, CBOs, CLOs and other credit-risk transfer devices will continue to be a very high-growth business.

Richard Gugliada is the managing director of Standard & Poor's CBOs/CLOs, Market Value, and Derivatives/Structured Investment Vehicles division. Richard made these comments while addressing Strategic Research Institute's Forum on Risk Securitization in New York on 11th Sept.

There have been several risk transfer based securitisation transactions recently, for example, J.P. Morgan & Co. Inc.'s Broad Index Structured Trust Offering (BISTRO) series of transactions. Other notable transactions have been Morgan Stanley's Sequils transaction, Citibank's strategic asset redeployment program, etc. For more details on such risk transfer devices, click here.

Risk securitization is similar in theory to credit derivatives: the assets remain on companies' balance sheets and the issuers do not aim at the typical accounting benefits of traditional securitizations. Highly rated financial institutions can use this financing method to efficiently and cost-effectively manage credit risk to specific assets. The seller transfers its risk on a reference pool of assets by creating marketable securities and selling them in the capital markets.

Links See our page on synthetic CLO and other CLO/ CDO structures. For Vinod Kothari's site on credit derivatives, click here.

Railtrack Group proposes to raise Stg. 10 billion by securitisation

This could well be the mega deal of all times. Last year, we had carried a news report about Railtrack's proposal to securitise arches. Now, it proposes to securitise its income and raise the largest amount ever sourced by securitisation – Stg 10 billion.

As per a report in The Independent on Sept. 10, Railtrack will securitise the income it receives from the train-operating companies. The proposal could take a more firm shape by end of the calendar year.

The City will eagerly await this news as apart from being a mega deal of all times, the transaction is likely to get a very good rating.

UK power utilities mull securitization finance

Several power utilities in the UK are planning to securitise receivables to raise finance. Among the names doing rounds in the market are TXU Europe, which is considering recouping part of the GBP310 million ($456 million) it paid to acquire Norweb Energi by securitizing receipts from Norweb’s retail customers.

Market practitioners in UK believe that power companies are becoming more interested in securitization because consolidation within the industry is putting greater pressure on companies to raise capital for investments, as well as to increase shareholder value. Securitization would be advantageous to a power company because it would lower its cost of funding, diversify funding sources and improve the balance sheet.

Links For more on securitization by utilities, click here.

Financial institutions in SA yet to tap securitization fully

An article by Greta Steyn in Business Day August 29 says that South African mortgage lenders are yet to realise the full potential of securitisation, though hopes are high that it would succeed in bringing down mortgage costs.

Mortgage-backed securitisation holds the promise of being the panacea for unlocking private finance for low cost housing. Gateway Home Loans, a low-cost housing arm of the parastatal National Housing Finance Corporation (NHFC), plans to launch mortgage-backed securities but has yet to succeed. Investors still find it hard to lap up securitized products in absence of an assuring guarantee, like the Fannie Mae in the USA. Market practitioners demand that the National Housing Finance Corporation, created by the govt. for housing finance promotion, should get into this role.

SA Home Loans intends of offer a mega MBS issue in the country of Rand 1 billion, once it collects that kind of a corpus.

An interesting development is Kiwane, a repackaging SPV. Kiwane buys illiquid corporate debt and converts the same into relatively liquid, highly rated, asset-backed bonds. Kiwane, which is managed by Gensec and Real Africa Durolink, invests in SA companies with investment grade rated debt. Kiwane was able to tap IFC Washington for Rand 70 million of mezzanine bonds.

Links Our country page on South Africa offers a number of links and articles on South African securitization – click here.

Deutsche Bank buys stake in Lewtan Technologies

Deutsche Bank AG has entered into an agreement with Lewtan Technologies, Inc. to buy a stake in the latter. Lewtan is a software solutions provider for securitization business and owns and runs ABSnet, a popular website for securitization deal information. Lewtan is based in Boston, USA.

Under the terms of the agreement Deutsche Bank has taken an equity stake in Lewtan, and the bank's Corporate Trust & Agency Services (CTAS) business will work with Lewtan to develop new applications for servicing the structured finance markets globally. The agreement will lead to the introduction of innovative web-based solutions for the securitization industry as early as the fourth quarter of 2000.

India's first MBS offer oversubscribed

India's first RMBS transaction, to securitise housing finance receivables originated by housing finance companies HDFC and LIC Housing Finance, was oversubscribed. The receivables were securitised through the agency of National Housing Bank which got legal powers to act as a conduit by virtue of recent amendment to its constitutional law.

The offer involved a deal size of Rs. 103.54 crores [USD 24 million] comprising 11,106 individual housing loans of Housing Development Finance Corporation Ltd (HDFC) and LIC Housing Finance Ltd (LICHF). The issue, which closed on August 29, has been marketed at a coupon range of 11.35 per cent to 11.85 per cent on book-building basis. The issue has drawn the interest of institutional investors, including insurance companies, mutual funds, financial institutions and commercial banks.

The transaction involves issuance of pass through certificates. The SPV is a trust settled by NHB. The deal, in the news for quite some time, passed through a checkered history first because of legal snags and thereafter due to interest rate hike.

Links Click here for previous news reports on this transaction.

Real estate securitisation soaring in Japan

A report in Jiji press of 4th Sept. says that real estate securitisation activity is soaring in Japan. As of now, MBS forms only 1% of the total bond market in Japan, but the signals are clear that the demand for MBS will keep growing due to strong investor demand for higher returns on investment amid the continuation of low interest rates and legal revisions to facilitate the establishment of special purpose companies and pave the way for the launch of real estate investment trusts.

Companies are also resorting to securitisation to clear up their balance sheets of real estate portfolios built during the go-go years of the past.

Some of the notable securitisation transactions in Japan in the recent past are securitisation of Seibu department stores which reflects the increasing trend towards CMBS transactions, securitisation of non-performing loans by Morgan Stanley reflecting the trend to get rid of non performing portfolios, mega securitisation by Dai-Chi, etc.

The Construction Ministry's also plans to securitize loans held by Housing Loan Corp. to the tune of Yen 50 billion next March and Yen 200 billion in fiscal 2001. This is expectedc to become a regular feature. The ministry has already picked Credit Suisse First Boston Securities (Japan) Ltd. as arranger of the securitization program. Terms of the scheme, including lead manger, yield and maturity, will be determined at the end of this year.

Links For more on securitisation in Japan, click our country page here.

Interest in ART increasing, says FT survey

With hardening of traditional reinsurance markets, interest in alternative methods of risk transfer, including securitisation of risk, is increasing, says a Survey in Financial Times, 4th Sept., 2000. Alternative risk transfer (ART) is the collective name to the devices such as securitisation, captive renting, etc. through which insurance companies or the protection buyers transfer insurable risk other than through traditional reinsurance. See our section on securitisation of risk for more on such devices.

Alternative risk transfer through catastrphe bonds has been common in risk cover for natural calamities. To date, about USD 5 billion worth cat bonds have been issued. Market practitioners feel that with hardening of traditional reinsurance markets, more such activity might be noted in time to come.

According to the Survey, banks have taken the early lead in developing ART techniques, but international reinsurers are trying to ward off competition by putting up their own ART conduits mostly in tax havens. A particular area of interest is weather derivatives – a number of power companies such as Koch Industries have used weather derivatives to hedge against income exposures affected by weather changes. See our page on weather derivatives for more info.

Much of motivation for ART will, however, depend upon simple economics. The prices of traditional reinsurance are still not high enough to warrant securitization. However, the prices are expected to harden in next 12-18 months, which will give a boost to risk derivatives.

Debate heats up on withdrawal of govt support to Fannie and Freddie

Rep. Baker's proposal to withdraw inherent US govt. support to giant secondary mortgage lenders Fannie Mae and Freddie Mac is on hot seat of controversy. The upcoming debate on the proposed regulatory changes in this regard is expected to be charged. We on this site carried news report on the proposal – click here.

