[This page lists news and developments in

global securitisation markets – please do visit

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Previous newsletters

May, 2001,… April 2001…  March 2001 ..Jan. and Feb.2001 
Nov. and Dec.2000  Sept. and Oct. 2000  July and August 2000 
May and June 2000  April 2000   Feb and March 2000   
For all news added before 21 January, 2000, please 
click here   
For all news added before 9th November, please 
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For News items added prior 3rd August, 1999, 
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Read on for chronological listing of events, most recent on top:


European equity analysts don't know what is securitisation

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

The important findings of the survey are:


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

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


The agencies do lower mortgage costs, finds Federal Reserve study

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

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

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

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

Peugeot launches major securitisation of car loans

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

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

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

Telekom Italia phone revenues securitization is a success

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

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

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

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

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

Bye bye Basle, see you soon!

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

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

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

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

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

Securitisation law in India: Whose baby is it?

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

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

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

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

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

Philippine govt. defers plans to securitise royalty income

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

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

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

Spanish securitization poised to grow fast, says Moody's

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

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

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

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

Fitch cautions on use of insurance to support securitisations

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

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

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


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


Synthetic securitisations continue to dominate as new applications emerge in Europe

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

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

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

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

Under-construction houses securitised in Singapore

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

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

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

Links For more on securitisation in Singapore, click here.

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

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

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

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

More info is available on the website of the company at

Swiss Re study sees 10 fold growth in insurance securitisation

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

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


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

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

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

Islamic securitisation in Singapore

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

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

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

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


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

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

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

Links For more on securitization in Korea, click here.

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

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

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

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

Links For more on article 9, click here.

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

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

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

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

European securitisation volume grows 100%

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

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

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

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

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

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

New securitisation rules proposed 
in South Africa

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

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

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

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

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

Singapore company to securitise prime shopping complex

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

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

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

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

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

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

Securitisation activity to speed up in Thailand with proposed law changes

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

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

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

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

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

Securitization residual value accounting to blame for debacle of Superior Bank

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

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

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

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

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

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


[This page lists news and developments in

global securitisation markets – please do visit

this page regularly as it is updated almost on a

daily basis. Join our mailing list for regular

news fed direct into your mailbox]

Previous newsletters

June, 2001May, 2001,… April 2001…  March 2001 ..Jan. and Feb.2001  Nov. and Dec.2000  Sept. and Oct. 2000  July and August 2000 May and June 2000  April 2000   Feb and March 2000   
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:


Q 2 rating scenario: upgrades dominate in RMBS, downgrades affect arbitrage CDOs

Rating agency Standard and Poor's has reported that rating upgrades in the US RMBS segment far exceeded the downgrades during this period. There were 184 upgrades and only 14 downgrades on a total of 111 transactions. The prime reason was the improved collateral performance. Transactions collateralized by prime mortgage loans received the majority of RMBS raised ratings.

In the ABS segment, there were 115 rating actions consisted of 73 lowered ratings (affecting 89 classes) and 42 raised ratings (affecting 43 classes), and affected transactions across seven different asset classes, including franchise loans, CBO, manufactured housing, auto, motorcycle, synthetics, and retail credit card. Bulk of the upgrades came from the auto and two-wheeler finance segment.

In contrast, there were increased downgrades in the CDO segment. Increased defaults among obligors in the high-yield debt markets (and lower recovery rates for defaulted collateral) continued to filter through to CDO transactions. The effect was most visible in transactions backed by high-yield bonds. During the second quarter, Standard & Poor's lowered its ratings on 17 tranches within 12 domestic CDO transactions, and placed its ratings on 28 tranches within nine transactions on CreditWatch with negative implications. The majority of these rating actions were made on arbitrage CBO transactions.

Links For a copy of the report of Standard and Poor's, click here.


First Jamaican future flow transaction rated

Standard & Poor's (S&P) assigned its triple-'A' rating to the first future flow transaction to emanate from Jamaica. Originated by the National Commercial Bank Jamaica Ltd (NCB), this USD 125 million transaction is backed by credit card voucher payments coming into the country. The variable funding certificates are due after 5 years.

The rating is credit-enhanced by a financial guarantee insurance policy provided by XL Capital Assurance Inc. which is rated AAA. The insurer guarantees timely payment of interest and principal when due.

NCB is the only financial institution in Jamaica that can process its own vouchers and has a strong market share (more than 80%) in the Jamaican international voucher acquisition business.

The transaction is also characterised by structural features that enhance the likelihood of payments. These include the offshore collection account and agreements by VISA and MasterCard to make payments directly to such account.

Links For more on securitisation in Latin America, please see our page here.

Belgian company to add sparkle to securitisation business: to securitise stock of diamonds

If the Marne et France's securitisation of champagne bottles added three cheers to securitisation, here comes the sparkle: A Belgian diamond wholesaler Rosy Blue N.V wants to raise USD100 million by issue of floating rate notes which will be backed by stock of rough and polished diamonds at different stages. The transaction has been assigned an expected rating of A by Fitch.

The modality of the transaction will be as thus: a a special purpose company will be incorporated in Luxembourg whose business will be limited to purchase of diamonds for refinancing the stock thereof. The stock of rough and polished diamonds will be sold to the Luxembourg company on consignment sale basis, to be resold to the wholesaler whenever a real end-buyer is found. Payments of interest and principal to noteholders are backed by the cash flows from the ongoing sale to final buyers. The transaction is based on a revolving pool of assets.

The noteholders' security arises from the fact that the physical stock of diamonds, subject to stress tests applied by the rating agencies, with the SPV will always be more than the accrued interest plus principal of the noteholders.

Antwerpse Diamantbank N.V will act as a backup servicer in this transaction, and will sell the stock of diamonds on behalf of the SPV, if the wholesaler is disqualified in terms of the servicing arrangement.

Italian cooperative bank launches Italy's largest RMBS offer

Banca Popolare di Milano, a cooperative bank, will be launching Italy's largest RMBS offer to raise approx. Euro 1.34 billion. Of this, as much as Euro 1.262 billion has been rated AAA by Fitch. The mezzanine tranche of Euro 54 million has been rated AA and the balance of Euro 27 million has been rated BBB by the agency. The offering will be the largest Italian RMBS so far.

The collateral for the transaction is 29,928 first lien residential mortgage loans, classified as in bonis (i.e. performing), originated by Banca Popolare di Milano. BPM is the fourth largest co-operative bank in Italy with a strong market presence in Lombardy and headquarters in Milan.

Links For more on securitisation activity in Italy and several connected articles, see our page on Italy here.

Mobile telephone company to make the largest Japanese securitisation offer

KDDI Corp., Japan's second- largest mobile-phone company, plans to raise an equivalent of USD 1.6 billion by securitisation of its office buildings and offer what might be the largest securitisation issue in Japan.

The securities will be backed by 5 office properties owned by the mobile phone company. The company has about 1 trillion yen worth debt to pay and the present securitisation exercise is aimed partly at restructuring its balance sheet.

Vinod Kothari adds: Japanese securitisation market in the second quarter of 2001 showed a small dip in volumes and should stand out on a steep growing growth curve. However, a Standard and Poor report says that the Japanese market is poised for growth and the dip in volumes might have been because of larger volume of private placements.


UK property company to securitise receivables as UK ABS activity heats up

British Land, the UK's third largest property company, is to securitise its investment in Meadowhall Shopping Centre outside Sheffield and raise GBP 900 million. Market reports indicate that the company has appointed Morgan Stanley Dean Witter, Citigroup and Royal Bank of Scotland to co-manage the offering.

It is notable that an earlier securitisation by the company had led it to serious problems with its existing shareholders and debtholders complaining. With the present securitisation, British Land will have nearly GBP 3 billion in oustanding securitised products.

In general, it is clear that an ever increasing number of UK corporates are resorting to securitisation. A feature in Financial Times of 12th July said "securitisation has become a mainstream financing technique for companies in the UK this year. Abbey National, Canary Wharf, Marks and Spencer, British Land, Rank Hovis McDougal, and General Healthcare have all recently used or soon plan to use securitisations of future cashflows to raise finance."

The half-year's tally of UK ABS issuance adds up to some GBP 19 billion, which compares with some GBP 28 billion for the whole year in 2000.


UK football club to securitise receivables

Leeds United football club is planning to raise some GBP 50 million by securitisation of its gate receipts.

Leeds has an estimated GBP 15.5 million in gate receipts annually, including GBP10 million from season tickets and Premiership matches. Of these, it will spin off GBP 5 million per year for the proposed securitisation plan to raise upfront money. The money will be used partly to reduce its bank debt and partly for development purposes.

This is not for the first time securitisation has been talked about in the sports arena. Even the international soccer body FIFA was to have securitised its receivables but the proposal got scuttled due to internal controversy.

Korean tyre company to securitise

Evidencing the wave of securitisation activity currently in Korea, Korea's largest tyre maker Kumho Industrial announced plans to issue 200 billion won (USD 154.5 million) in asset-backed securities on July 13. The securities are backed by trade receivables.

ABN Amro, Arthur Andersen and Kookmin Bank were selected as lead managers for the deal. The collateral is receivables owed by Hyundai Motor, Kia Motors and Shinsegae Department Store .

Korea emerged as the largest issuer of asset-backed paper in Asia, minus Japan for year 2000. The trend continues for this year as brisk activity is noticed both in terms of domestic placements as well as offshore issuance. Recently IFC Washington participated in an RMBS transaction – see news report here.

The won 200 billion issue will be broken into 2 tranches: 110 billion won will be senior, and the balance 90 billion won will be subordinated.

Links See our page on Korea here.

S&P outlines rating criteria for whole business securitisation

In view of the growing significance of whole business securitisation particularly in Europe, Standard and Poor's recently put up an article outlining the rating criteria for whole business securitisations. Click here for the text of the article.

Whole business securitisation is a hybrid between a plain corporate loan and a traditional asset-backed security. Whole business or operating revenue securitisation views the operating company as an operator of the business, and the business as a series of cashflows, and backed by credit enhancements and structuring, it aims at attaining better ratings for the instrument than a traditional corporate borrowing. The major motivations of a whole business securitisation are better rating and therefore cheaper funding, and higher extent of funding than permitted by traditional loans. Off-balance sheet treatment is not applicable to these securitisations : therefore, motivations that spring from off-balance sheet treatment do not apply.

As better rating is the key feature, S&P talks of the determinants in rating of a whole business securitisation. "A detailed cash flow model of assets and their matching to the debt liabilities is stressed and the results analyzed. Structural support in the form of a liquidity facility and/or cash reserve is common and often crucial to the ratings outcome. Both types of transactions entail debt tranching and structural subordination, although smaller deals often require a single tranche. Sequential repayment of debt tranches is frequently taken into consideration. More critical in hybrids than in many standard asset-backed deals is the discipline imposed on the business operator to adhere to specified behavior and minimum level of performance. This is accomplished by means of features of the transaction structure, in particular through:


  • Continuous vetting and supervision of information, accounts, as well as the legal and regulatory framework;
  • Covenants, both to constrain the behavior of parties to the transaction and to provide for possible early termination of the debt;
  • The record of judicial enforcement in the relevant jurisdiction; and
  • The performance and incentives of the servicer. "

Links See our page on whole business securitisation here.


Asian securitisation awards: Kamco is the best

Journal The Asset Online recently announced its Asset Asian Awards 2001. In securitisation transactions, the Kamco deal was awarded the best deal with Paliburg CMBS being the runner up.

Kamco in July 2000 raised USD 367 million by securitisation of non-performing loans of Korean banks that Kamco has been picking up over time. The deal was the first foreign-currrency denominated NPL securitisation from Asia, minus Japan. The deal was also the largest Korean securitisation offered offshore.

On this site, we have covered the Kamco deal well – see our page on NPL securitisation here. We have also done a web-chat on this deal with representatives from Deutsche Bank and Duff and Phelps (now Fitch).

The runner up deal was the CMBS offer from property and hotel group Paliburg Holdings. This was the first CMBS from Hong Kong in 2000. This US$179.49 million equivalent issue was offered without an insurance wrap, was broken into 7 tranches, including five floating rate notes totaling HK$1.17 billion, a HK$77 million fixed rate note and a HK$153 million zero coupon note.

Links See our page on Asia here.

Securitisation of hedge funds is the latest hot stuff

Some days back, we reported a securitisation deal by Prime Edge involving packaging of private equity investments which Wall Street Journal described as a path-breaking innovation. The transaction was based on an apparently simple idea – repackaging of investments in several private equity funds. The CDO conduit is to spread its investments in 20 different private equity funds. See Standard and Poor's press release here.

Financial Times of July 5 contains a story titled : New asset-backed security linked to hedge funds: Collateralised fund obligations are part of a growing product area. This feature says that JP Morgan and Deutsche Bank are both working on creating these CDO products that will make investments in hedge funds and that the fund of funds warrant that Bear Stearns was developing could double as the basis for a securitisation. The Financial Times feature strikes the chord when it says: "The securitisation of hedge funds brings together two of the hottest areas of finance. Securitisation technology is now commonly applied to any area of finance that generates fairly predictable cash flows – there is now a massive market in repackaged bonds and bank loans. Hedge funds have become red hot since the equity markets stopped producing stellar returns."

On the other side of the Atlantic, the Wall Street is showing tremendous interest in CDOs of CDOs, that is, CDOs that repackage investments in other CDOs. At a New York CDO summit recently held under the auspices of Institute For International Research, market playeres went gung ho. Some one remarked: . "CDOs of CDOs are the greatest thing. It helps everybody. We can turn it around in a few hours. We love this market right now."