Currently, Fannie Mae and Freddie Mac are two shareholder-owned securitization agencies supervised by the Department of Housing and Urban Development. The Office of Federal Housing Enterprise Oversight, an independent agency under HUD, is responsible for ensuring that the lenders are operated in a financially safe and sound manner.

Under Rep. Baker's plan, Fannie and Freddie will be subject to the same capital rules for banks that hold their securities and will remove any implied financial risk to the federal government. The draft of the proposed regulatory overhaul was made by Baker who is the main advocate of the changes. It is also noted that In his letter to Rep. Baker, Fed Chairman Alan Greenspan has indicated his support for measures proposed by Baker.

Fannie Mae and Freddie Mac, on the other hand, have represented vehemently to retain their current status as champions of home ownership in the U.S. to record levels. Fannie Mae models is followed world-over.

Links: Visit site fmwatch.com which leads the debate against the government support to the agencies. Also see our site on US securitization market which briefly discusses the role of the agencies.

Teething troubles bother Italy's government dues securitization

Call it teething troubles or the infirmities of infancy. Or call it bureaucratic bungling, but unconfirmed reports suggest that the much-publicized government dues securitisation from Italy – the securitization of social security contributions by INPS – is fraught with some initial collection problems, and it seems that the first tranche due in Jan 2001 may not be paid in time. Click here to read about the INPS securitization.

Reports from market operators suggest that the deal's performance is disappointing at the point where it is feared that series 1 will not be called in January 2001 due to cash shortfall. Market operators stress that such an event would have a very negative domino effect on series 2 and 3. There are reports from the fiduciary in Italy suggest that during the first 8 months the appointed collectors (concessionari) didn't collect any funds at all, as the governement had not set the commissions for their remuneration. The seller INPS, however, did collect some funds.

Updated 3rd Sept., 2000 A report in Euroweek of 25th Sept. quoting Chase Manhattan's performance report and Italian press news reports says that investors and dealers are viewing the transaction with great anxiety. A report from Merrill Lynch also confirms that the cash collections for investors's servicing are far below expectations and it is quite likely that Series 1 AAA bonds will have an extended maturity. It is also reported that the servicing is being done by INPS, not by the concessionari who have not started collecting as yet.

Links For more about securitisation in Italy click here. For more about securitisation of government revenues, click here.

SECURITISATION NEWS AND DEVELOPMENTS – Nov. – Dec., 2000

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[This page lists news and developments in

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IMPORTANT

For all news for Sept. and October, please click here 
For all news for July and August, please click here 
For all news for May and June, 2000, please click here 
For all news added before May, 2000, please click here 
For all news added before 25th March, please click here   
For all news added before 21 January, 2000, please click here   
For all news added before 9th November, please click here   
For News items added prior 3rd August, 1999, click here.

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

 

US asset-backed market likely to end 2000 with marginal growth

It has not been a very good year for US abs markets. While the first half showed a negative growth rate after a long time, the volumes picked up in the second half. With just two weeks to go, it now seems the volume for the calendar year will only be marginally up from the last year's, nowhere near the impressive double digit growth rate it was maintaining for a long time in the past.

As of end of the last week, volumes for year 2000 output stood at USD 263 billion, about 2% behind the 1999 volume of USD 269 billion. Taking expected deals during the holiday season into account, market analysts do not expect the aggregate year 2000 volume to be very better than that last year. The decline in volumes is attributed to lesser of 144A deals coming to the market, while public offers showed an impressive performance.

Market analysts are also busy making yearly tallies of lead investment bankers. It is likely that Salomon Smith Barney will end up as the top underwriter with Lehman Brothers at number 2 position.The two together will hold more than a quarter of the market.

Links For data of the volumes in the ABS and MBS market upto 30th June, 2000, click here.

Guy Hands continues to make news

With the focus on financing potential of securitisation for infrastructure projects in London, Guy Hands of Nomura continued to be in the news.

The Independent of 16th December carried the following comment:

"IF GUY Hands at Nomura can do it, then so can the fusty old managements who run the utility businesses that he seems so keen to get his hands on. PowerGen has became the first UK utility to mortgage some of its future revenues to pay down a chunk of its present debts [see news item below]. Peter Hickson, PowerGen's finance director, has parceled up about one year's worth of gas and electricity bills and sold them to Bank of America for pounds 300m. The resulting cash inflow will both help to reduce PowerGen's debts and cut around half a per cent from its interest payments.

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Will other utilities follow where PowerGen has led? The most obvious candidate is Railtrack. Like electricity and gas bills, its track access revenues are secure and reliable. And if electricity and rail companies can do it, then why not water companies? Securitisation is one of the mechanisms Nomura would have used to make its takeover of Welsh Water stack up financially. This is just the kind of instrument water companies may now have to look at if, as looks likely, their exotic restructuring plans are blocked by the regulator. "

Who is Guy Hands

Head of the Principal Finance division of Nomura Securities at London is one of the most talked-about financiers in the City and in the securitisation world, he has the reputation of being the one who pulled securitisation out of its mainstream applications and intermixed venture capital approach into it to introduce to the world a wholly new range of asset classes such as pubs, real estate, plant and infrastructure assets.

 

French bank in mega CLO deal

French banking group Natexis Banques Populaires has announced that it has securitized a portfolio of loans to a number of companies under French control, for a total value of Euro 2 billion, as per a report in La Tribune of 20th December.

Following the launch of Natix in June 2000, this operation, which has been named Igloo, is the second securitization operation concerning a portfolio of loans to French companies by the Bank. The operation was jointly managed by Natexis Banques Populaires and Merrill Lynch International.

World Football body to securitise receivables

Federation Internationale de Football Authority [FIFA] wants to securitise future receivables to raise as much as USD 1 billion by way of securitisation, thus catapulting securitisation from the limited mainstream of banks and financial intermediaries to the sports arena. FIFA would be the first international sports body to use securitisation to raise resources. According to a report in The Times London, FIFA will cover its costs in the run-up to the next two World Cup tournaments. The organisation is working with Credit Suisse First Boston to prepare the securitisation for subscription by the middle of next year.

This would be the second notable instance of securitisation in the sports field, and the first of its own kind. Before this, Formula 1, the TV-based car sports organisation, has used securitisation to raise resources.

The securitisation deal banks o potential marketing contracts and television revenues surrounding the 2002 World Cup.

UK electricity company to securitise receivables

Powergen, the third largest electricity company in the UK, has decided to raise resources by securitising its future receivables. Reports suggested that Powergen will raise £300 milion against its customers' future payments of gas, electricity and telecoms bills.

Securitisation is seen as the right funding device to reduce the huge funding the company currently holds from banks. The company justified securitisation saying it would entail lesser funding costs as compared to straight bonds.

Links For more on securitization in the UK, see our country page here.

Securitisation makes headlines in London: The Tube mulls it for revitalisation funding

For a last few days, securitisation as an infrastructure funding option has been making headlines in London newspapers as it has been suggested as a mode of funding the essential revitalisatin of London's underground train system.

An agency called Transport for London has suggested securitisation as the device, whereby the Tube can raise Euro 3.8 billion to part-finance its requirements. The Times on 16th Dec. carried a commentary titled Securitisation is the right route by Patience Wheatcroft which projects securitisation among other options as a straightforward and cleaner option. The commentary cites the various ventures where Guy Hands of Nomura has used securitisation as a funding device: "Guy Hands has made Nomura a major player in such diverse sectors as train leasing companies, housing and pubs. There is no magic involved. Those who are prepared to put up the cash need to be assured that the income will be there to service the bonds and the coupon they demand is determined by the level of security they feel on that front. Pubs proved an easy deal for Hands, for instance, since he had no difficulty in persuading investors that the drinking public would continue to take refreshment in his establishments".