Bond Week reported that Triton Partners is marketing its first collateralized debt obligation backed by other CDOs. The deal, called Triton CDO Opportunities I will total $300 million and will be lead managed by Morgan Stanley and TD Securities in New York.


FASB staff answers questions on servicing

The Financial Accounting Standards Board (FASB) staff on 3rd July gave answers to 8 questions relating to servicing activities in a qualifying SPV. These answers will subsequently be a part of the implementation guide on FAS 140 to be issued by FASB.

Commenting on the answers, noted expert on securitization accounting Martin Rosenblatt said: "Although the industry did not get everything it wanted (e.g. NPV), all changes from the draft Q&A are improvements and there are no negative surprises."

Among the questions answered in this guide, FASB says that for activities not permitted for the SPV, a nominee of the SPV cannot do the same on behalf of the SPV. Another answer relates to circumstances in which a loan restructuring by a qualifying SPV might amount to fresh lending, not permitted the SPV.

The answers permit the SPV as a servicer to sell defaulted loans, only if "if the servicing agreement in effect at the time the SPE was established describes specific conditions in which a servicer of a defaulted loan is required to dispose of the loan and the servicer has no choice but to dispose of the defaulted loan when the described conditions occur, then such a loan disposal is a permitted activity of a qualifying SPE."

Links For more on accounting issues, click here.

Australia looks forward to a record-breaking year

The level of activity in the Australian securitization market is seeing a record rise and rating agency Standard and Poor's expects that Australia is in for a never-before year. In a press release of 3rd July the rating agency says that the securitisations rated by it during the first half total A$16.8 billion which is up 34 per cent on the same time last year.

Residential mortgage-backed securities have increased in volume this year by more than 45 per cent for the same period in 2000. All four major Australian banks now have established securitisation programs. A notable feature of Australian securitization this year is the rise in offshore issuance. Offshore issuance has accounted for 71 per cent of total issuance volume so far in 2001.

In an unrelated feature published in Asiamoney, JP Morgan wrote that as far as RMBS volumes in Australia are concerned, they have already exceeded the entire volume for 2000.

With more than USD 40 billion in oustanding securities, Australia is taken to be the second largest securitisation market in the World.

Links Our country page on Australia has just been updated with new content including the consolidation issue. Click here.

First half ABS volume surges to expectations

Global asset-backed securitization volumes in the 1st half of 2001 have surged, which was much expected given the trend established earlier this year.

The website of Asset-backed Alert which regularly tracks ABS data showed that upto the end of the half year, the total global securitization volume in year 2001 stood at USD 216 billion, compared to USD 172.2 billion for the same period in the previous year. This shows a growth of more than 25%.

Of the above, non-US securitization volume stood at USD 58.8 billion compared to USD 40 billion last year, showing a growth of nearly 46%. Thus, growth in securitization volumes outside the US is far higher, which is only expected given the fact that number of European and Asian markets are still honeymooning with securitization, while it is already a graying lady i the US.

It is expected that the trend of growth will be maintained in the second half and the year will end with a far higher rate of growth than the last year. The last year, it may be recalled, was not a year of high growth as far the US markets are concerned.

Links See our global securitization page.

US mortgage securitisation grows nearly 300% in first half 2001

Thanks to reduced rates of interest, there has been a deluge of mortgage origination in the US markets, resulting into substantially higher mortgage securitisation volumes in the first half of 2001. Data released by Thomson Financial Securities show that the mortgage backed bond issuance volume for the period upto June 30th was USD 208 billion, up from from USD 78 billion in the first half of 2000.

The substantial jump in volume is associated with a similar increase in mortgage origination volumes, which in turn has happened due to consecutive interest rate cuts by the Fed.

The data shows that Credit Suisse First Boston was the top underwriter in the first half of this year, managing 169 offerings worth $29.9 billion. Then comes Bearn Stern and UBS Warburg.



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Fleet uses ABCP route to arrange mega funding for restructuring of Finova: vulture funding?

In an unusual transaction, FleetBoston Financial's Fleet Securities has used the ABCP route to raise a mega sum of USD 6 billion for Berkadia LLC.

Berkadia is the joint entity formed by Warren Buffet's Berkshire Hathaway and Lucadia National Corp. for the specific purpose of funding troubled finance company Finova out of bankruptcy. Finova had filed for Chapter 11 bankruptcy in March this year, when Berkadia outbid GE Capital for the restructuring funding. The use of the ABCP proceeds will go towards repaying the loan Berkadia gave to Finova. In other words, the present ABCP transaction is used for funding the restructuring of Finova. The market place contends that after paying off the existing creditors of Finova to the extent of 70%, Berkadia will start liquidating the assets of Finova which are expected to be worth much more than the liabilities. In Altman's language, therefore, the ABCP deal is essentially a securitised vulture funding.

An article in Investment Dealers Digest of 6th August quotes market practitioners who agree that this kind of funding using ABCP route is unusual. Also unusual is the huge size of this transaction, even though there have been larger ABCP issuances.

The ABCP market in the USA has been booming. Market data on abalert.comshows the latest outstanding ABCP volume at more than USD 650 billion, which rose up from less than USD 400 billion in Jan 1999.

Links See for more on ABCP our page here.

Swedish municipality CMBS to stir up activity in the country

The vast Swedish mortgage market that has so far mainly fed itself on traditional European mortgage funding instruments is now likely to see increasing volume of securitisation. Recently, a CMBS transaction originated by a Swedish municipality achieved AAA rating from Standard and Poor's, which may prompt more mortgage funding to migrate to securitisation.

The originator in question is Framtiden, a municipal housing company wholly owned by the City of Gothenburg, the second largest city in Sweden. The transaction will use a special-purpose entity, Framtiden Residential Housing Finance No. 3 AB. The collateral is loans granted to subsidiaries of the originator. The loans are secured on pledges of Pantbrev (traditional mortgage funding instrument in Sweden, comparable to German pfandbriefe) in three predominantly residential portfolios comprising a total of 9,268 apartments in 143 modern apartment blocks in Gothenburg.

Links There is more content and number of links on the Swedish securitisation market on our country page.

Asia's first whole business securitisation completed in Malaysia

This is certainly a very creditable achievement for Malaysia because whole business securitisation is a complicated and esoteric securitisation method that has been perfected in the UK. But no wonder, since the transaction was handled by Nomura Securities which has to its credit several such deals.

Nomura International completed in mid-June this year a USD 250 million bond issue for 1st Silicon (Labuan) Inc., a special-purpose subsidiary of 1st Silicon (Malaysia) Sdn. Bhd., a state-of-the-art wafer foundry located in Kuching, Sarawak, and Malaysia's first 200mm silicon wafer processing plant. This transaction was talked about for quite some time.

The whole-business financing will be used to repay a syndicated bridge loan from Nomura of USD 180 million.

The asset-backed bonds have also been guaranteed by Sarawak Economic Development Corporation, which is an agency of the State Government of Sarawak. The Bonds have achieved BBB/Baa3 ratings from Standard & Poor's and Moody's Investors Service Ltd. respectively. This is the first time that a Malaysian corporate bond issue has achieved investment-grade ratings without having an explicit link to the Malaysian Sovereign.

The floating-rate notes have a seven-year maturity, with a put and call option on the fifth anniversary. They are being issued at par and carry a coupon of Libor plus 275 bps.

Links For more on whole business securitisation, see our page here. For more on Malaysia, see our country profile here.

Malaysian securitisation market is ready for trigger

Malaysia has been talking about securitisation for quite some time now, but it seems now the stage is finally set for some hot action. The curtains are finally rising.

Several CBO transactions are at various stages right now. Arab-Malaysian Merchant Bank Bhd has reported launched a CBO recently – see our report below. Yet another CBO of a managed portfolio is in the offing from CIMB. This transaction will use an SPV called CBO One Berhad and would raise RM 385 million in two tranches, the senior 7 year tranche being RM 360 million, rated AAA. Besides, there will be a subordinated interest of an amount not yet decided, held by the originator.

Both AMMB and CIMB deals will be offered to domestic investors which is natural given the low rates of interest prevailing in the country.

In the meantime, Malaysian media is replete with securitisation stories – The Star, for example, on 23rd August carried extracts of a press briefing by Copernican Securities, and Business Times on the same date published an interview with RAM official – and Malaysian conference rooms are abuzz with securitization classes. Speaking of the conferences, Rating Agency Malaysia (RAM) is holding end-August conference with both domestic and international speakers, and IBBM continues with its three workshops on securitisation each year. Private event producers are also reported to have offered securitisation events.

Links: See our country page on Malaysia.

Gibralter passes protected cell company law

A law to allow formation of protected cell companies (PCCs) was passed by Gibralter in early July 2001. The House of Assembly passed a bill for a Protected Cell Companies Ordinance on 3 July 2001.

A protected cell company is a new concept in corporate legislation which allows the setting up of a multi-part company containing different cells, with each cell having its own assets, liabilities, debtors and creditors with mutual independence from other cells as also from the core capital of the company. The law allows both incorporation of PCCs as also conversion of existing companies into PCCs.

Each cell may have its own cellular capital, cellular shares and distribute cellular dividends.

Cellular companies are expected to be particularly useful for captive insurance companies, securitisation SPVs and collective investment conduits. The advantage of a PCC is that a single cellular company may act as an SPV for several transactions while still maintaining protected assets of the cell. This is a huge saving on incorporation and administration costs.

Links For more on protected cell companies along with article links, click here.


Ginnie Mae may get legislative booster

According to a report on Reuters Ginnie Mae, the US government agency that is engaged in issuing mortgage backed securities may get a legislative support to help it emerge larger than its cousins – the Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are private sector mortgage securitization agencies, but are referred to as GSEs or government-supported enterprises, due to an implicit credit support of the government. Ginnie Mae, on the other hand, is a part of the Department of Housing and Urban Development and its guarantee bears the full faith of the Federal government.

Ginnie Mae is older and has to its credit the first MBS issued in 1970 [see for more in the history of securitisation], but the GSEs have grown larger than Ginnie Mae. During 2000, Ginnie Mae issued USD 105.5 billion of mortgage-backed securities while Fannie Mae issued USD 211.6 billion, and Freddie Mac issued USD 166.9 billion in MBS.

The legislative amendments being thought of include allowing Ginnie Mae to participate in high LTV loans, and to increase Ginnie Mae's current limit of lending for a single mortgage.

Links: For more on the RMBS market, click here.

Australian rugby body may securitise world cup revenues

According to reports in Australian press, including the Australian Financial Review, the Australian Rugby Union may decide to issue asset backed securities using the revenue from the 2003 World Cup as a collateral. There were reports that this proposal is being considered by the Board of the Union among other alternatives.

As a justification, a spokesman of the Union has been quoted as saying: ""There's money that could be better spent now than later". Securitisation of future revenues is obviously seen as a way of preponing the money flows.

The 2003 world cup is to be co-hosted by Australia and New Zealand. The last world cup in 1999 yielded a net profit of some A$ 131 million.

Links For similar news item relating to football body in England, see here.

Korea: volumes dip but asset diversity displays maturity

The data on securitisation issuance in the first half of 2001 were recently released by Financial Supervisory Service, which indicates that though the volumes have taken a beating this year, compared to last year, the diversity and complexity of transactions is comparable to any advanced market.

Credit card backed ABS showed an impressive growth, with its issuance reaching 7.3 trillion won, as compared to mere 300 billion won last year.

However what was a star performer last year – secondary collateralized bond obligations (CBOs) [see our news item here], plunged to a level of only 300 billion won compared to 16 trillion won last year.

All in all, the total issuance of ABSs reached 22.77 trillion won during the first half of the year, down 3.7 percent from the same period last year.

Another key feature of the Korean market was securitization of non-performing loans. The trend towards securitisation of problem loans in Korea is visible in the current half. Some days ago, Seoul Bank announced plans to raise ABS against 470 billion won of problem loans.

Links: For more on securitisation in Korea, see our page here.

India: Trade body calls for comprehensive code

According to a report in Hindustan Times of 19th August, Assocham, an all-India trade body, has advocated setting up of an apex regulatory authority for laying down prudential norms, promotion of special purpose vehicles to provide a level playing field and credit rating for securities instrument.

The nine-member core group, headed by JM Morgan Stanley vice chairperson Naina Lal Kidwai has also recommended an umbrella legislation, which recognizes the rights of the investors in securities paper or their trustees to effectively recover their dues. The group feels the new regulatory authority would go a long way in avoiding differences of opinion between multiple regulators and in assigning accountability. On the issue of formation of special purpose vehicle for securitization, the group is of the opinion that non-banking companies should be allowed to act as such subjects to certain specified norms.

Links See our country page on India here.

Accounting rule EITF 99-20 bleeds many US banks and corporates

An innocuous-looking accounting rule that requires credit sensitive tranches of asset-backed and mortgage-backed securities to be fair valued and the resulting gains or losses to be taken to the revenue statements is bleeding a large number of US corporates. There are quite a few to carry gains to revenue; many have taken heavy losses.

The first prize might go to American Express [see our story here] which took a loss of some USD 826 million on CDO junior tranches. But it has many to keep company – Bank One Corp., Citigroup Inc. [loss of USD 116 million], Lincoln National Corp., Torchmark Corp. , Conseco, Phoenix, to name a few.