IFC promoting securitisation in emerging markets

International Finance Corporation, Washington (IFC) is promoting securitisation in emerging markets. IFC has the task and reputation of spreading new financial instruments in emerging markets.

Currently, IFC is on various projects involving mortgage-backed securitisation in several emerging markets. In the past two years the IFC has helped set up new financial institutions in Argentina, South Korea and Colombia that are designed to buy up mortgages in the secondary market. The model adopted is similar to US Fannie Mae.

One of the institutions where IFC has participated as a promoter is KoMoCo, Korea. KoMoCo has already come out with three issues of mortgage-backed bonds. Click here for more about KoMoCo. In Argentina, IFC has helped in the promotion of a body called Banco de Credito & Securitizacion.

IFC's forthcoming projects could be Mexico, Russia and the Middle East.

First Islamic securitisation to hit the market

The first Islamic securitisation is likely to hit the market soon. The transaction will emanate from Saudi Arabia and is backed by leases on military property. The transaction will be lead-managed by Credit Suisse First Boston. We reported on this site recently that CSFB has opened an office in UAE to promote securitisation in the Middle East. Soon, another commercial mortgage backed securitisation may be launched from Bahrain.

The transaction is aimed at attracting Islamic funds into investing in a deal which is compliant with Islamic principles. Islam debars charging or paying of interest: but risk-participation is permitted.

A report in Investment Dealers Digest said that the upcoming Saudi Arabian transaction will likely not resemble what Western investors consider a typical asset-backed security. The issuer would have to sell the assets to a third-party, special- purpose vehicle, which in turn would have to hold on to at least 51% of the assets securitized.

Links There is an article on Islamic securitisation in our articles section – click here.

Securitisation workshop in Bahrain Vinod Kothari Consultants along with Bahrain Institute of Banking and Finance will be offering a course on Securitisation and Credit Derivatives in Bahrain in March, 2001. For details, click here.

ABN Amro to hit the market with largest ever synthetic CLO

ABN Amro is reportedly preparing what would be the largest-ever CLO in history – a USD 15 billion deal. A report in Euroweek of Dec. 1 says that this would be a synthetic transaction, partly funded. As is the case with synthetic CLOs, the deal might aim to raise a part funding to provide credit risk swap to the USD 15 billion worth portfolio. The portfolio would comprise of North American corporate loans.

In the meantime, ABN Amro is already in market with Euro 8.5 billion synthetic securitisation of European corporate loans. Named Amstel CLO 2000-1, the offer consists of 4 tranches.

Vinod Kothari comments: Taking into account the above with Deutsche Bank's synthetic CLO named CAST 2000-2, European synthetic CLO activity seems to be at its peek.

Links For more on synthetic CLOs and CLOs in general, refer to our page on bank loan securitisation here.

Alternative risk transfer forum notes increasing convergence between insurance and financial products:
Insurance seen as a source of capital

Speakers at the the 10th annual World Captive and Alternative Risk Financing Forum held in Palm Beach Gardens, Fla., USA noted increasing trend towards convergence of financial and insurance products.

Erwin Zimmermann, divisional chief executive of Swiss Re New Markets saw insurance as an essential tool of risk management. It has become increasingly important for corporates to manage their volatility. The role that insurance solutions can play, therefore, is by helping to minimize that volatility and providing a source of contingent capital, which unlike debt or equity, is not reflected on a client company's balance sheet. However, unfortunately, the traditional financial markets do not see insurance as a financial product. "Rather than seeing it as a financial product that can provide a value, it instead is seen as a cost. A key attraction of using insurance as a source of contingent capital is that it can lower a company's cost of capital". The present-day corporate ought to see insurance as an essential building block of the company's capital structure, just like equity and debt. . "This shift in view means the risk manager is no longer the ruler of sprinklers and loss control, but also the owner of this financial area," said Zimmermann.

Zimmermann proposed insurance as a source of contingent capital.

Within the insurance product, according to Zimmermann, one has either the choice of speaking in terms of a traditional vs. alternative risk transfer, or one can talk in a more pragmatic sense: an optimally structured convergent financial instrument, where insurance is an element in a financial instrument. The financial instrument approach would require insurers to provide more modeling, a more complex structure and capital markets innovation.

Links For more on alternative risk transfer, see our insurance risk securitisation page here. A very good site on alternative risk transfer is here.

Why do investors flock to securitisation products: S&P highlights investor perspective

International rating agency Standard and Poor's (S&P) has highlighted the advantages of securitisation from investors's perspective. A commentary titled The Investor Perspective: The Benefits of Buying Securitized Bonds appeared on Ratingsdirect on 28th Nov.

Securitization is being embraced the world over by pension funds, life insurers, and other types of investors because of key highlights of securitised instruments : their comparatively high quality and low volatility, their relative value, their ability to cope with unexpected events, and the opportunities they offer for portfolio diversification.

As regards low volatility of structured instruments, studies by the rating agencies show that the migration of the ratings, that is, downgrades or upgrades to the initial rating, are less frequent in case of securitised instruments than for other instruments. On this site, we carried a report on this study – click here. Over 1978 to 1999, S&P has rated 3269 ABS transactions with 4685 classes, of which only 2 have defaulted and only 2% have been downgraded. This is a remarkable evidence of stability and quality of ABS transactions.

Securitisation structures are designed to mitigage event risk, that is, impact of adverse economic scenarios on the performance of the transaction. S&P cautions investors against investing in transactions that look like securitisations, but truly speaking are not – "A lot of transactions look like securitizations on the surface but they ultimately depend on the ability of the underlying originator to generate more assets, in contrast to a true securitization".

Another strong investor incentive in investing in securitised products is portfolio diversification.

Lack of liquidity might be an adverse factor on a number of securitised instruments.

Economic stability brightens securitisation prospects in Russia

As the once-trouble-torn Russian economy is gradually recuperating, securitisation deals are being noted around, particularly future flows deals. Future flows deals have proved particularly handy for bringing down funding costs in emerging markets with low sovereign credit ratings.

Report in Euroweek 24th Nov. suggest that the EBRD and Standard Bank are finalising the underwriting of an asset backed loan that will provide financing for some half dozen Russian goldmines. More such deals are in the pipeline, says the report. A similar deal was struck last year – not exactly securitisation but a loan paid off by the sale proceeds of gold exported from the country. In view of the lower credit rating of the country, these deals are essentially bullet payment small tenure loans.

Links For more on securitisation of future flows, click on our page here.

Munich Re might enter the market with a catastrophe bond

Reinsurance company Munich Re might come to the market with a USD 500 cat bond against US hurricane and earthquake risk and European windstorm risk. The deal is expected to be arranged by Lehman and Goldman Sachs Munich’s subsidiary American Re will also play as a third manager on the deal.

The issue is expected to be tranched into two classes: a USD 250 million, three-year tranch dedicated to hurricane risk expected to be priced at 600-675 basis points over LIBOR and the other tranche for earthquake and windstorm risk expected to be priced at 675-750 basis points over LIBOR. The deal will be linked to a parametric measure, unlike an index-based or indemnity-based deal.

Links To learn more about cat bonds, click on our page here.

Swiss Re's insurance credit-enhances franchise royalty securitisation

Swiss Re has provided first loss reinsurance on a securitization of intellectual property for Arby's(R), the fast-food chain best known for roast beef sandwiches. It was a private placement by a newly-formed special purpose vehicle of $290 million of non-recourse fixed rate insured notes.

The transaction is backed by rights to collect franchise royalties and fees from current and future Arby's(R) branded franchise owners throughout the U.S. and Canada, and is believed to be a cutting-edge transaction. — The execution hinges on an innovative insurance and reinsurance platform in which a Swiss Re Group company takes the first loss position, and Ambac Assurance Corporation takes the excess risk position and provides a AAA financial guaranty policy for the $290 million issue of asset-backed securities.