International Accounting Standard IAS 39 and comparable US GAAP FAS 115 require "available for sale" assets to be fair valued, but the gains or losses may be reported into equity rather than to affect current earnings. EITF 99-20 takes the impact directly to revenue, which leads to volatility. Martin Rosenblatt explains that EITF 99-20 sets forth very strict tests to determine when an unrealized loss is an other-than-temporary impairment of a securitized beneficial interest. It is whenever there has been a decline in the present value of the estimated cash flows, which virtually requires entities to do the exercise quarterly.

Investors in the ABS/ MBS market would be concerned with this requirement, particularly while buying subordinate tranches. Recently there was a marked interest in demand for subordinate tranches, but the accounting rule may force investors to rethink.

Links: We have an article on this site by Martin Rosenblatt explaining EITF 99-20 – click here. For more on securitization accounting, click here.

Risk securitisation deals of 2000-1 analysed

A very informative article in Risk Management of August 2001 takes stock of the level of activity and trends in the risk securitization market during April 2000 to March 2001. The authors Morton N. Lane and Roger Beckwith note that even though the number of deals and the amount of securities issued have both marginally come down, the market displays more of experimentation and more types of perils covered. The authors also note more use of securitisation in direct underwriting of risk.

During 2000-1 (April 2000 to March 2001), there were 10 deals with a total security issuance of USD 1126.0 million, as compared to 11 deals with security issuance of USD 1219.4 during the same period in 1999-2000. The authors discuss the salient features of all of these deals.

The authors talk of the trends shown by these data. One noticeable trend was lower ratings of the tranches. During the whole period under review, only one tranche was rated above BB, which indicates that in risk securitisation, it is a good policy to stay humble and get the securities rated at humbler ratings.

In terms of the exposure periods, more and more securities are going for commitment periods longer than 12 months. More than 60% of the issuance during the review period went for more than 12 months' cover. The authors attribute this to the economics of security issuance as also investors' demand for longer term securities.

Links This highly readable article is available online at For more on risk securitisation, see our page here.


European securitisation body working on common legal framework

IThe European Securitisation Forum, a body of securitisation professionals in Europe, is working on a standard legal framework for securitisation in Europe. In its Newsletter for Summer, 2001, the body says that harmony and consistency in the various regulatory regimes governing asset securitisation in Europe will help stimulate the growth of the market and will lower borrowing and financing costs for con-sumers and businesses.

The current legal framework in Europe is fragmented. France has a law dealing with Fondos, Italy has a more modern and promotional securitisation law, while Belgium and Portugal have adopted their own laws. Germany works on the basis of bank regulatory guidelines with no basic law on securitisation. UK too has prudential supervisory guidelines from the FSA, but no basic law.

The Forum has set up a sub-committee that will publish a white paper on the legal framework. The white paper will provide a blue print for lawmakers in various European countries. Some of the specific objectives of the Framework include the enforcement of security interests, remedies against the originator, and the true sale issue.The framework will also provide for harmonious accounting treatment.

The Framework will also propose laws and regulations that do not restrict ownership of classes of assets (or their servicing) to residents or nationals or to a specific class of persons. The Framework will call for securitisation vehicles that are fiscally transparent and achieve tax neutrality for securitisation without the requirement of exhaustive compliance with general tax laws applicable to corporate entities.

The framework is expected to be completed in early 2002.

Links The website of European Securitisation Forum is here.

European CMBS market getting active

It may still be too premature to compare the European CMBS market with USA, but it is clear from recent deals that the European CMBS market is getting more active and more innovative, says Liz Jones in a recent issue of International Financial Law Review.

The author speaks of some recent deals: the synthetic CMBS issue called Europe Two and the latest ELOC transaction, the impressive ProLogis deal and British Land Company's Werretown supermarkets securitization to drive home the point that the European CMBS market is opening up fast..

Europa Two, a synthetic CMBS structure, involving the issuance of Euro1.528 billion fixed and floating rate amortizing credit-linked notes, originated from Germany. The most highly rated notes were secured by an issuance of AAA Pfandbriefe. The lower rated notes were secured by unsecured and unsubordinated notes issued by Rheinische Hypothekenbank. The return on notes is linked with the performance of the underlying portfolio of commercial mortgages and the Pfandbriefe/other notes forming the secured assets. The underlying commercial mortgages relate to properties located in six different jurisdictions: France, Germany, Ireland, Spain, Switzerland and the UK.

Looking forward, the author says that "banks with large commercial property loan books or with particular concentrations of risk are likely to continue to find CMBS an invaluable tool with respect to managing regulatory capital requirements and general exposure levels. It may be that the idea of using a commercial property finance programme or conduit will also catch on where sufficiently large volumes of loans are being generated. "

Links For more on CMBS, see our page here.

Whole income of a private hospital securitised in Europe

The whole business revenue securitization device continues to find new applications in Europe. The latest to use this home grown innovation was a UK-based private hospital chain.

General Healthcare Group is a private hospitals group in UK. It raised GBP 975 million by securitization of its operating income. The collateral for the deal is recurring patient fees and a GBP 1.1 billion property portfolio that includes General Healthcare's 44 hospitals throughout the UK.

The deal is broken into 6 tranches. The two senior tranches, both rated AAA, include a GBP 350 million floating rate note with an expected maturity of July 2009, and a GBP 150 million fixed rate note expected to mature in July 2018. Both of these are wrapped by an insurance cover from Ambac, UK, and apparently borrow Ambac's rating.

Links For more on whole business securitization, see our page here.

CDOs emerge as the largest asset class in European securitisation

It is no secret, as we have come out with several stories on the fast growth of CDOs in Europe. So this one reiterates the theme that CDOs have outgrown any other asset class in Europe. Standard and Poor's reports that in the first half of 2001, CDOs accounted for 43% of total volumes. The CDO market showed an increase in the number of transactions as well, compared with the first six months of 2000, underscoring the depth to which the European market has embraced CDO methodology.

Most European CDOs are balance sheet CDOs, as European banks are more driven by capital relief considerations. Besides, the market for high yield bonds is not all that deep in Europe for arbitrage conditions to exist. Nevertheless, in the first half of 2001, there were 3 arbitrade CDOs from Europe: Panther CDO 1 B.V.; Duchess 1 CDO SA; and Mayfair Euro CDO 1 B.V. These deals contained a range of assets including European and U.S. high-yield bonds, European investment grade bonds, and leveraged loans. Further arbitrage transactions are expected in the second half of the year.

Links For more on CDOs, see our page here.

Sharp rise in repackaging transactions

Rating agency Standard and Poor's reports a sharp increase in repackaging transactions. This goes very well with the increasing attempts to create new CDO asset classes in form of private equity, convertible debentures and hedge funds [see below].

Though every CDO is essentially a repackaging, a repackaging CDO refers to those where investments in asset-backed and mortgage-backed transactions, quite often in their subordinate tranches, are repackaged into further asset-backed securities. See for more details our page here.

Standard and Poor's data below shows CBOs of ABS as well as CMBS more than doubling in volume. The rating agency says that "Repackaging vehicles have now become a viable, in fact dominant, liquidity source for subordinate and mezzanine tranches of structured products. The repackaging of structured finance and real estate securities in 2001 has become one of the fastest growing sectors of the CDO universe." Three types of CDOs have emereged in the market – CDOs of CMBS, REITSs, etc., CDOs of ABS transactions, and CDOs of CDOs.

The economics of repackaging transactions lies in the fact that the market for ABS is mostly illiquid and therefore, there are higher premiums particularly for the subordinate tranches which makes it an ideal candiadate for CDO transactions.

Links See for more our page on repackaging.

Global CDO volumes rise in first half 2001

Rating agency Standard and Poor's recently released global first half data for CDOs to point to the strong growth in volumes as also the trends. The Table below shows the growth data for the first half of 2001 compared with the first half of 2000.

Evidently, arbitrage CDOs are growing far faster than balance sheet CDOs, which have, in fact, shown a negative trend. This is inspite of the fact that the global economy is passing through tough times and corporate defaults are increasing. The rating agency's analysts say that "collateral managers and investors are becoming increasingly cautious of higher defaults, lower recoveries, increased credit migration, and distressed trades" and that "investors and issuers are more closely scrutinizing various default and recovery assumptions prior to making investment decisions".

The US accounting rule EITF 99-20 has also been responsible for substantial write offs by a number of investors in their portfolios of CDOs. American Express was recently in limelight for writing off something like USD 826 million. Conseco Finance in Q2 wrote down more than USD 25 million.

In the wake of increasing defaults particularly in the constituents of high yield CDOs, investors are placing increased stress on choice of CDO managers – seasoned managers are in increased focus.

Table 1   Global CDO Sector Roundup
First Six Months (Excludes Market Value CDOs and CDS*)        


Type of transaction Number of transactions Bil. $ Number of transactions Bil. $
Arbitrage CBO 19 5.00 34 11.70
Arbitrage CLO 14 5.99 10 3.79
EMCBO 1 0.27 2 0.34
Balance sheet 13 9.92 5 3.41
Project finance 1 0.47 0 N/A
Real estate CBO 4 1.14 7 2.39
CBO of ABS 3 1.08 12 2.93
Total CDOs 55 23.88 70 24.65

*CDS—Credit default swaps.

Source: Standard and Poor's

Links For more on CDOs, see our page here.

Deutsche to try new CDO to invest in convertibles

We recently reported a unique CDO by Prime Edget which would invest in private equity, and another one where J P Morgan is working on a CDO of Hedge funds. This was hailed as a major innovation in CDO technology which converts equity investments into debt. The signals are already apparent – the idea is going to find larger application.

The journal Credit Magazine reports of a proposed securitization of convertibles that Deutsche Bank in London is working on. The differentiating feature of convertibles is that they usually pay low or no coupon and only give capital appreciation when they get converted into equity. When repackaged into a CDO, they may require either a higher portion as equity, or a part of the capital flows may have to be used to pay off income using the equity portion as a support class.

Convertibles in Europe are booming with some USD 30 billion worth convertibles issued in 2000, and the first half of 2001 has already seen USD 20 billion worth issuance.

Links For more on repackaging, see our page here.

India moots security interests perfection law: to grant enforcement powers to securitisation SPVs

This is certainly a major step forward in revamping the existing archaic and delay-ridden system of enforcement of financial claims: India's financial regulator Reserve Bank of India has proposed a new look law on creation, registration and enforcement of security interests on a wide array of properties. Not surprisingly since the craftsman of the law was also the person who participated in the making of the draft securitisation law, securitisation SPVs are also being given special powers of enforcement.

Titled Creation and Enforcement of Security Interest by Banks and Financial Institutions Bill, 2001 it is the Indian version of Article 9 of the UCC in United States. The law moots the creation of a Central Registry of security interests which will replace the present system of multifarious registrars under the Companies Act, Motor Vehicles Act, Transfer of Properties Act, etc. Registration of security interests under the new law shall not be mandatory, but shall take away the application of the new law.

If the security interest is registered, the secured creditor may require the borrower to meet the claim in 60 days, failing which the secured creditor may repossess the secured article. The judicial machinery will not be involved in the process of repossession, but the secured creditor may seek the help of the judicial magistrate for smoothening the repossession.

The properties on which security interests may be created and enforced under the new law include all movable and immovable property, actionable claims, and all other intangible rights.

Secured creditor for the purpose of the new law includes a securitization SPV. The law, however, does not talk about the transfer of security interests and whether the security interest can be enforced by a transferee of the security.

Links For full text of the proposed law, click here.

Malaysia's first CBO soon

They either talk about it, or do it. In Malaysia, it is still the former. But that by itself is interesting, because now they are talking about something which is the hot flavour of the US and European markets – a CBO.

According to reports in Business Times of 6th Augst, Arab -Malaysian Merchant Bhd (AMMB) has announced a CBO programme of RM 255 million (approximately USD 67 million), consisting of senior and subordinate tranche bonds of RM225 million and RM30 million, respectively. In order to undertake the programme, a bankruptcy remote special purpose vehicle Prisma Assets Bhd, which is independant from the merchant bank, has been set up.

The senior tranche which will receive an indicative "AAA" rating from Rating Agency Malaysia Bhd and a subordinate tranche, which will not be rated and will be held by the merchant bank. The bonds for both tranches will carry a legal life for five years with a bullet repayment upon maturity. The underlying asset for the transaction will be a pool of diversified corporate bonds issued by companies in Malaysia. Based on the structure and size of the senior tranche bonds, the merchant bank expects them to be fully subscribed for by investors, AMMB said in a statement.

This will be the first CBO from Malaysia. Very few CBOs have been originated from Asia, mimus Japan. The distinguishing features of CBOs from usual balance sheet securitisations is that here, the originator is not necessarily the one having a portfolio of loans to sell: he acquires a portfolio from the market, supports it with his own subordinate participation called the equity tranche, and sells the rest of the senior securities at finer spreads, thereby making a sizeable return on the equity contribution. Thus, CBOs are aggressively used as arbitraging vehicles. In the high yield segment, arbitraging by CBOs is fairly common.

Links For more on CBOs, see our page here. For more on securitisation in Malaysia, see here. Vinod Kothari is a regular tutor of securitisation training programs in Malaysia – see our securitisation workshops page for forthcoming securitisation event in Malaysia.

Portugese regulators seek to remove legal impediment: securitisation free of withholding tax

The securitisation market is not very well developed in Portugal, but the regulators are taking proactive steps to make the way for market forces. With the securitisation law passed in late 1999, a recent proposal to amend the tax statutes will clear up withholding tax problems for securitisation.

The proposed amendment, according to a commentary, will remove withholding taxes for payments made by a local SPV to offshore investors, or for local originators to offshore SPVs. The law is currently in its waiting period and will soon be enforced.

Current Portugese tax law stipulates a 20% withholding tax on all interest payments to non-residents. If an SPV is domiciled outside the country, the payment of interest by the originator to the SPV will be an offshore payment, and like so, if the SPV is local but the bonds/ notes are bought by offshore investors. The market players are currently finding it hard to avoid these deductions, except by the tedious process of having Lisbon-subsidiaries licensed as full-fledged banks, which currently escape these provisions.

Links See our country page on Portugal here. See full text of Portugese securitisation law here.

Emerging market securitisations sail through stress to mature

It is very important for any financial instrument to pass through a full cycle that includes inception, euphoria, stable growth and stress before it could mature. Emerging market securitisations, particularly from Asia and Latin America have recently passed through several situtations of stress which they could withstand..

A recent article by Greg Kabance in Fitch's Global Securitisation QuarterlyJuly 2001 recounts some of the experiences with emerging market securitisations in the recent past. Most of the emerging market securitisations are future flow securitisations, in which performance risk as well as country risks are high.

Turkey passed through sovereign downgrades and economic crisis linked with political instability. Fitch has a dozen outstanding securitisations originated from Turkey, most of which are net payment inflows into Turkey from hard currency countries. Of these 2 were downgraded in the 2001 crisis, and of these two, one has been fully paid up. The other one has strong collections being trapped outside the country and is expected to be fully paid.

Another country to face crisis was Pakistan. Pakistan Telecom had originated a future flow securitisation of net settlement telephone revenues in 1997 which was then rated BBB-, higher than the sovereign rating of Pakistan. Later, with Pakistan's rating suffering setback and the political instability including the Kargil conflict, the deal was downgraded to BB. Fitch says that it does not rate Pakistan, but the current rating of the transaction is 5 -6 notches above what the rating of Pakistan is likely. Inspite of reducing net tariff collections, the transaction has not been downgraded any further as the rating agency believes that the reserves and the legal stregths of the transaction will sail it through when it matures in 2003.

Coming to the Indonesian crisis, Fitch believes that Bunas, an existing company, gives a strong example of an existing asset securitisation which continues to perform under adverse local conditions. Bunas securitised auto receivables in early 1997, rated BBB. During the 1997 crisis, Bunas went down under and ultimately went bankrupt, but the transaction paid off. The true sale of receivables was never challenged, and Bunas was not actually liquidated: as it continues to service its other defaulted loans, it continues to service the securitisation transaction as well.

Yet another example of Asian securitization is that by the Philippine Airlines which securitised ticket receivables in 1997 in an unrated transaction. In June 1998, the airlines filed for bankruptcy protection and all its other obligations were stayed; however, there was no embargo on the securitization payments as they were believed to be diverted outright by way of a true sale. In March 99, the company got an order for restructuring and it is a fact that ABS investors were among those who got the most favourable treatment.


CDOs continue to default, and grow

The CDO market continues to grow stronger by the day, even as more and more CBOs, particularly in the high yield segment, continue to default. There has been an estimated USD 40 billion on new CDO issuance in the first half of year 2001, excluding synthetic securitisations. And this is inspite of rising corporate bankruptcies and defaults which continue to affect the ratings of existing CDOs.

An example of the inherent weakness in CDOs is the recent announcement by American Express that its subsidiary will write down fair value losses to the extent of USD 826 million on account of investments in mezzanine and junior CDO tranches. The Chairman of American Express, Kenneth Chenault admitted that his company did not fully comprehend the risks of investing in the whizz-bang portfolio of CDOs.

To an extent, Alan Greenspan contributed to the CDO boom. Greenspan was addressing the annual meeting of the Bond Market Assocation via satellite. He was talking about the dwindling market in treasuries and was talking of replacements, which he enumerated as swaps, agency debt and, most intriguingly, a high-grade CDOs. He cited "a senior tranche of a CDO backed by high-grade corporate debt" as an example of riskless security. When Greenspan speaks, Wall Street reads not only between the lines, it is actually between the words. The market found lot of cheers for the CDO segment in Greenspan's remarks.

With the risk-based capital standards having been put off for a while, bankers might still be drawn into investing in subordinate CDO tranches, but needless to stress, it is very important to understand the risks inherent in such investments.

Links For more on CDOs, click here.


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global securitisation markets – please do visit

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Terror on the Street: securitization markets might see some lasting impact

Even though rating agencies are constantly re-assuring that the WTC-related CMBS transactions that closed just about a month before the terrorists attack are covered by insurance and that there is no reason for instant worries, investors are still unnerved.

CMBS transactions have a substantial exposure on New York property. The total exposure of CMBS universe on downtown NY properties is close to some USD 20 billion, which includes the two single-property deals on the WTC by GMAC and Bank of America [see below]. Rating agency Standard and Poor's admits that it is keeping a close watch on CMBS transactions which are passing through "an unprecedented situation – one that will surely test the structures and criteria upon which the industry was built and investors have come to rely".

The other casualty of the sordid episode is that insurance companies are likely to suffer heavy damage. A report in The Independent 21 Sept said Munich Re and Swiss Re, the largest reinsurers in the world, are likely to suffer losses of USD 3.25bn. This might usher in changes in the view the insurance industry is organised. Currently, even though catastrophe reinsurance securitization has been around for quite some time, it has not been able to find a strong base and the technlogy has been exported away to other markets such as credit risks and weather risks. The current magnitude of losses will surely push up substantially the cost of reinsurance, which will create new interest in insurance risk securitization. The Indepedent article talks of the possibility that "the use of the increasingly global reinsurance companies may decline and insurers may instead try to offload their liabilities by securitising them via catastrophe bonds in the capital markets".

In fact, the securitization industry, as the rest of the capital market, is likely to get into a re-examination and introspection mode in the coming few months.

WTC damage may percolate down to several securitisation deals

Thanks to the ever-increasing role of capital markets in distributed funding and risk sharing, every major loss is a shared loss. In the bygone era, a natural or manmade calamity would affect those directly under its influence, and a handful of banks and insurance companies. In today's complex world, both funding and risk transfer operate through a variety of capital market instruments where the funding as well as the risk protection comes from capital market investors. So all losses leave a long trail.

The unfortunate terrorist attacks on what used to be the World Trade Centre on September 11 is likely to affect several securitisation investors. The World Trade Center's office area was only recently taken on lease by Lloyd Goldman and Silverstein Properties from the Port Authority. Silverstein took a loan of USD 563 million from GMAC, and the latter issued CMBS backed by the loan and the lease to a select group of institutional investors, in an issue that closed only in August, 2001.

Though the lease is covered against an insurance policy, there are doubts floating around that as President Bush has repeatedly referred to the terrorist attacks as an act of war against the United States, insurance policies have an exception against an act of war. There is no exception against an act of terrorism, and therefore, rating agency Fitch issued a press release on 18th Sept hoping that the insurance cover will be available. Unnerved investors, however, still have fears which are not entirely unfounded.

Bank of America had given yet another loan to Blackstone Real Estate Advisors against Seven World Trade Center, which was also securitised into a USD 383 million CMBS.

So in all, the securitization market has more than a USD 1 billion at stake.


Prepayment rates rise in US mortgage markets: 
IO strips and subordinate tranches suffer

The several consecutive rate cuts by the Fed have brought the inevitable impact on US mortgage markets: increasing prepayment rates. The terrorists struck on 11th September, and to maintain the stability of the financial markets, the Fed further cut interest rates by 1/2 per cent on 17th September. These events together are likely to further worsen the prepayment scenario, spelling surest trouble for the IO and other CMO investors.

The US mortgage market is estimated at some USD 2.6 trillion. These investments are sensitive to interest rates: if prepayment speed increases due to declining interest rates, mortgage investors whose yield assessment was based on a particular prepayment speed will get lesser of interest in future, and hence, their values suffer. Particularly sensitive to interest rates are the IOs and subordinate tranches of CMOs.

The prepayment speed in August climbed up by some 1 to 6 percentage points, on a CPR basis. A recent S&P report, issued before the terrorist attacks, quoted mortgage analysts who "predicted that prepayment rates will continue their ascent into October, as herds of homeowners are expected to refinance their existing mortgages at lower interest rates to cut their monthly payments or tap into the equities of their homes, which have appreciated as a result of a robust real estate market."

This scenario can only worsen in the wake of the terrorist attacks, and consequent global financial uncertaintly, followed by a further rate cut by the Fed.

It is notable that in terms of EITF 99-20, mortgage investors will be required to devalue interest-rate sensitive tranches while preparing their financial reports as at end-September.

Korean lease securitisation gets AAA rating with AMBAC cover

Hanareum International Funding Ltd., a subsidiary of Korean Deposit Insurance Corporation recently got a US$278 million guaranteed floating rate notes issue rated by Standard and Poor's. The isse was rated AAA with a wrap cover from AMBAC. The notes are backed by a portfolio of performing leases and loans originated by 16 failed Korean merchant banks and purchased from Hanareum Mutual Savings and Finance Co.

The transaction represents AMBAC's first involvement in a Korean transaction.

The leases in this transaction owe their origin to 16 failed Korean merchant banks. The portfolio consists of a carefully selected subset of well-seasoned, performing assets that have been sample audited to confirm that they meet specified legal and eligibility criteria. The transaction is also supported by a letter of commitment by KDIC relating to certain asset representations and warranties

The transfer of assets in this transaction is perfected against third-party claims under Korea's ABS act. Note payments ultimately depend on collections from the underlying loans and leases, and on the surety bond provided by AMBAC. The servicing of the underlying receivables will be performed by KDB Capital Corp., with Deutsche Bank AG contracted as back-up servicer.

Links For more on the Korean securitization market, see our country page here. For text of Korean ABS law, click here.


Italy plans to liquidate real estate via securitisation

In June 2000, Italy made history by securitisation of non-performing social security contributions in a securitisation transaction known as INPS. With the success of INPS and INPS-II this year, the Italian government wants to go ahead with more securitisation to reduce its budget deficits.

A report in Financial Times of Sept 11 has quoted Giulio Tremonti, the treasury minister, as saying that the government wanted to raise some GBP 3.8 to 4.8 billion equivalent by securitisation of its real estate holdings.

Under proposals, which are still not very clear, the government will set up SPV or SPVs that will acquire billions of euros worth of real estate assets that are directly and indirectly owned by the public sector. The SPVs will then launch a programme of bond issues over forthcoming years that are secured against the value of the property portfolio. This model has been used by Canary Wharf and several others in the UK, and has been on for last several years in the USA. Nevertheless, the Italian government sees in it some highly innovative plan.

Links For more on securitisation in Italy, see our page here.

ABS lives on after death, says S&P

The asset-backed investment is dead, long live the same! There are defaults galore in the bond market in the USA, and many CDOs tranches of 1997 and 1998 vintage are badly affected, but then, defaulted bonds do not necessarily mean a loss as far as asset-backed investors are concerned. Even after rating agencies give a D rating to a structured finance investment, it might still continue to pay both principal and interest.

The findings of this study are very important for the ABS market. S&P says that as of the second quarter of 2001, there were 116 defaults among structured finance securities, which means the relevant security has received a rating of D. S&P is obviously talking of the US market, as in Europe, there is no default to date.

Residential mortgage-backed securities (RMBS) accounted for 83 of those defaults; commercial mortgage-backed securities (CMBS), 14; and asset-backed securities (ABS), 19. Their recoveries averaged 61%, 66%, and 29%, respectively. The fact that there are higher number of defaults in RMBS does not mean there is higher probability of default – in fact, there have simply been higher RMBS issuance. Since 1978, there have been 6361 RMBS classes rated by S&P.

But a 61% recovery rate is simply remarkable. The recovery rate simply means the total amount the investor receives, as a percent of the original principal, cumulatively. The percentage is the reciprocal of cumulative loss percentage.

There have been lesser defaults in ABS, but the loss experience is not consistent. For example, there are 12 classes of credit card issuance by a single issuer which were found fraudulent and are therefore subject to bankruptcy court.


Taiwan proposes new law on securitization

As per reports in Financial Times of 5th Sept., Taiwanese Finance Ministry has proposed a new law on securitization. The prime purpose of securitization laws in the erstwhile Asian tigers such as Korea and Taiwan is to put the larger chunks of bad bank loans back into circulation through the device of securitization of non-performing loans. Korea has done it and Taiwan is obviously impressed.

The new legislation is proposed to put in place by December. Taiwanese finance minister described the effort as one occupying the top priority for his government. Bank overdues have reached over 7% of the assets of Taiwanese banks.

Links For more securitisation in Taiwan, see our country page here.