Swiss Re feels that the transaction will lead to a further convergence of insurance and securitisation markets.

ABN Amro bank launches first Asian synthetic securitisation deal

ABN Amro bank took the laurels to become the first originator of a synthetic securitisation in Asia. The transaction, called HK Synthetic MBS Co. Ltd, seeks to transfer the credit risk inherent in mortgages originated by ABN Hong Kong.

The HK Synthetic MBS, a Cayman Island companuy, is the SPV used for the purpose, will write a credit default swap with ABN. The proceeds of the notes will be put up in deposits to be held by the SPV. The amount so deposited will be used in case of losses suffered by ABN which need to be compensated by the SPV in terms of the default swap.

Rating agency Standard and Poor's expects to give a AA rating to the class A notes to be issued. The transaction has as many as 5 classes running from A to E. A class forms the largest part , HK$ 1124 out of a total issuance of HK$ 1261. Class A notes get a subordination of approximately 10.8% due to the combined impact of classes B through E.

The reference portfolio consists of a pool of 1168 mortgages originated by ABN Amro. The principal outstanding under the mortgages equals the amount of notes issued by the SPV.

Links To know more about synthetic securitisation, click here.

Greece securitises dividend income

Aptly naming it as Hellenic Securitisation, a Greek government body on 17th Nov securitised government receivables in a novel deal. The receivables in question are the dividends being paid to the Government every year by the state-owned Consignment and Deposit Loan Fund. The government has thus raised upfront cash to the tune of USD 633 million. Market reports say that this is the first public issuance of asset-backed securities in Greece, but two deals are closely following – one, that of lottery ticket receivables, and the next will be the Italian-type social security receivables.

The Hellenic Securitisation deal carried two tranches. The first tranche, having a maturity of 4.3 years, was priced at 18 basic points over Euribor, and the second tranche, with expected maturity of 10.3 years, was priced 24 basis points over Euribor. Investment managers have claimed that the issue was oversubscribed twice.

Your comments Securitisation of government revenues is becoming quite a cult in Europe, with Italy doing as many as 3 transactions over last year or so, and Greece doing or proposing three. Where do you think this is leading to? Do you have any views on this tendency? Do write back and we will be glad to publish your views on this site.

Links For more on securitisation in Greece, refer to our country site here. For news relating to the social security revenues, click here.

FDIC staff issues draft memorandum on securitisation of predatory loans

The issue of banks investing in predatory loans either directly or through the securitisation route has been causing concern of bank regulators in the USA, as covered earlier on this site. There have even been court cases against banks that bought

What are predatory loans:

Predatory loans are not just subprime loans. The FDIC draft guide lists the following features of predatory loans:

  • Misleading or fraudulent marketing
  • Loan fees and interest rates higher than necessary to cover profit and risk
  • Excessively priced products, such as single premium credit life insurance
  • Large prepayment penalties that make it difficult to refinance affordably.
  • Balloon payments likely to result in default and foreclosure
  • Abusive collection and aggressive foreclosure practices
  • Mandatory arbitration provisions
  • Underwriting based on the value of collateral rather than a borrower’s ability to repay

or underwrote such mortgages –see report here. The FDIC staff has now proposed a memorandum to guide banks into staying clear of buying or investing in predatory loans. The draft memorandum was issued on 17th Nov., and the FDIC has sought public comments on it. The memorandum provides suggestions on how to avoid purchasing or funding predatory mortgage loans and investing in securities backed by such loans. These activities may be the most common means by which financial institutions and other investors unknowingly help to fund predatory loans, incurring several risks.

Apart from buying subprime loans, the draft guides includes a section on how to refrain from investing in MBS secured by subprime loans.

The FDIC draft document is available at:
http://www.fdic.gov/

The site also allows electronic comments to be filed with the FDIC.

 

Philippines president passes order for securitisation regulations

Philippines president Joseph Estrada has ordered the goveernment agencies concerned to develop a legal and regulatory framework. The President passed an order to this effect on November 17 [E.O. No. 318]. The order is effective immediately.

Earlier on this site, we carried news about trade and industry in the country pleading for facilitative regulatory framework for securitisation. Responding quickly, the Presidential order instructs the Department of Finance, the Bureau of Internal Revenue, and the Securities and Exchange Commission, as well as the Housing and Urban Development Coordinating Council (HUDCC), to form top-level teams which will develop the administrative and regulatory framework in their respective departments for the development of a market for assetbacked securities, in consultation with the private sector.

Besides clarifying the regulatory, tax and securities regime relating to securitisation, it is expected that the Order will also achieve the following:

Other provisions of the E.O, include the following:

1. The SEC shall issue the revised rules on securitization and shall recognize the creation of Special Purpose Vehicles as the recipient of assets and issuer of asset-backed securities and securitization transactions, if determined to be within the current legal and regulatory framework.

2. The Insurance Commission shall study and, if possible, implement the expansion of the coverage of admitted assets for insurance companies to include investments in assetbacked securities.

3. The above listed agencies shall coordinate and seek the assistance of the BSP regarding policy, administrative and regulatory issues in securitization where coordination with BSP is necessary.

4. The HUDCC, in coordination with the SEC and DOF, shall initiate the formation of a private sector Secondary Institution (SMI) for assetbacked securities with priority to the housing industry.

5. The Board of Investments shall consider the inclusion of SMIs for asset-backed securities in the Investment Priorities Plan as among those eligible for tax and other incentives under the 1987 Investments Code.

Mexican government wants securitisation push

President-elect Vicente Fox who broke the 71-year old single-party reign in Mexico and will assume the presidency from Dec 1 wants to give a big push to securitisation. To carry the idea to reality is Mr. Jose Luis Romero Hicks, who is overseeing housing policy as a part of the President's team.

To begin with, Hicks wants to set up a body similar to the Fannie Mae for securitisation of mortgages. Hicks plans to undertake a series of steps to make this possible. Although twenty-three of the country's 32 states have adopted laws making it easier for mortgage lenders to foreclose on the homes of delinquent borrowers, the country does not have a secondary mortgage corporation. Title insurance does not exist.

Hicks' plan is to securitise mortgages worth USD 2.5 billion out of Mexico every year. Towards this, he has discussed his plans with Wall Street investors at firms such as Citibank and Merrill Lynch. [based on the Dallas Morning News 19th Nov.]

Korean mortgage body to get technical and equity support from global majors

Internationally-known mortgage-market-maker Fannie Mae, mortgage lender Countrywide International Holding, and global investment banking firm Merrill Lynch have tied up with Korea Mortgage Corporation (KoMoCo) as foreign technical partners to assist KoMoCo in various aspects of its mortgage securitisation business.

KoMoCo is the Fannie-Mae-type body to securitise mortgages in Korea. KoMoCo's website is here.

Under the contract signed on 31st Oct., IFC takes over equity stake in KoMoCo equal to KRW 15 billion. Besides, Merril Lynch will provide assistance in capital market development, Countrywide in business development & operations, and Fannie Mae in IT Development & Treasury Functions.

KoMoCo has already begun issuance of mortgage backed securities. In September this year, KoMoCo issued 500 billion won worth of mortgage-backed securities which was its second issuance.

Links For more on securitisation in Korea, click on our country profile. For KoMoCo's website, click here.

Dutch tax reforms set markets worrying:
Eurotunnel revises SPV structure

The recent proposed tax reforms in Holland which seek to treat the junior tranches of securitisation paper as equity for tax purposes has set the markets aflutter. While this website has been getting several mails of concerned market players, there are even news reports of several recent securitisation structures trying to protect themselves from being adversely affected by the proposed changes.

For example, the recent securitisation deal of Eurotunnel had an SPV set up in Netherlands. The transaction will now also be using an SPV in Luxembourg. The transaction can use either of the two SPVs to issue the notes. The obvious plan of action is to shift the jurisdiction avoiding Netherlands.