[This page lists news and developments in

global securitisation markets – please do visit

this page regularly as it is updated almost on a

daily basis. Join our mailing list for regular

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

Previous newsletters

Nov.,2001.Sep.,2001., Aug 2001… July, 2001.June, 2001May, 2001,… April 2001…  March 2001 ..Jan. and Feb.2001 Nov. and Dec.2000  Sept. and Oct. 2000  July and August 2000 May and June 2000  April 2000   Feb and March 2000   
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Moody's foresees more CDO downgrades

Rating agency Moody's put up on 19th Oct a report titled CDO Rating Transitions; Year-To-Date Review — August 2001. Apart from reviewing the downgrades in the CDO sector upto August, the report also gives the agency's views on likely downgrades following the Sept. 11 incidents. This is what the rating agency has to say:


  • The events of September 11h will further stress the CDO market. The extent and duration of the stress will depend primarily on the economic impact resulting from those events.
  • Several market value CDOs have seen their overcollateralization and/or minimum net worth test cushions erode to the point of violating or just barely passing these tests. Yet other market value deals had been repositioned earlier this year to a more defensive posture. Those deals continue to have a cushion in these tests.
  • Should the economy deteriorate in the wake of the disaster, CDOs on Watchlist would be most vulnerable to rating downgrades, while deals that are on the cusp may be pushed over the edge. CDOs exposed to cyclicals, especially those industries that have been the hardest hit, will undergo the greatest deterioration in credit quality in the current environment.
  • Lack of liquidity in the high-yield market could also pressure CDOs, should investors continue to lighten their allocation to high-yield.
  • Should the U.S. economy — or the high-yield market — prove to be resilient, the spread-widening of the past couple of weeks will be viewed as a buying opportunity. Furthermore, some argue that there has been some dislocation in the market thereby offering potential relative value opportunities for some managers.

Vinod Kothari adds: A Deutsche Bank publication of 10th October has also gone into the ABS and CDO downgrades in the 3rd quarter. Deutsche Bank analysts say: "With over $50 billion in negative rating actions [this is for ABS and CDOs together] in the third quarter (a record we are not proud to advertise), it seems like ancient history to talk about ABS as immune to rating volatility. But to be fair, that reputation was built in the days when the market was smaller and more concentrated in a handful of asset classes, such as autos and cards, which performed exceedingly well in good times and bad. The structured products market of the 21st century is not as homogenous as it once was."

Links For more on CDOs, see our page here.

European securitisation activity continues surge: Italy and Spain in focus

Recent surveys put up by rating agency Standard and Poor's show impressive performance by Italy and Spain in a surging European securitisation market. The third quarter issuance in leading European countries is given in our page on Europe – click here.

In Italy, volumes surged to a record USD 15.4 billion at the end of the third quarter 2001; almost three times the USD 5.5 billion tally recorded in the same period last year. S&P expects the market to hit USD 20 billion by year-end. The asset-class-based break up of volume during this 9-month period is as under:

Table 1   Italian Issuance Breakdown (1999–2001)

($ Bil.)
  1999 2000 Q3 2001
ABS 5.800 4.500 6.7
CDO/CLO/CBO 0.857 3.040 1.7
CMBS 0.102 1.084 2.5
Repak 0.000 0.000 0.0
RMBS 0.087 1.500 4.6
6.900 10.500 15.4

In Spain, the issuance upto Sept 2001 has been USD 5.7 billion which is marginally lower than the USD 6.0 billion recorded over the same period last year, but S&P says that looking at the depth of the pipeline, the issuance could well exceed USD 10 billion for the whole year. "Standard & Poor's expects to see increased growth in the use of fondos de titulización de activos (assets securitization funds, under Royal Decree 926/1998) to securitize loans to corporates and loans to small to midsize enterprises (SMEs), as well as the expansion of the securitization of consumer loans, future flows, and trade receivables."


Links For more on securitization in Europe, see our Europe page here. See our page on Italy here and Spain here.

Life Insurance securitisation to look up

With terrorism and anthrax scares and all that stuff, life may not be all that secure, but analysts are talking optimistically about life insurance securitisation. In a recent interview with KPMG Industry Insiders, Brian Lo, associate director of Swiss Re New Markets spoke of the prospects of life insurance securitization.

Insurance securitization itself, though a very promising innovation, has not had any significant volumes over the last 6-7 years, and has mainly been concentrated in catastrophe insurance segment. However, life insurance securitization works with a different motive. Brian Lo says that a life insurance company is looking at life premium securitization essentially from the viewpoint of funding and capital relief, similar to banks and other fund-based securitisers.

The method of premium securitization is, however, different from the usual transfer of receivables. Brian says that an insurer cannot sell premium receivables directly out of the operating company, therefore, it is often most efficient to use a reinsurer as an intermediary, typically offshore. If reinsurance is used, risk transfer must be demonstrated. Also, if the issuer goes insolvent, state regulators effectively shut down the company, making it difficult to secure an interest in the assets backing the policies.

Brian expects that the market will see two or three deals next year.

Links For more on risk securitization, click here.

Cat bonds issuance to shoot up

The increase in reinsurance costs due to Sept.11 events, and the insistence of corporates to seeking full fledged insurance cover would prop up the demand for catastrophe bonds, expects rating agency Fitch.

In a press release of Oct. 15, the agency said that the next year's issuance may even exceed USD 2 billion mark. Cat bonds were a wonderful innovation of risk transfer, but their issuance never got off to a commercial start due to prevailing lower costs of reinsurance.

Cat bonds are alternative risk transfer tools, and they compete with the traditional reinsurance markets. The desirability of cat bonds versus traditional insurance depends primarily on insurance rates, insurance capacity and the perceived financial strength of (re)insurers versus the reliability of funds held in trust with cat bonds. Fitch expects significant increases in traditional insurance rates, significant declines in available capacity and modest declines in perceived insurer financial strength as a result of the disaster. The changes in these three factors will tend to make cat bonds a more competitive alternative, quite simply because traditional insurance is becoming more expensive and less available.

On the pricing front however, bond spreads have also increased in the wake of the disaster, which partially offsets the increase in (re)insurance prices. Cat bonds tend to trade at wider spreads than traditional corporate bonds with similar credit ratings. This premium (to compensate for the exotic or esoteric nature of the bonds) has increased since the disaster and reflects the general market trend of a flight to quality. Fitch believes rising rates in the cat bond market will somewhat dampen sponsors' enthusiasm but, overall, the forces behind increased cat bond issuance outweigh the forces against it.

Further, Fitch expects the higher spreads offered by cat bonds relative to similarly rated alternatives will attract additional investors, especially since it is the 'smart' money that understands the fundamentals of property risk related to wind and ground shake have not changed as a result of recent events. Fitch notes that the share prices of publicly traded property/casualty insurers have risen markedly as investors anticipate higher returns from rising premium rates. Fitch believes investors will similarly be drawn to the cat bond market in anticipation of these higher returns.

One important item to note is that Fitch believes the potential surge in cat bond issuance relates only to property exposed to natural catastrophes such as earthquake or hurricane risk. In order for cat bonds to work, independent modelers must be able to estimate a probability of loss that both the sponsor and investors accept as reasonable. Such models for earthquake and wind risk are well accepted and have been in use by both the traditional insurance and cat bond markets for a number of years. However, Fitch believes it is nearly impossible to credibly model the human behavior element as it relates to events like those of Sept. 11.

Links For more on insurance risk securitisation, see our page here.

Fitch analyses impact of Sept.11 aftermath on RMBS deals

Just as the whole world is busy analysing the variegated effect of the Sept. 11 attack on their respective piece of business or life, Fitch has come out with a comment on the likely impact on RMBS transactions. RMBS is not directly involved in the World Trade Center tragedy, but since the aftermath might have broad-ranging impact on the US and global economy in general

In a Press release of 15th Oct., Fitch said economic repercussions will be varied across the country but the adverse affects on residential mortgage-backed securities (RMBS) ratings would be limited, and short term. Contractionary forces including the immediate disruptions in travel and business operations and the dramatic declines in consumer confidence are leading to reductions in consumer spending, less certain corporate spending in response and an anticipated softening of the housing market. Counterbalancing these effects are the U.S. government's fiscal and monetary policies, relief agencies, insurance proceeds and declining mortgage rates.

Some RMBS pools may be affected by a combination of vulnerable industries and real estate markets. Vulnerable industries include aircraft and parts, air transport including ground services, travel agents and tour operators, hotels, passenger car rental and amusement parks. Metro areas with the highest exposures to these industries combined with overheated real estate markets prior to the attacks include Las Vegas, Orlando, Seattle, San Francisco and Miami. In terms of RMBS pools' exposure to these regions, the Northern California/San Francisco area represents the most significant concentration in prime jumbo RMBS, approaching 20% of mortgaged properties in typical pools.

Fitch will closely monitor outstanding RMBS default rates and losses in these areas as well as the in greater New York City area during the next year.

Going forward, credit enhancement requirements for pools with relatively high exposure to regions at risk will be moderately higher at speculative-grade ratings and potentially slightly higher for lower investment-grades.

Links: For more on RMBS, see our page here.

UK property company launching Britain's mega CMBS

According to a report dated 14th Oct., on, Land Securities, Britain's largest quoted property company, is planning to issue CMBS adding to GBP 1.8 billion, which is among the largest single CMBS offers in UK so far. The purpose of the CMBS is reportedly to fund its acquisition of 6,700 properties owned by BT.

Canary Wharf and British Land are known for their mega CMBS offers in UK market. The present proposed deal will be a close rival to the largest reported CMBS so far – that by Welsh water company Glas Cymru, which raised just under GBP 2 billion bn earlier this year.

At the present juncture, the complete blue print is not available but reports suggest the the originator will seek a monoline insurance wrap to get a AAA rating on the senior tranche.

Links For our report titled European CMBS getting activeclick here. For a report on British Land's securitisation of commercial property, click here. For securitisation markets in UK, click here. For general coverage on CMBS, click here.

Workshops For details of Vinod Kothari's 3-day workshop on securitisation in Europe, click here.

First securitisation deal in Italy

According to a report in Jesualem Post 15th Oct., Bank of America and agrochemicals producer Makhteshim-Agan Industries have closed a securitization deal for securitising the latter's accounts receivables. This is reportedly the first securitisation deal to originate from Israel.

The USD 150 million transaction is based on the revolving transfer of the accounts receivables of the originator. The accounts are generated both in Israel and other marketing locations in Europe and global subsidiaries. It is not clear from the report whether the deal will be sold to international investors or to domestic ones. It is also not clear whether the offer will be rated or not.

Car rentals, airlines-related ABS may suffer

Air travel may be a casualty of the post Sept 11 developments; car rentals which are related to air travels are very likely to suffer, as per experts.

Deutsche Bank's Securitization Monthly for Oct 2001 discusses the impact of the recent global disturbance on car rentals industry. The genesis of the problem is air travel, which has reportedly already suffered by something like 30%. USA has already begun its military offensive, but as things stand, it does not seem like international business travel, apart from travels to and from certain locations in Asia, is directly affected. Therefore, the 30% dip in passenger traffic may not worsen, and may take sometime to restore partly. Analysts expect the restoration to be only partial: to an extent, air travel will remain affected.

During the 1991 gulf war, air travel showed a substantial negative growth: however, the Gulf War ended after some 45 days, and air traffic remained affected for some 6 months. The current conflict, as being predicted by the politicians as well as others, may last longer. Therefore, a milder but more long lasting effect is being predicted on air travel.

A large part of car rentals are directly connected with air travel, and therefore, might suffer as well.

India sees a flurry of securitisation activity

A lot of noise, and some deals coming to the market – this describes the Indian securitisation scenario post Sept-11.

The most significant noise, in terms of the decibel volume it carries, is the one that has been heard 50 times over the last several years: securitisation of electricity dues, and power sector funding. The power sector needs a funding of Rs. 800 billion [approx USD 17 billion] over the next 10 years, and securitisation has been named as one of the key funding devices by several experts.

At a recent meeting of Indian Electrical & Electronics Manufacturers Association, a Power Ministry official said central power utilities have been directed to securitise their delinquent receivables from the State electricity boards. This adds up to some Rs. 35 billion.

Among the deals that recently came to the market was a Citibank-arranged securitization of auto loan receivables originated by Ashok Leyland Finance. Worth Rs 630 million, this was claimed to be the first deal where POs and IOs have been sold separately. Citibank has used its conduit Peoples Financial Services as the SPV for this securitisation, as also for several of its earlier securitisations.

The other deal that is reportedly in offing is CLO by ICICI –see below.

Links For more on securitisation in India, see our country page here.

Securitisation a key tool for Philippine economic re-ignition

According to reports in Manila Bulletin of 7th Oct., Philippine House Speaker Jose de Venecia announced yesterday a strategy to relaunch the government's mass housing program and re-ignite the economy through a large-scale securitization program and the creation of an SPV that would convert non-performing loans and assets into development capital. The Speaker said he has already submitted to President Gloria Macapagal Arroyo his proposal for the country's first large-scale Securitization Act and the Special Purpose Vehicle measure as part of the strategy to turn around the economy.

In essence,what the Philippine government is proposing is two unrelated things but both have a common factor – the securitization methodology. Residential housing being promoted by securitisation is by now an established fact and many governments have used secondary mortgage markets as the basis for fulfilling the housing needs of citizens.

The other target is securitization of non-performing loans held by banks. The Philippine government sees role models in Korea, Thailand and Mexico.

Links For text of a 1998 securitization law in Philippines, see our laws section.

ICICI is all set to launch India's first CLO

According to reports in Financial Express of 8th Oct., premier term lending institution ICICI is all set to mop up some Rs 4.75 billion (approx USD 100 million) from the market by securitisation of its term loans. This would be the first CLO in India and the first transaction to use a bond structure instead of a traditional pass through structure.

The tenure of the bonds may be like 4-5 years and the pricing may be around 11 per cent, which, in view of the likely AA- rating is quite a good spread for the investors. From the newspaper report, it appears as if ICICI itself will be the trustee for the investors, which seems unlike the independent-SPV and indpendent-trustee structures globally used.

With the demand for fixed income securities increasing, there is certainly a very good potential for a new breed of fixed income securities in the market. This would be the first CLO in India: previous securitisations have used either residential mortgages or car loans as the collateral.

Not only balance sheet CLOs, India apparently has a very good potential for arbitrage CDOs as well, with a wide variety of corporate bonds in the market. However, the regulatory structure for reinvestment-oriented SPVs is not yet clear, not to speak of the tax treatment of such SPVs. A draft securitisation bill is gathering dust as more politically sensitive matters continue to occupy the attention of the government.

Links For more on securitisation in India, see our country page here. For more on CLOs and CDOs, see our page here.

Accounting charges in 3rd quarter may pare securitiers' income

Call it paring or plundering, but if Conseco's 3rd quarter write downs are any representation of what is in store for other frequenters to securitisation market, it is going to be a very quarter indeed.

October 2, Gary Wendt of Conseco Finance wrote his customary investor memo, in which he listed two major items of write downs – the values of IOs and CDOs aggregating to about USD 350 million.

Under securitisation accounting standards, the values of IOs are based on assumed rates of default, prepayments and other credit sensitive factors. Declining interest rates, increasing rates of default, etc would have led to reassessment of the values of IOs for Conseco. The revalued IO would reduce the balance sheet value for Conseco from USD 459 million to USD 193 million, that is, a write down of 58% in just 3 months! This results into a charge of USD 225 million on the income statement.

The other item of write down is the value of the CDO portfolio, which is subject to accounting rule EITF 99-20. The outlook is not certainly positive: "The downturn in the economy increases the likelihood of default in certain types of CDOs. We also will write down certain below-investment-grade securities, primarily fixed maturities, which in our view are especially susceptible to the expected downturn in the economy".

The last quarter also saw substantial write downs in CDO portfolio by many securitisers, notably American Express – see our story here.

Italian securitisation may reach Eur 30 billion this year, says Moody's

It is going to be a record upsurge in the history of European securitisation, and given the fact that Italian securitisation is practically only 3 years old, it is a remarkable development. A Moody's report titled "Veni, Vidi, Securitizi: Crossing the Market's Rubicon: The Italian Structured Finance Market First Half 2001 Review" lauds the market development in Italy.

As against 25 deals worth EUR 10.1 billion in year 2000, some 60 deals crossing Eur 30 million are expected by the end of the year, says Moody's. While during the first six months of 2001, 30 publicly rated term deals closed, valued at EUR 11.6 billion, breaking all Italian structured finance records and placing Italy just behind the United Kingdom, as the number two European securitisation market. And since July, another seven transactions closed, worth an estimated EUR 4.9 billion.

Mortgage portfolios of banks and NPA deals are big drivers of the market. However, NPLs as a percentage of the total securitization volume is declining as the related tax benefits expired this May.

Vinod Kothari adds: The government is already on record putting securitization on the priority list for liquidation of the government's real estate holdings, and reduction of budgetary deficits.

Links For more on Italy, see our page here.

Expert cautions against risks in intellectual property securitisation

In Oct 2001 issue of Credit Management, a journal of the Institute of Credit Management, Peter Banyard has cautioned against the risks of investing in complicated and contentious cashflows such as intellectual property securitisation.

"At some stages over the last few years I have dealt with the securitisation of debt. If you have a good, reliable income stream from your lending and need to realise that asset, it can make sense to sell it", says the author. However, if the cashflows are as complicated as in intellectual property securitisations, investors could be heading in for trouble.

"The first problem is working out how much intellectual property is worth. Then there is the problem of finding a buyer and, if all goes well there, working out the legal side of things." The author says: " Securitisation may be easy enough if it is uncomplicated; perhaps the income from a straightforward contract or loan. It's fiendishly difficult when it comes to little legal quarrels over who owns what and, in the case of IP, there are usually a number of claimants to a share in it."

Talking of David Pullman's appetite in promoting intellectual property securitisation, the author says that the celebrities in intellectual property securitisation have a number of lawsuits around them. "My own advice to anyone thinking that negotiation by lawsuit is a reasonable way of doing business is to think again. Unless you have Mr Pullman's unusual gifts I feel sure it will prove a bitter and disagreeable experience", says the author.

Link For more on intellectual property securitisation, click here.

S&P sees vast potential in hedge funds CDOs

If there are enough takers for rating agency Standard and Poor's recent release that it is prepared to rate CDOs of hedge funds, or "fund of funds" as it has been called, the world of CDOs might increasingly see new brand of collateral – hedge fund investments. There have already been on state some CDOs to invest in private equity and hedge funds – see our reports here.

S&P release of Oct 1 says that it is developing criteria for rating debt secured by the market value of hedge funds of funds. Prima facie, the rating of hedge fund CDOs will use the same approach as it has used for other CDOs. The release says the approach will be the same as for market value collateralized debt obligations (CDOs), in which the rated debt is backed by the market value of "eligible assets" discounted to reflect their inherent riskiness. This approach requires that the portfolio of assets conform to strict valuation, documentation, reporting, and monitoring guidelines.

In rating these transactions, Standard & Poor's will review the fund of fund's investment strategies, underlying asset characteristics, risk measurement and management processes, and level of liquidity. Particularly important will be the level and quality of management, the correlation of returns among underlying funds or strategies, the use and extent of leverage, and the structure of ownership in the underlying funds.

S&P is optimistic of hedge fund CDOs as it sees securitization potential in the $300 billion hedge fund market. There are takers already: the release says that it is already examining some of these proposals.

There are estimated to be as many as 5,000 hedge funds worldwide holding in excess of $300 billion in assets. Many of the funds of funds participating in this vast market may find securitization an attractive option. Standard & Poor's Micropal, a funds analytic system, contained information on 1,362 hedge funds as of May 31, 2001. At that time, 964 of these funds had reported combined net assets of $152 billion within the last quarter. This comprised about $126 billion in actual invested assets — a figure that excludes the net assets of the 233 hedge funds of funds.

French Ruling casts doubt on future flow securitization

A ruling by French Supreme Court has cast doubt on assignment of future flows, which in turn forms the basis of a number of securitization deals known as future flow securitizations. A future flow deal is distinct from an existing asset deal as the receivables in the former case do not exist on the date of the transaction; and will be created and transferred in future. Several legal systems regard a future flow as a future asset, transferable only in future, though the promise for its transfer can be made now. Hence, if the transferor, before completing the transfer goes bankrupt, it is questionable as to whether the transferee will have claim over such receivables which had not been created and transferred before bankruptcy.

Legal experts contend that the French law, Articles L 313 to 23 of the French Monetary and Financial Code (also known as the Dailly Law) specifically permits this. However, in a decision of April 26 2000 the commercial section of the French Supreme Court held that a transferee of receivables assigned under the Dailly Law was not allowed to recover the sums due by the transferor's debtors pursuant to the continuation of an ongoing contract after the opening judgment of insolvency proceedings against the transferor.

There have been similar fears based on an Italian supreme court ruling and an old English case law – see our site here.

Links For more on the above ruling, see article by Gide Loyrette Nouel here. Also see our page on future flow securitization here.

First securitization deal concluded in Bolivia

Nacional Financiera Bolivianan (NAFIBO) through an SPV labeled COBOCE-NAFIBO 001, on September 26 sold in the Bolivian market for the first time in country's history a securitization deal worth USD 4 million, according to a news contributed by NAFIBO's securitization manager.

The cash flow securitisized comes from 60 promissory notes issued by the municipality of Cochabamba. NAFIBO is a second tier bank located in La Paz.

The originator from this deal is Cooperativa Boliviana de Cemento (COBOCE). On this deal COBOCE sold to the SPV the 60 promissory notes, which in turn were securitisized an sold in the market. The deal was rated AA- by FITCH. The securities sold have a maturity of 3.5 years and yield 10%. Interest is paid every 90 days and capital starts amortizacing every three months starting on month 18.

UK football club securitises future ticket sales

According to reports in Financial Times of 1st October, Latham & Watkins has closed a GBP 60 million securitisation for Leeds United FC by assigning their future ticket sales.

It is the biggest securitisation of its kind by a Premier League football club. The club issued two tranches of bonds secured against 25 years of ticket sales.

The present deal has been talked about for quite some time and we put up a report earlier on this site. There have been other football securitizations in UK by Ipswich Town and Southampton football clubs, but this one is the largest and the most remarkable.

Investors get jittery on trophy property securitisations

The commercial real estate industry had come to rely heavily on securitisation transactions, but the Sept. 11 event has hit it, at least to the extent investors are far more shy today than ever before in investing in "trophy" property securitisations, that is, where one prime commercial property formed all or a substantial part of the collateral for a transaction.

The lease of WTC itself was funded by two major securitisation deals, reported on this site before. The Rockfeller Center is funded by some more than USD 1 billion of securitisation money. Though, in case of WTC damage, rating agencies have been holding that the insurance claims will take care of investor paydown, it is clear that being paid out of insurance proceeds was not something that the investors aimed at.

The market expects investors will be more choosy about the composition of the CMBS portfolio in time to come and it will be difficult to sell trophy asset securitisations. In Europe, where this trend was only catching up of late has already seen some of the major securitisers deferring their plans. CMBS spreads have gone up by some 10 bps post Sept. 11.

Links For more on CMBS in general, see our page here.



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Egyptian mortgage law permits securitisation

To the knowledge of an outsider, there is no mortgage securitisation activity in Egypt to date, but a recent mortgage-related law seeks to create the legal environment permitting mortgage securitisation.

The Real Estate Finance Law effective end of September 2001, among other things, provides for securitisation. It permits a bank or mortgage financier to assign his interest in a mortgage, to issue securities and trade in the same. Article 11 of the new law deals with assignment and securitisation.

The said provision specifies that the assignee of the mortgage, which will be the SPV in case of securitisation, shall be responsible for interest and equity servicing of the securities of the SPV, out of such assigned rights. Servicing, however, may be retained by the financier.

There are punitive provisions for defaults on mortgages, which might reduce the time it takes to foreclose a mortgage.

SA Home Loans kickstarts South African securitisation market

In what is claimed as the first South African mortgage securitisation deal, SA Home Loans came out with a Rand 1.25 billion deal that securitises part of the mortgage portfolio of the mortgage lender.

The issuance is in form of floating-rate bonds which have been issued through a special purpose vehicle called the Thekwini Fund and are divided into a R1.15bn Triple A-rated tranche and a R100m Triple B mezzanine debt portion. The higher-rated bonds were priced at a spread of 70 basis points over the Johannesburg inter-bank rate.

According to SA Home Loans, the deal has been oversubscribed, and investors were increasingly interested in lower-rated bond deals.

Links For more on South African securitisation market, see our page here.

Federal regulators publish new capital rule

US federal banking regulatory bodies on Nov. 29 finally published their new regulatory capital rules relating to recourse, retained residual interests and risk mitigation devices in securitization and credit derivative transactios. The draft rules had been circulated before.

The new rule changes regulatory capital standards to address the treatment of recourse obligations, residual interests and direct credit substitutes that expose banks, bank holding companies, and thrifts (collectively, banking organizations) to credit risk. The rule synthesizes the capital treatment outlined in two notices of proposed rulemakings issued in 2000–"Recourse and Direct Credit Substitutes" and "Residual Interests in Asset Securitizations or Other Transfers of Financial Assets."

The new rule treats recourse obligations and direct credit substitutes more consistently than the agencies' current risk-based capital standards, and introduces a credit ratings-based approach to assigning risk weights within a securitization. The final rule also imposes a "dollar-for-dollar" capital charge on residual interests and a concentration limit on credit-enhancing interest-only strips, a subset of residual interests whereas the extant rules provided for a low-level rule, with a maximum set at the capital required to hold the asset in question.

The rule is effective on January 1, 2002. Any transactions settled on or after January 1, 2002, are subject to this final rule. Banking organizations that enter into transactions before January 1, 2002, may elect early adoption, as of November 29, 2001, of any provision of the final rule that results in a reduced capital requirement. Conversely, banking organizations that have entered into transactions before January 1, 2002, that result in increased capital requirements under the final rule may delay the application of this rule to those transactions until December 31, 2002.

Links See Martin Rosenblatt's article on the new FDIC rules here. See also our page on regulatory issues here.

Australian company launches record RMBS deal

RAMS Mortgage Corp has announced the launch of the biggest ever Australian residential mortgage backed securities. RAMS's current RMBS issue, its 12th, is about A$ 1.45 billion, and is the largest in Australian history. The issue from RAMS was priced at a weighted average margin over time of 38.38 basis points over the one month bank bill swap rate.

Australian domestic RMBS demand is deep enough, as demonstrated by this large domestic issuance. Rating agency Standard and Poor's says more than A$23 billion of Australian RMBS has been issued to date and that looking forward the market remains firmer heading into the next year. The pipeline for new RMBS deals remains strong for early 2002, with most Australian mortgage lenders now having established securitisation programs.

Links See our country page on Australia for more, updated with latest links.

US ABS may end 2001 with a 25% growth rate

With barely 4 weeks to the close of 2001, US ABS market may have yet another record year, the third one in a row and end up with an issuance volume of nearly USD 350 billion. Apart from the staple diet of the market – auto loans, HELs and credit cards, it is the sterling performance of the CDO segment that is accountable for this record performance in a year that otherwise marks gloom everywhere else.