What do you think of the Dutch tax reforms? We have initiated a discussion on the Dutch tax reforms – have a look at it and post your views – click here.

S&P cautions of risks inherent in Japanese finance company securitisation

Securitisation by finance companies forms a predominant part of Japanese securitisation, and Standard and Poor's expects this to grow particularly among small to midsize players, given the potential for securitization to help finance companies' assets become self- funding. To date, finance companies in Japan have securitized a wide array of asset types, including lease receivables, installment sales receivables, unsecured loan receivables, and other types of trade receivables.

While appreciating the motivations for finance companies to securitise, S&P is cautious of the risks securitisation carries. In a report on Ratingsdirect, S&P discusses the following risks inherent in finance companies' use of securitisation:

  • Credit risk, retained by the originator, in form of a reserve account funded by the originator, and/or the purchase of subordinated tranches of notes.
  • Liquidity risk stemming from early amortization triggers in revolving structures. Early amortization events in asset-backed issuance are often tied to the performance of the securitized asset pool. As such, if the asset pool performs significantly below expectations, the transaction might not be able to fund the purchase of new assets, and/or a wind-down of the transaction might be triggered prior to expected maturity. Usually the originator has incentive to avoid triggering early amortization events, and in some cases can do so by adding better-performing assets to the securitized portfolio, although this practice varies depending on the individual structure of the deal and the incentive for the originator to do so.
  • Variability of cash flow. In many structured transactions, originators receive cash from the receivables only after certain obligations under the notes have been paid, such as interest on the senior notes, various fees, and the establishment of required cash reserves. In essence, the remaining excess servicing income from the securitized assets amounts to a variable income stream, which has to be incorporated into the company's asset liability management strategy as if the assets remained on balance sheet.
  • Accounting risk. Under new accounting rules adopted in April of this year in Japan, originators will record up-front gains from the sale of receivables in securitizations. These gains are essentially the present value of future cash flows expected from the excess spread generated by the assets and servicing fees. If assumptions regarding gains prove to be unrealistic, companies may be required to write down recorded gains. Moreover, because future income streams are being recognized up-front, any slowdown in up-front gains through securitization activity could lead to a precipitous drop in income, as occurred in the U.S. in 1998.

Currently, the risks associated with securitization are insignificant for Japanese finance companies rated by Standard & Poor's, because the practice of recording up-front gains from securitized assets is relatively limited, as is the extent to which these companies rely on securitization as a funding technique. Nonetheless, because of the growing popularity of structured issuance, Standard & Poor's will continue to monitor the impact of asset securitizations on the overall credit quality of finance companies in Japan.

Mortgage securitisation in Portugal likely to grow, says S&P

Rating agency Standard and Poor's is of the view that mortgage securitisation in Portugal is likely to grow, enabled by a growing market for mortgage funding, facilitative law and low interest rate environment.

Securitisation law was passed in Portugal in November last year. On the securitisation laws section of this site, we have the full text of the Portugese securitisation law – click here. The law has established and simplified procedures for the transfer of mortgages and substantially reduced the associated costs, opening up the door to the development of an RMBS market in Portugal. Under the new law, a transfer of mortgages for the purpose of securitization does not require a public deed, making the process virtually free of charges or costs. A transfer agreement contracted under private law between the assignor and the assignee is sufficient to make the transfer valid and enforceable.

S&P officials also feel that the low interest rate regime is conducive to securitisation. The steady decrease in interest rates, which fell to 3% at year-end 1999 from 13% in 1990 and strong economic growth (on average 1% above the E.U. 15-year average between 1996 and 1998) augment the new Law to stimulate the Portuguese mortgage market further and assist in the growth of securitization.

Links See our country page on Portugal – click here. See the full text of Portugese securitisation law here.

Synthetic securitisation spurts in Europe

A Reuters report quotes Merril Lynch as saying that synthetic securitisations have shown an amazing growth from almost nowhere in 1999 to constitute about 1/4 of all securitization in the current year.

Merril Lynch estimates the year-to-date volume of synthetic securitisation at around USD 19 billion, as compared to USD 65 billion for funded securitisation. Synthetic securities had a negligible presence last year.

Synthetic deals are popular because they enable institutions to get assets off their books for regulatory purposes, thus freeing up capital, without selling them to vehicles that issue asset-backed bonds.

Links Our page on CBOs/ CLOs provides an interesting reading, and further links on synthetic securitisation. Click here.

Credit Suisse First Boston puts up securitisation unit in UAE

Credit Suisse First Boston (CSFB) has allied with Strategic Capital, a UAE based company to set up a commercial real estate finance and securitisation operation in the Gulf. This is the first dedicated attempt to initiate securitization in the Gulf region. The securitisation unit was inaugurated on 5th Nov.

Speaking at the inaugural function, Jonathan Davie, vice-chairman of Credit Suisse First Boston said that while the UAE has rapidly grown and diversified from an oil-dominated to a modern, service-oriented economy, the next natural step in its progress is the integration of its financial system to the global capital markets, so that its private sector may benefit from long-term international investment. Real estate securitisation will benefit the UAE since it will introduce international institutional investors to the country and provide it with a benchmark credit framework, which in turn facilitates the issuance of corporate bonds or equity.

China to get into mortgage securitisation

According to a report in Reuters of Nov. 7, China is studying the introduction of securities backed by housing mortgages. The Reuters report is based on the official China Securities newspaper. Dai Genyou, director of the monetary policy department of the central People's Bank of China, was quoted as saying the government had been studying the instrument since last year. No definitive time table for the mortgage securitisation was given. Dai said the central bank had identified two possibilities, setting up a specialised institution for securitising mortgages, or selling mortgages directly.

News reports about the Australian bank Macquarie Bank Ltd tying up with China Construction Bank for mortgage securitization has been around for quite some time. Click here for a news on this site.

Links Do visit our country page on China here.

Bank of Italy requires banks to ensure independent handling of securitisation funds

The Bank of Italy has recently issued rules that require banks getting into securitisation to ensure that the funds on account of securitised accounts are not comingled with those of the bank, and there is greater transparency is administration of securitised portfolios.

According to a write up in Corporate Finance October, 2000, these rules require the securitising bank to (i) ensure the constant separation of the portfolios of different securitization transactions with their own assets, (ii) ensure the transparency of each transaction to investors and the market, (iii) ensure entering into exclusively transactions which pertain to the administration of each securitization transaction on a mutually exclusive basis.

The central bank has also required that the sums relating to each transaction must be deposited in specific bank accounts, expressly identified or separated for each transaction. The special purpose vehicles will also have to keep accurate accounting notations separate for each transaction. The notations will have to be continuously updated and would need to permit to (i) reconstruct at any time the aggregate of the transactions entered into in connection with each securitization, (ii) give concrete application as to the provisions on the segregations of the portfolios, assuring the separations of the assets of the vehicle from those of other transactions. In this respect, Bank of Italy requires that it receives the offering circulars, periodical information and statistical updates on the basis of forms to be subsequently distributed by Bank of Italy for each transaction.

Links For securitisation in Italy in general, please do see our country link here.

Dutch tax reforms to adversely hit securitisation

Tax law amendments proposed in Holland called the Dutch Tax Reform 2001 would adversely hit securitisation business. The new tax proposals will have the following serious implications: (a) tax deduction to the issuer will not be available on subordinate tranches of Dutch ABS ; (b) at the same time, investors could become liable for withholding tax. It seems that the tax laws would treat the subordinate tranches at par with payments to equity, having both the above consequences.

The tax measures above are not targeted at securitisation per se, but for hybrid debt instruments which conceal features of equity in debt instruments. What adds to the injury is that these proposals are to be given retrospective effect from January, 2000.