CDO issuance in the USA continued to grow in the face of a growing percentage of high yield defaults. CDO issuance is expected to be down in terms of volume, but much higher in terms of number of issues which only indicates a broader base and augurs well for the future. The dip in volumes is accounted for by a lesser number of balance sheet structures which typically have a huge ticket size each deal.

The auto loan sector is likely to end up with more than 50% growth this year, which goes well with the downgrades of the auto majors in the country. With their corporate ratings down, auto majors tried to increase their presence in securitisation markets to gain a cost advantage. The classic case in point is that of Ford which brought a record deal to the market as it faced increased costs in the corporate bonds.

Links For more on the US market, see our country profile here. Statistics of business volumes are available on this website.


Securitisation wave may stay away from Thailand

After 4 years of the passage of the securitisation law in Thailand, securitisation activity has not picked up in Thailand, and a survey by a local Thai rating agency indicates that activity levels may not pick up in the country.

Thai Rating and Information Services conducted a survey of their various clients to check their interest in securitising cashflows. However, Thai banks were reluctant to get into securitisation deals. High margins on retail lending, the bias toward shorter-dated maturities in bank funding structures and adequate capital bases have discouraged banks to look to securitise their loans. Internationally, the drive to securitise assets is partly accounted for by regulatory capital concerns, as securitisation structures are designed to free up regulatory capital.

Since the passage of the securitisation law in 1997, only two deals have been done in the country: Liquor SPV by a group led by Charoen Sirivadhanabhakdi and the Staso deal, involving the Lotus Novotel and Regency Park hotels. Banks who are major players in securitisation business internationally are conspicuous by their absence in Thailand.

Links For more on securitisation in Thailand, see our country profile here. For text of the Thai securitisation law, click here.


Japanese banks may go for major off-balance sheet drive

Japan's four major banking groups: Mitsubishi Tokyo Financial Group Inc. , Sumitomo Mitsui Banking Corp , Mizuho Holdings Inc. and UFJ Holdings Inc., may be forced to go for major off balance sheet exercise this year to reduce their regulatory capital. These banks are reportedly facing new pressures on their capital on account of large loan losses.

Securitisation of loans to the tune of Yen 7 -8 trillion or USD 60 billion is expected to take place by these major banks. Japanese securitisation has been growing fast over the last 4 years, at triple digit growth rates, but this year's compelled securitisation drive may surpass the growth record in the past.

Links For more on securitisation in Japan, see our page here. Also see a news item below on Mycal's failure.

Insurance securitisation looks up as reinsurance costs harden

The Sept. 11 event has pushed up the cost of insurance and more so, reinsurance, with the result that the so-long sleeping beauty of the risk securitisation business – insurance securitisation – may now be woken up.

An article in Business Insurance of 5 Nov says that as insurance markets harden, the role of capital markets and other alternative risk transfer vehicles will likely remain a supplement to traditional coverage. Of course, insurance securitisation may not lead to any substantial disintermediation in the insurance markets. The article quotes several practitioners from the market who affirm that they are seeing lot of potential deals since Sept 11.

Yet another article in the same journal confirms that reinsurance world had changed on Sept. 11, which has been universally described by reinsurance brokers as a defining moment. The rates will go north effective Jan 1, particularly on items like terrorism coverage and workmen's compensation.

ART has far remained a beautiful idea thanks easy capacity and rates in the traditional reinsurance market. However, with increasing reinsurance rates, there will be a definitive activity in this segment.

Links For more on risk securitisation including links to several external sites, see our page here.


DBS planning synthetic CLO in Singapore

If activity in Hong Kong, Korea, Malaysia, and Singapore is any indication, Asian securitisation scenario is heating up fast and may soon be catching up with the rest of the World.

An article in Finance Asia 4th Nov. says Singapore's DBS is planning a synthetic CLO. There have been very few synthetic CLOs in Asia – the one which is known is ABN Amro's synthetic securitisation of RMBS in Hong Kong.

The indication from the article is that it will be a fully collateralized USD 165 million deal, through which the bank will sell risk on an equal amount of its portfolio. Fully collateralized synthetic CLOs should give 100% capital relief to the originator. The Monetary Authority of Singapore has come out with rules on both securitisation and credit derivatives, and they are genereally in line with those by FSA, UK.

The proposed offering is likely to have an average life of three-and-a-half years and will be multi-tranche.

DBS is a known name in Singapore securitisation scene – it has so far been well known for its CMBS deals, which have been reported on this site.

Links For more on securitisation in Singapore, see our page here. For full text of Singapore's MAS guidelines, see our page here. For MAS guidelines on credit derivatives, see our website here. For more on CLOs, see our page here.

Diamond securitization is on!

Securitization sees the light of diamonds, as diamond securitization sees the light of the day. We had reported about this deal before – see here. Now the deal is in the market.

A report in Financial Times of 6th Nov says that the originator named Rosy Blue, a diamond company based in Antwerp, launched a USD 100 million bond backed by its entire stock of rough and polished diamonds, in a deal brought to the market by Nomura International. The deal was launched on 5ht Nov. The issue was priced at a spread of 95 bps over 3 Ml and has reportedly been bought mostly by banks in Belgium, France and Switzerland, with a few London branches of Asian banks.

The bond is set to mature in July 2008.

This is one more of the whole business variety of securitization deals being structured by Nomura. The whole business structure uses the entire cashflows of an operating business to pay off the investors and is distinct from traditional asset-backed structures.

Links For more on whole business securitization, see our page here.

BIS publishes working paper on securitisation: seeks comments by Nov 15

In Oct 2001, BIS put up a working paper on asset securitisation, seeking comments by Nov. 15. The working paper is an elaboration of the IRB approach earlier outline in Jan 2001, and gives details for synthetic securitisations in particular.

The guiding principles of the approach detailed in the working paper are:


  • In recognition of asset securitisation as an important source of funding and mechanism for credit risk transference, the IRB approach should be neutral with regard to the capital requirements it produces in order not to create incentives or disincentives for banks to engage in securitisations.
  • The IRB treatment of securitisations should reflect the relative credit risk inherent in the various tranches within a securitisation transaction. That is, IRB banks would be required to hold more capital against retained or purchased subordinate tranches as compared to that required for senior positions within a given securitisation. Whereas the standardised approach to securitisation is based on the application of a small range of risk weights corresponding to external ratings, IRB banks will be required to consider the availability of external ratings and information about the securitised assets in determining the minimum capital requirement.
  • The approach should adequately capture credit risk exposures of securitisations through a combination of minimum capital and operational requirements.


Full text of the working paper is at this link.

Earlier this year, BIS had decided to defer the implementation of Jan 2001 proposals to be refined and re-presented by Jan 2002. See our news item here.


Mycal's failure hits Japanese ABS market

Mycal Corp., one of Japn's leading national chain retailers, filed for civil rehabilitation proceedings on Sept. 17, 2001. A number of ABS offerings in Japan are directly connected with Mycal and rating agency Fitch has expressed concerns that Mycal's failure has shaken the fast growing ABS market in Japan.

In an article in Global Securitization Quarterly of Oct. 2001, Fitch analysts say that Mycal's failure will affect several CDOs where Mycal's corporate bonds represented a large share of the collateral. Besides, there were some CMBS deals which were based on sale and leaseback of commercial properties owned by Mycal or its subsidiaries. These transactions were rated above the rating of Mycal itself, and in theory, the failure of the originator should not have affected the rating of the deal. However, these CMBS transactions were put on rating watch negative.

Fitch contends that the CMBS rating methodology Fitch uses underscores the fact that anchor tenant or operator of the property is a key factor and unless the rating of such operator is above investment-grade, Fitch will not grant investment-grade rating to the CMBS.

UK insolvency law reform may adversely affect securitisation transactions: legal experts

One of the distinctive features of UK securitisation practice is that a number of securitisation transactions, and almost every whole business securitisation transaction, has been structured on the basis of a secured loan by the SPV to the originator, rather than a true sale as in most other countries. The basis of this practice is the typical structure of the UK insolvency law which allows appointment of an administrative receiver by a secured creditor/s having floating charge over all the assets of the borrower company. The appointment of an administrative receiver takes away the jurisdiction of the Courts to sit over the estate of the bankrupt company.

In July this year, the government has put up a white paper titled Insolvency -A Second Chance. Amid concerns that the existing provisions of law are inclined to favour a section of secured creditors to the prejudice of other creditors, the white paper proposes that "on the grounds of both equity and efficiency, the time has come to make changes which will tip the balance firmly in favour of collective insolvency proceedings ­ proceedings in which all creditors participate, under which a duty is owed to all creditors and in which all creditors may look to an office holder for an account of his dealings with a company's assets. It follows that we believe that administrative receivership should cease to be a major insolvency procedure."

Commenting on these proposals, Ian Field and Jennifer Marshall of Allen and Overy, London write in International Financial Law Review Oct 2001 that the proposed changes will adversely affect the securitisation industry whic in UK increasingly makes use of the secured loan structure, as true sales in UK context involve several legal difficulties and compliance costs. Even though the White Paper does propose exemption from the new regime for certain capital market transactions [Para 2.18], which are not yet detailed, the authors feel that the exception may even create greater uncertainty, one, since the scope of exempt transactions is not known as of date, and two, as to whether a given transaction will qualify for the exemption or not.

Vinod Kothari adds: To my mind, what is more important is plead for a certain true sale regime, free from notification obligations and the stamp duty irritant. UK had an exceptionally creditor-friendly insolvency law and the reform will bring it more in line with international practice. That certain securitisation transactions that relied on these exceptional legal provisions will be put to problems is not a reason to thwart a larger cause.

Links For full text of the UK insolvecy white paper, click here. For whole business securitisations that use the secured loan structure, click here. For more on securitisation in UK, click here.



[This page lists news and developments in

global securitisation markets – please do

visit this page regularly as it is updated almost on a

daily basis. Join our mailing list for regular

news fed direct into your mailbox]

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

Previous newsletters

Jan, 02 .Nov, 01 .  Oct.,2001.Sep.,2001., Aug 2001… July, 2001.June, 2001May, 2001,… April 2001…  March 2001..Jan. and Feb.2001  Nov. and Dec.2000  Sept. and Oct. 2000 July and August 2000 May and June 2000  April 2000   Feb and March 2000   
For all news added before 21 January, 2000, please 
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UK: whole business structure used for ferry revenues securitisation

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

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

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

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

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

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

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

India's new foreclosure norms will help securitisation

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

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

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

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

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

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

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

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

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


US securitization trade body to be launched soon

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

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

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

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

Bank of America subsidiary launches largest subprime home equity deal

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

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

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

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

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

Scope discussion on Accounting interpretation SIC 12 deferred

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

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

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

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

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

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

Securitization of government revenues booms in Italy

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

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

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

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

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

Links For more on Italian securitisation market, click here.

Colombia passes securitization law

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

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

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

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

    Philippines to push securitization law

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

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



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Can Enron be another LTV Steel?

Can the true sale issue raked up in LTV Steel bankruptcy raise its head in the Enron bankruptcy proceedings? In the LTV Steel proceedings, LTV had filed motion seeking to rewind the transfers of inventory and receivables made by it to subsidiaries from where on the assets has been securitised. While the case shook the securitization industry, there was no final verdict on the motion. See details on our site here.

An article in Private Placement Letter of 21st Jan analyses similar concerns around the Enron debacle.

Enron is a much larger issue, both in amounts involved, ramifactions and the social and political noise it has created. Structured finance market exposure on Enron is substantial, partly direct and partly indirect. There are CMBS deals with Enron office space exposure, CDOs referenced to Enron, substantial ABCP exposure adding upto about USD 1 billion at the time of bankruptcy, etc. Securitization pros are concerned that if true sale of these assets is questioned, it might lead to a backlash to structured finance market. One person is reported to have said: "There's some systematic risk to securitization markets stemming from this. There was a lot of concern in the market last year from the LTV case. It's hard for me to imagine that, for something as large as Enron, there won't be some noise".

Links See our page on true sale and its implications. See here for more on LTV Steel. See below for a related story.

Fitch cautions investors against sale/leaseback CMBS

Rating agency Fitch has cautioned investors against CMBS created out of sale and leaseback of commercial real estate owned by potentially bankrupt companies. A typical such scheme will be one where a company, on the brink of financial distress, sells its commercial real estate and takes it back on the lease, and the leasing unit securitises the lease receivables.

In a recent press release, Fitch says it has reviewed several sale/leaseback transactions – where a company sells its commercial real estate assets and then leases them back so that the new owner can securitize the resulting pool of mortgages. This is particularly so if the company is pursuing this financing strategy on the brink of its bankruptcy and may subsequently shut its doors. "In these instances, CMBS investors may have to weather delinquencies and defaults because of an insufficient assessment of the risks involved', cautions Fitch. The deals where a red flag should go up would be ones of sale/leaseback transactions where investment-grade rated proceeds exceed a highly stressed value of the property. Vacant properties are typically sold at a fraction of their original value

In CMBS deals in general, if the assets are not easily fungible or are located in unattractive markets, the investor of CMBS bonds could hold, as collateral, empty buildings for a long period of time. This risk is exacerbated in sale and leaseback transactions due to arbitrary valuations.

Links: For more on CMBS, see our page here.


US ABCP volumes rise in 2001: 
to maintain growth in 2002

The US asset-backed commercial paper conduit market continues to rise, and is expected to grow further in year 2002. The ABCP market ended 2001 with about USD 745 billion in commercial paper outstanding, up 16% from USD 641 billion at the start of 2001. In year 2002, rating agency Standard and Poor's, based on a survey of ABCP administrators, expects the market to rise another 13%.