As per the proposed amendment, a debt instrument will be treated as a quasi-equity if two of the following three conditions are satisfied: (a) if the coupon or compensation is contingent on profits or can be postponed; (b) if the loan is perpetual or has a maturity over 30 years; or (c) if the loan is subordinated to one or more non-preferential loans. Condition (a) and (c) could easily be satisfied by subordinate securitisation tranches.

Vinod Kothari comments: With increasingly complicated financial instruments being designed, it is always a dilemma to distinguish between payments on equity and payments on debt for tax purposes. The former are appropriation of income; the latter are a charge against income. The Dutch tax reforms only are a pointer to what might be a larger concern over time in other countries too.

Malaysia scraps stamp duty on securitisation

While presenting his Budget 2001 before the Parliament recently, Finance minister Tun Daim Zainuddin proposed to scrap stamp duty on securitisation transactions completely.

He also proposed to scrap the real property gains tax on securitisation.

This may be a major incentive for securitisation transactions to take place in Malaysia. In the past, Malaysia has been depending on notifications exempting stamp duty having a limited effective period. The Budget proposal will change the law and abolish stamp duty on securitisations completely. The property gains tax is also on issue on mortgage securitisations, as it may be contended that transferring a mortgage is akin to transferring real estate.

Securitisation market has still been been in its infancy in Malaysia, with very little activity on the domestic front apart from the purchase of mortgage loans by Cagamas.

Links For more on securitisation in Malaysia, check here.

Greece follows Italy's footsteps: to securitise social security receipts and others

Following the landmark securitisation of government's social security dues in Italy, Greece will be shortly coming out with securitisation of delinquent social security contributions. According to a report inEuroweek, the social security payments to IKA that were to be originally securitised this year will now most likely land in the first quarter of 2001. The issue will raise between Euro 2-3 billion, and is being arranged by BNPP, National Bank of Greece and Salomon.

The government is also likely to securitise future Greek lottery receivables and raise Euro 900 million. That deal is mandated to Morgan Stanley, Schroder Salomon Smith Barney, Warburg and two Greek banks.

Links: For more on securitisation in Greece, please see our country page on Greece here.

Italy set to launch securitisation of industrial compensation insurance

After being successful in raising upfront cash against its social security receivables, Italy is all set to lauch another first – securitisation of insurance receivables against mandatory industrial compensation insurance. A report on news portal efinancialnews.com by Piers Townsend says that this deal may be launched next week.

Workmen's compensation insurance payments are mandatory payments required by employers and self-employed to an agency called Istituto Nazionale per l'Assicurazione contro gli Infortuni sul Lavoro (Inail) which compensates the participants for accidents or injuries at workplace. Inail is going to securitise these receivables in a USD 1.14 billion transaction that will rated AAA. Like the government social security contributions securitisation last year, this deal also consists of delayed payments. The notes will have an expected maturity of 2.5 years.

BNP Paribas and JP Morgan are lead managing the deal with Banca di Roma and Finanziaria.

Links: Our country page on Italy consists of comprehensive materials, articles and links – click here.

Philippines: Trade body pleads for securitisation law

Leaders of the Federation of Philippine Industries (FPI) have urged monetary authorities to put securitisation laws in place to revive the economy and spur credit and lending. FPI has also suggested that Bangko Sentral ng Pilipinas, should encourage securitisation by providing its stampon the face of the instruments created by securitisation.

FPI explained that this program can also be used by the banks to liquidate their non-performing assets (NPAs).

The banks may create a "special purpose vehicle" that would pool these non-performing assets and issue securities against these assets to convert their real estate inventories into cash.

FPI leaders presented this program in a meeting with Trade and Industry Secretary Mar Roxas II at the BOI building early this week.

Through this asset backed securities program, the government may be able to enhance the credibility of these instruments by adding their guarantee to these securities with the condition that part of the proceeds of this investment scheme would be allocated to the financially distressed but economically-viable institutions.

It is notable that the country's economy is currently in serious problems and the peso is fast depreciating against dollar.

S&P transition study reveals
European securitisation rating show great resilience

Ratings of securitised instruments in Europe have been very stable, indicating that the risk of an ABS being downgraded, after it is bought, is comparatively much lesser. In respect of the lower end of structured products, rated A or below, the chances of downgrades are very very low, almost nil. This is evident from a listing of ratings transition published by international rating agency Standard and Poor's. [European Asset-Backed Transactions' Transition Study, dated 26th Oct.]

Rating transition is an important tool in risk evaluation of securities. The transition table lists the number of cases that have been downgraded or upgraded, and migrated up or down, over a past number of years. Based on the transition study, analysts compute the probabilities of a certain rating to stay through the life of the security. The S&P study takes into ABS rated by S&P from 1987 till the first half of 2000.

Some of the highlights of the study are:

  • No European asset-backed transactions have defaulted since the market's inception;
  • As of the first half of 2000, all European asset-backed transaction downgrades occurred as a result of supporting party downgrades, that is, downgrades of credit enhancers or guarantors: 73% of these were a direct result of one single factor, the downgrading of a number of major insurance companies in the early 1990s; 21% from downgrades of third parties to the transaction; and 6% were as a result of the introduction of EMU when the ratings on six of the 'AAA' local currencies converged in the 'AA' category affecting asset-backed transactions’ ratings where the respective sovereign was a supporting party;
  • The European asset-backed market has reduced its reliance on third-party credit support through the introduction of a number of new structural features;
  • A remarkable fact brought out by the study is that the lower rated classes -A or below, have proven to have been the most stable to date. For example, in case of A rated paper, out of 145 issues, 4 have been upgraded and only 2 have been downgraded. (S&P however cautions that lower rated paper did not exist in any great number until 1997, and have existed only through very favorable economic conditions and generally are not affected by the rating level of supporting parties);
  • and Since the beginning of 1999, there has been a marked increase in the number of upgrades reflecting the performance of the underlying collateral, testifying to market’s increasing maturity.

Full text of this important study is available on S&P website – under Structured Finance, look for Commentary

Italy going ahead with second securitisation of social security contributions

Last year, Italy stole international limelight when it securitised delinquent social security contributions. The transaction, named INPS, has since been in problems as collections were delayed.

Unfazed by problems in INPS-I, Italy is going ahead with INPS-2. The mandate for INPS 2 has been awarded to the houses that arranged the first tranche. The government is apparently in a hurry and wants to complete the deal before the end of the year to meet is budgetary deficit targets.

INPS 1 ran into trouble three months ago when it became clear that payments had not been collected as expected. The problem stemmed from a lack of communication between the government and the various debt collectors. On this site, we have carried reports about these problems – click here.

Links For more on Italian securitization scene, click here.

European Investors migrate to asset-backed securities

European investors are showing a distinct preference to asset-backed securities. While bond markets in general are in shambles, investors equate asset-backed securities with government bonds and German pfandbriefes in terms of risk perception.

One of the most important factors that has boosted demand for ABS in Europe is the fact that there has not been a single case of default ever since the inception of the market in late 1980s. During year 2000, there has not been a single case of rating downgrade of an AAA-rated European ABS paper, while downgrades abound in other debt securities.

Post August 2000, there has been plenty of issuance in Europe, and issues have met with liberal response from investors. Several market professionals state the most remarkable fact: not only is there strong demand, there is demand from investors who are new to the ABS market.

Vinod Kothari adds: Apart from the resilience of ratings and the fact that there has not been a default, there also seems to be working a usual S-curve phenomenon. The market is on the steep-slope-up part of the S-curve, while the US market has come to flat plateau stage. European investors are still honey-mooning with asset-backed securities. Hope the honey moon lasts long!

THE IMPACT ON SECURITIZATION OF REVISED UCC ARTICLE 9

/in /by

Steven L. Schwarcz

Relevant links:

A press release by UCC explaining impact of Article 9 changes

A narrative on Article 9 by UCC

The recent revisions of Article 9 of the Uniform Commercial Code ("UCC") are expected to have a significant impact on securitization-a type of financing that is perhaps the most rapidly growing segment of the U.S. credit markets and increasingly a major part of foreign credit markets. In its current form, Article 9 governs the sale of only certain types of assets that are involved in securitization transactions. Revised Article 9 attempts to broaden its coverage to virtually all securitized assets. I analyze how it does that and what it means for Article 9 to apply to these transactions, addressing issues of perfection and priority of asset transfers, commingling of proceeds, assignability of assets in the face of contractual restrictions, and the effect of negative pledge covenants. Finally, I show that the revisions of Article 9 do much to bring the commercial law setting for securitization into the twenty-first century.

Introduction

Asset securitization is "by far the most rapidly growing segment of the U.S. credit markets" and increasingly is becoming a major part of foreign credit markets. In a typical securitization, a company (usually referred to as the "originator") sells rights in income-producing or financial assets-such as accounts, instruments, lease rentals, franchise and license fees, and other intangible rights to payment-to a special purpose vehicle ("SPV"). The SPV, in turn, issues securities to capital market investors and uses the proceeds of the issuance to pay for the assets. The investors, who are repaid from collections of the assets, buy the securities based on their assessment of the value of the assets. Because the SPV (and no longer the originator) owns the assets, their investment decision often can be made without concern for the originator's financial condition. Thus, viable companies that otherwise cannot obtain financing because of a weakened financial condition now can do so. Even companies that otherwise could obtain financing now will be able to obtain lower-cost capital market financing.

What does Article 9 of the Uniform Commercial Code have to do with securitization? In its current form, Article 9, which generally addresses only secured transactions, nonetheless governs the sale of certain types of financial assets-accounts and chattel paper-that are commonly involved in securitization transactions. The rationale for including sales of these assets in Article 9 was that "[c]ommercial financing on the basis of accounts and chattel paper is often so conducted that the distinction between a security transfer and a sale is blurred, and a sale of such property is therefore covered . . . whether intended for security or not." This same rationale, and the significant minimization of transaction costs that the rule achieves, holds equally true today.

What has changed today, however, is that, increasingly, many other types of financial assets are sold as part of commercial financing transactions. Whereas factoring was the only significant form of commercial financing to involve sales of financial assets (accounts and chattel paper) when the UCC originally was adopted, securitization-which involves the sale of a whole range of financial assets-has now become significant. Yet, Article 9 had not been amended to take securitization into account. Revised Article 9 is a bold and largely successful attempt to remedy that omission and to adapt the law governing secured transactions to the realities of modern commercial and financial transactions. It accomplishes these goals in several ways.

I. Revised Article 9 Brings the Sale of Most Types of Financial Assets Within Its Scope

As a threshold matter, Revised Article 9 brings within its scope the sale not only of accounts and chattel paper, as under current law, but also of "payment intangibles" and "promissory notes." Significantly for securitization, the definition of an account is expanded from current law to include not only credit card receivables and health-care-insurance receivables but also any "right to payment . . . for property that has been or is to be . . . licensed, assigned, or otherwise disposed of," thereby covering license and franchise fee receivables. Moreover, the term payment intangible is broadly defined as "a general intangible under which the account debtor's principal obligation is a monetary obligation." This definition appears intended to cover financial assets that are not already covered by the terms account, chattel paper, and promissory notes. For example, loan participations and commercial loans not evidenced by instruments would be payment intangibles.

Accordingly, Revised Article 9 will apply to securitization transactions so long as the financial assets being sold consist of accounts (including credit card, health-care-insurance, license, and franchise fee receivables), chattel paper, promissory notes, or payment intangibles. I will refer to these types of financial assets as "covered financial assets." The reader should note, however, that in some securitization transactions, financial assets are not sold but are merely transferred as security. Revised Article 9 then will apply, as does current Article 9, to virtually any financial asset so transferred.

The remainder of this article discusses what it means for Article 9 to apply to the securitization of financial assets. Most significantly, all sales of covered financial assets will be perfected, and the priority of the SPV as against creditors or a trustee in bankruptcy of the originator will be governed, by the rules of Article 9. Establishing clear and pragmatic rules for perfection and priority of the transfer of covered financial assets will minimize transaction costs for the reasons previously explained in the context of transferring accounts and chattel paper: parties to the securitization transaction will not have to make the difficult determination of whether each transfer of a covered financial asset is a secured transaction or a sale; filing for both types of transfers will forestall litigation attempting to second-guess that determination if the originator in the securitization transaction eventually goes bankrupt; and sales of covered financial assets no longer will have to be perfected under state common law procedures that often are costly and impractical.

But Revised Article 9 will apply to securitization in a myriad of other ways. In this article, I focus on the more significant impacts most likely to be encountered in a typical securitization transaction, such as mitigating the effect of commingling proceeds of financial assets and promoting assignability of financial assets, notwithstanding contractual restrictions to the contrary. The reader must recognize, however, that Revised Article 9 will have other impacts on securitization, some less significant, some that will be significant in only certain transactions, and some whose significance might not become obvious until transactions are actually done under the revised statute.

Of course, the fact that Revised Article 9 will apply to the sale of covered financial assets does not mean that Article 9 applies to those sales for all purposes. In interpreting Oklahoma's enactment of current Article 9, the Tenth Circuit Court of Appeals previously had concluded that Article 9's application to the sale of accounts-characterizing the buyer of accounts as a "secured party," the seller as a "debtor," and the sold accounts as "collateral"-means that accounts cannot be sold under Oklahoma law. Although that decision was much criticized, and the Permanent Editorial Board of the UCC issued a commentary stating that the case was incorrect and also amended comment 2 to current section 9-102 to clarify interpretation, those actions have not generally been approved by legislatures or courts and do not necessarily have the force of law. Revised Article 9, once approved by legislatures, is intended to drive the final nail into the Octagon coffin by providing not only that the question "whether a debtor's rights in collateral may be voluntarily or involuntarily transferred is governed by law other than this article [9]," but also that a "debtor that has sold an account, chattel paper, payment intangible, or promissory note does not retain a legal or equitable interest in the collateral sold." The latter point attempts to address the "rarified" argument that Octagon was correctly decided because certain limited property interests may remain with the originator after the sale of financial assets.

II. Revised Article 9 Establishes Clear and Pragmatic Rules for Perfection and Priority

Two of the essential goals of a commercial law statute are clarity and simplicity of implementation. In the context of the commercial law rules for perfection and priority, Revised Article 9 furthers both of these goals.

A. Perfection

Perfection refers to the protection of a transferee's interest in transferred assets from creditors of the transferor and from the transferor's trustee in bankruptcy. Under current Article 9, perfection is generally achieved by filing financing statements in jurisdictions where the debtor (originator) or the collateral is located. The problem, however, is that it is often unclear where the debtor and the collateral are located and, in the latter case, the location may well change.

Revised Article 9 addresses this problem in two ways: by making the location of the debtor-as opposed to the location of the collateral-determine the jurisdiction whose law governs perfection in most cases; and by clarifying where a debtor is deemed to be located. The former point is less critical to securitization, which involves intangibles, than to other forms of secured financing where the assets are tangible items that can be moved around. But the latter point is quite significant to securitization. Section 9-307 of Revised Article 9 changes the rule of current section 9-103(3) to provide that registered organizations, such as corporations, organized under the law of a particular state are deemed to be located in that state. Thus, one would file financing statements against an originator incorporated under the laws of Delaware in Delaware, irrespective of where the originator's assets or business are located. Furthermore, where the originator is a foreign company not incorporated under state law, Revised Article 9 provides that its location is in the foreign jurisdiction where the originator has its chief executive office (or, if the originator has only one place of business, in the jurisdiction where that place is located), but only if that jurisdiction itself has a public filing system for perfection. If that jurisdiction does not have a public filing system, the originator is deemed to be located in the District of Columbia. Of course, whether filing in the District of Columbia will achieve perfection under the law of the foreign jurisdiction is also a question of that jurisdiction's law.

Revised Article 9 also brings a measure of pragmatism to the securitization of payment obligations evidenced by instruments. Under current law, a security interest in instruments can only be perfected by taking possession of the instrument. That may be impractical, however, where (as is common) a securitization transaction involves the transfer of large pools of instruments. The revision solves that problem by allowing a security interest in instruments to be perfected by filing. Nonetheless, holders in due course and certain other purchasers for value of instruments would have priority on the rationale that requiring them to check the filing system in connection with each purchase would impede those transactions, whereas there is only "a remote possibility that is not of serious concern" that an originator will voluntarily transfer instruments to third parties in breach of contractual restrictions.

One of the major controversies that arose during the Article 9 revision effort was how to perfect the sale of payment intangibles. Bankers were concerned that a perfection requirement of filing financing statements would subject them to costly new procedures when selling loan participations, a form of payment intangible. A somewhat practical solution was reached to mitigate this concern: the sale of payment intangibles would be deemed to be automatically perfected, without the need to file financing statements. This solution, however, is imperfect. Buyers of payment intangibles cannot search filing records to determine whether those intangibles previously have been sold to others. Thus, an SPV in a securitization transaction cannot ascertain the priority (discussed below) of the SPV's ownership rights, other than by relying on representations of the originator. Originators that are insufficiently capitalized to back up their representations therefore may find it difficult to securitize payment intangibles.

B. Priority

Priority refers to the ranking of multiple claims against a transferred asset. In a securitization context, it means that "the SPVs and investors' claims against the transferred financial assets are superior [in ranking] to any third-party claims," including that of the originator's trustee in bankruptcy. Under current Article 9, priority is generally accorded to the first secured creditor to file or perfect, under a rule usually referred to as "first in time, first in right." Revised Article 9 continues that rule.

There is, however, one exception under current Article 9 to first in time, first in right. A holder of a purchase money security interest ("PMSI") generally takes priority over an earlier perfected security interest in the same collateral. That exception, however, would create a significant problem for securitization and other forms of accounts receivable financing: because accounts are the proceeds of inventory, it would mean that a later perfected inventory financier with a PMSI would take priority over an earlier perfected SPV or accounts financier. To ensure that the PMSI exception does not discourage accounts receivable financing, current Article 9 has a special rule that favors accounts receivable financiers, including SPVs that purchase accounts, over purchase money financiers of inventory. Revised Article 9 continues that special rule.

III. Revised Article 9 Mitigates the Effect of Commingling of Proceeds

Commingling refers to the mixing of proceeds of collateral with assets of the originator. Under current Article 9, in an "insolvency proceeding" (such as bankruptcy), the secured party or SPV's interest in cash proceeds will be lost if the cash is commingled with other funds of the originator, except to the extent that an artificial formula preserves the security interest. However, this rule is unfair to secured parties because it can arbitrarily limit the amount of a perfected security interest in commingled cash proceeds and it allows an originator contemplating bankruptcy, in what has become a commonplace legal strategy for debtors, to intentionally commingle proceeds of a perfected security interest in advance of filing a bankruptcy petition in order to use the formula to defeat the perfected interest.

Revised Article 9 will remedy that unfairness. Rejecting the artificial formula, it returns to the common law principles of "tracing," under which a perfected security interest will continue in traceable cash proceeds of the original collateral. This would permit common law tracing rules such as the "lowest intermediate balance rule," in which it is presumed that funds remaining in an account after withdrawal by the debtor include the proceeds of collateral (or, put another way, that withdrawals from a deposit account following the deposit of proceeds are first made from non-proceeds).

Revised Article 9 also expands the definition of proceeds, which currently includes only what "is received upon the sale, exchange, collection or other disposition of collateral or proceeds." This relatively narrow definition had created confusion, for example, as to whether dividends of stock are proceeds. Under the expanded definition, stock dividends clearly would be included.

This expanded definition of proceeds can have major significance for securitization. Increasingly, the financial assets used in securitization transactions represent rights to payment that arise in the future ("future assets"). If, however, the originator goes bankrupt after the securitization transaction is entered into, section 552(a) of the Federal Bankruptcy Code may cut off the SPV's interest in future assets. While section 552(b)(1) generally would preserve the SPV's interest in future assets, that interest is only preserved to the extent that the future assets constitute "proceeds, product, offspring, or profit[]" of the SPV's prepetition assets. In this connection, courts interpret the term "proceeds" by reference to the UCC definition. Thus, Revised Article 9's expanded definition of proceeds will expand the universe of future assets that can be sold to SPVs without the fear of the SPVs' interest in those assets being cut off in the event of the originator's bankruptcy.

IV. Revised Article 9 Promotes Assignability Notwithstanding Contractual Restriction

Parties to contracts sometimes restrict the assignment of rights and obligations thereunder. These restrictions are often referred to as "anti-assignment clauses." In a securitization transaction, the parties to that contract are the originator and a third party obligated on the financial asset. Because the focus is on the originator's transfer of its rights in the financial asset to an SPV, we need only examine the obligor's ability to restrict that transfer.

Current Article 9 nullifies anti-assignment clauses that prohibit "assignment of an account or . . . creation of a security interest in a general intangible for money due or to become due." The rationale given is that the nullification of anti-assignment clauses "is widely recognized in the cases and . . . corresponds to current business practices." An implicit rationale, however, might be that the obligor on the account or general intangible is not prejudiced by its assignment, whereas enforcing the anti-assignment clause would impair the free alienability of property rights.

Revised Article 9 clarifies the rule of current Article 9. First, the revision eliminates any argument that a transfer of financial assets in violation of an invalidated anti-assignment clause nonetheless constitutes a breach as between the obligor and the originator. Second, the revision treats anti-assignment clauses in payment intangibles and promissory notes differently depending on whether the transfer in question is a sale or merely a transfer for security. Anti-assignment clauses would be ineffective in both cases from preventing perfection of the transfer of the right to payment, but they would be upheld to prevent an originator from selling its underlying business relationship. Thus, if the originator is a bank which has made a loan to a borrower, the bank could sell a participation in that loan-a loan participation being a payment intangible-to an SPV or other third party and could perfect that sale notwithstanding an anti-assignment clause in the underlying loan agreement; but the bank could not alter the underlying debtor-creditor relationship with its borrower. The buyer of the loan participation therefore would have no direct collection rights against the borrower.

V. Revised Article 9 Clarifies the Effect of a Negative Pledge Covenant

A negative pledge covenant is an agreement by a debtor in favor of a third party (typically, a creditor) in which the debtor agrees not to grant a security interest in or otherwise encumber its assets. In a securitization context, originators often make negative pledge covenants in favor of SPVs regarding transferred and to-be-transferred financial assets. If, of course, those financial assets already have been sold to the SPV and the originator retains no interest therein, the originator would have no power to grant a security interest and a negative pledge covenant then would be superfluous. But it is sometimes unclear whether the financial assets have been sold; and originators often do retain interests, such as interests in financial assets not yet sold, or undivided interests in financial assets that have been sold, or rights to surplus collections. In those cases, negative pledge covenants may be important.

Current Article 9 is unclear as to the enforceability of a negative pledge covenant. Revised Article 9 offers clarity by providing that while negative pledge covenants cannot restrict alienability, a transfer of financial assets in breach of a negative pledge covenant nonetheless constitutes a default by the originator. That default could entitle the SPV to exercise remedies against the originator and might also allow the SPV to sue the transferee, if it knew or should have known of the breached covenant, for tortious interference with contract.

Conclusion

The revision of Article 9 does much to bring the commercial law setting for securitization into the twenty-first century by embracing a broader range of financial assets, setting clear and pragmatic rules for perfection and priority of their transfer, clarifying inadvertent legal ambiguities, and reducing unnecessary transaction costs.