The four major constituents of the ABCP market include: autos representing roughly 18%, trade receivables at 17%, equipment leases and loans at 16%, and credit card receivables at 10% of new commitments. Other constituents include time shares and franchise fees.

The major administrators surveyed by S&P included: Citigroup N.A, ABN-AMRO Bank N.V., Banc One, N.A., JP Morgan Chase, General Electric Capital Corp., Westdeutsche Landesbank Girozentrale, Rabobank Nederland, Liberty Hampshire Co. LLC, Societe Generale, Bank of America National Trust & Savings Association, Canadian Imperial Bank of Commerce, Barclay's Bank PLC, Credit Suisse First Boston, First Union National Bank, Charlotte, Bayerische Landesbank Girozentrale, General Motors Acceptance Corp., Firstar Bank, N.A., and Dresdner Bank AG.

Links For more on ABCP, see our page here.

Upgrades mount up in CMBS: S&P optimistic

In a report on U.S. CMBS rating transitions in 2001, a report released by Standard and Poor's shows upgrades outstripping downgrades by a large margin, with the outlook for rating upgrades in 2002 remaining favorable. U.S. transaction volume in 2001 totaled USD 74.3 billion, almost reaching the record USD 74.5 billion brought to market in 1998.

It may be noted that 1998 was the peak in US CMBS market after which volumes started declining consistently until the last year, largely due to a decline in conduit activity and general sloth in CRE sector.

The S&P report says that undercurrents of weakness began emerging towards the end of 2001, which did not show up in the year-end report.

Links For more on CMBS, please see our page here. See also a story below on non-US CMBS.

Emerging market deals may be affected by global economic sloth

Rating agency Standard and Poor's recently analysed the several emerging market transactions rated by it that may be affected by global economic scenario pursuant to 9-11. For the purposes of this analysis, emerging market deals can be classified into: asset-backed deals, tourism-dependant future flows, commodity future flows, and remittance based future flows.

One of the most significant reasons for weakness of several emerging market deals, unrelated to 9-11, is Argentinan economic crisis. Several of the rated securitization deals originated from Argentina, both existing asset and future flows, are liable to default owing to the peso-to-dollar exchange announced by the Government as also other measures.

Among tourism-related flows are airline ticket sales and credit card voucher payments, both of which are related to travel volumes. The rating agency feels that the transactions backed by sufficient collateralisation may not be affected.

Various commodity-backed transactions backed by export receivables have suffered due to declining prices of commodities.

Japan begins securitization of bad loans

In a major drive to clean up the creaking banking sector burdened with bad debts, the Japanese government has appointed Goldman Sachs and Mitsubishi Trust Bank to securitise loads of bad loans. To begin with, the exercise begins with securitisation of Yen 9.6 billion rated paper, but the deal will go upto Yen 100 billion (USD 744 million) of non-performing loans in what is believed to be the country's first securitisation of bad bank credits. Of course, Morgan Stanley has earlier securitised bad loans bought from Japanese banks, but this is a deal directly aimed at creating a secondary market in bad loans.

The Japanese government had constituted the Resolution and Collection Corp (RCC) on the structure of the Resolution Trust Corp, USA to take over bad loans of Japanese banks and restructure them.

Class A of the 4-tranche notes was rated AAA by Standard and Poor's, on factors such as the mortgage quality, subordination, cash reserves and the sound legal structure of the deal.

The asset-backed bonds are to be placed privately at a total price of about Y10bn.

Links For more on NPL securitization, see our page here. For more on Japan, see our page here.

Off-balance sheet financing comes under fire

The collapse of Barings Bank sent accounting standard setters into making a spate of new accounting standards that gave the World IAS 39 and FAS 133; Enron's debacle will certainly lead to review of some major accounting standards including those on consolidation and off-balance sheet financing.

That a major social opporbrium is building against off-balance sheet financing is a clear indication from the latest article in Business Weekthat hard hits attempts of corporate America in achieving off-balance sheet funding. "Hundreds of respected U.S. companies are ferreting away trillions of dollars in debt in off-balance-sheet subsidiaries, partnerships, and assorted obligations, including leases, pension plans, and take-or-pay contracts with suppliers. Potentially bankrupting contracts are mentioned vaguely in footnotes to company accounts, at best. The goal is to skirt the rules of consolidation, the bedrock of the American financial reporting system and the source of much its credibility", says the Special Report in Jan 28 issue of Business Week.

The article titled "Who else is hiding debt" scorns the use of special purpose vehicles to move away debt. "Because of a gaping loophole in accounting practice, companies create arcane legal structures, often called special-purpose entities (SPEs). Then, the parent can bankroll up to 97% of the initial investment in an SPE without having to consolidate it into its own accounts. "

If you are wondering which accounting rule is the article referring to, it is EITF 90-15 and EITF 97-1.

Link The full text of the Business Week article is available here.

More defaults in a year than together in the past:
Enron causes 6 ABS defaults

You are free to ask: is the beginning, or the end, or the end of a beginning or the beginning of the end. But looking at the number of defaults in asset backed securities, year 2001 has overshadowed 16 years of strong performance of securitized classes. Rating agency S&P has reported 18 defaults in 2001, compared to 11 defaults over a 15 year period for 1985 to 2000. As 1985 was the year when non-mortgage-backed rated securitization made a debut, it is all history on one side, outweighted by a single year.

The 18 defaults composed of synthetic securities (six), franchise loans (nine), retail credit cards (two), manufactured housing loans (one). The 6 synthetic defaults had one name to blame: Enron, whose bankruptcy triggered claims on credit default swaps against the investors. It is notable that in synthetic transactions, the investors are protection providers or guarantors through securitised swaps.

The data excludes two other notable defaults of 2001 – Hollywood Funding and LTV Steel. Hollywood Steel is recognised by S&P as a UK ABS. In LTV Steel, securitization funding was replaced by DIP funding, which is counted as an exchange and not a default by S&P.



  • For full text of the S&P article, click here.
  • The LTV case is covered by our news items here and here.
  • Several other ABS defaults including Hollywood Funding and sad episodes are covered on our page here.


ABS Rating Downgrades abound in 2001;
most relate to collateral

Standard and Poor's has recently published a rating migration report for ABS ratings for year 2001. While this report reflects a murky scenario with downgrades reaching all time high, the rating agencies are still going strong on the fact that ABS issuance has for the first time waded through a recession, and most of the downgrades relate to performance of the collateral.

Out of a total of 320 rating changes by S&P (which is less than 7% of all outstanding classes), there were 245 downgrades and 75 upgrades, compared to year 2000, where there were 183 downgrades and 63 downgrades. However, S&P underscores the fact that most of these downgrades related to collateral performance (by the way, there are not too many other possible reasons for a downgrade, other than credit enhancer or counterparty downgrade).

S&P says that the major downgrades this related to synthetic securities [84 downgrades] where corporate downgrades worst affected the ratings of the synthetic securities, referenced to such corporates. Next in order were CDOs where the subordinate classes could not escape a downgrade, once again due to downgrade of the constituent corporates.

Links For full text of the S&P article, click here.

Auto majors increasingly look at ABS

The key feature of the US ABS market for the first two weeks of 2002 has been increasing presence of auto majors for new ABS issuance. Last week, Ford Motor company jumpstarted the market with a USD 5 billion ABS deal. This week, General Motors Corp. and Toyota Motor Corp. have joined the fray.

Everyone in the market was expecting increased supply of auto paper, since the rating downgrades of the manufacturers has pushed up their costs of corporate bonds. Asset backed deals, on the other hand, provide them cheaper and easier access to funds.

European papers have also reported plans by several European auto majors to package auto loan ABS rather than to look at unsecured corporate bonds.

Links For more on auto loan ABS, see our page here.


Non-US activity may push global CMBS growth

Commercial MBS volumes originating in the USA have been steadily declining since 1998, and non-US CMBS volumes have been growing fast. During year 2001, issuance outside the USA grew 87% from USD 12.1 billion in 2000 to USD 22.7 billion. As for year 2002, analysts expect the growth rate in non-US CMBS to be maintained.

Europe In the non-US market, Europe is seen as the growth engine. In UK alone, in year 2001, volume more than doubled to USD 10.7 billion, bolstered by some mega CMBS issues such as Canary Wharf and British Land. There was substantive activity from Italy as well, primarily comprising of a mega issue from the Italian government.

In year 2002, European activity will see a spike as some jumbo deals likely to be priced in the first quarter will add up to a volume of USD 5 billion. Moody's also concurs that the growth rate in European CMBS will continue in year 2002 – press release of 4th Jan.

Japan The Japanese CMBS market did very well in year 2000 when the issuance tripled over 1999, but in year 2001, the volume grew by meagre 20%. In year 2002, there might be a number of real estate NPL securitisations by banks, but CMBS as such may continue the same way as in 2001. Number of JREITs have been formed this year, which may get active in the CMBS market.

Rest of the world: Analysts expect CMBS debutante deals in South Korea, South Africa and New Zealand this year.

Links See for more on CMBS our page here.


CDOs : Asset managers' money machine

An article in journal Pension and Investments 7th Jan 2002 says CDOs are asset managers' latest money machine as they rake in fixed income over a substantially leveraged asset base. With the growing CDOs volumes and diversity in CDO classes (for example, see below about hedge fund CDOs), asset managers continue to make their moolah out of CDOs.

CDOs continue to attract well-known asset managers. In 2001, Guardian Trust Co., Nicholas-Applegate Capital Management and Pareto Partners were among the firms that launched CDOs. Sources said other big-name firms, including Fidelity Investments, are also planning to join the bandwagon.

The typical CDO fees are 40 bps with an additional 10 bps linked to performance. However, the equity stake usually required is only 5% and managers have to contribute only a part of it. True, there are more risks in managing CDOs as there are several triggers and ratios to keep track of.

US CDO volumes have continued to grow, despite the jump up in high-yield default rate from 6.3% to 8.9%.

There may be lessons to learn, but volumes will continue to grow: S&P

A press release of 9th Jan by S&P says that despite all problems and all critique, there might be lessons to learn, but the CDO volumes in 2002 will continue to rise. Transactions originated in 2002 will continue to incorporate structural innovations and mechanisms to further protect investors from pronounced credit deterioration within the portfolios.

Specifically, lessons learned from earlier-vintage CDOs include the need for longer warehouse facilities, less aggressive equity assumptions, and longer ramp-up periods for managers to accumulate collateral post closing. But chief among the observations made is the need to prevent excess spread from leaving a transaction upon early signs of credit deterioration.

Links: For more on CDOs, see our page here.

Japanese securitisation may grow 40% in 2002: S&P

Inspite of a falling economy, Japanese securitisation volume may grow 40% in year 2002, as regulatory pressure will continue to force banks to reduce their balance sheet risks. Total issuance in 2001 was estimated at JPY3.2 trillion.

S&P expects that if 2002 proves to be a repeat of 1998 and 1999 when a banking crisis forced companies to look to the securitization market as a source of funds, issuance may reach JPY5 trillion.

Growth will likely be focused on bank repackagings of loans to create cash and synthetic CDOs. Bank CLOs may increase due to regulatory pressures on banks who may look at these as a means of balance sheet management, and risk management in the form of credit default swap transactions. In addition, issuance in 2002 will also include its share of debt backed by real estate assets and securitization of various loans in the consumer finance sector.

Consumer finance securitization was the highlight of 2001 as finance companies found it to be a very effective means of funding. Consumer finance securitization accounted for about 17% of total ABS issuance in 2001, compared with less than 3% in 2000.

In MBS segment, there has been substantial CMBS activity fired by real estate portfolios of failed insurance companies, notably Chiyoda Life and Daihakyu Life. In year 2002, there may be lot of non-performing real estate loans being securitised. The work of Japan's Resolution and Collection Corp. to liquefy some of the defaulted real estate assets it has purchased from Japanese banks, as well as balance sheet management by some financial institutions, will contribute to the increase in NPL securitizations. Meanwhile, some of the repositioned real estate assets from the insolvent insurance portfolios will be purchased by sponsors of the newly formed J-REITs as they seek to amass their real estate portfolios.

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

Mexican securitisation grows 290% in 2001, to maintain growth over 2002: S&P

According to a S&P press release of 9th Jan, llow interest rates and legislative measures should assist Mexico's domestic securitization market to grow over year 2002. Year 2001 was a record year in terms of volume, with 290% spike over 2000.

For year 2002, the rating agency expects securitizations within a diversified pool of asset types, including federal tax participation flows, partial credit guarantee, construction bridge loans, and mortgages, as well as commercial real estate. As far as tax participation flows are concerned, recent legislation has allowed Mexican states and cities to securitize their federal tax participation flows through bond offerings.

The low-income housing industry is another sector that will continue to be an active issuer of structured finance debt in 2002. Both construction companies and mortgage banks ("Sofoles") have made great efforts to start addressing Mexico's estimated 6-million-unit housing deficit, and the need for additional funds is becoming more pressing. To overcome this need, issuers will continue securitizing construction bridge loans such as the one issued by Corporacion GEO, as well as other bridge financing like Hipotecaria Su Casita's issuance, until they have generated enough assets to make mortgage securitization feasible.

In addition, the creation in October 2001 of Mexico's federal mortgage bank will foster the development of primary and secondary mortgage markets in Mexico during 2002 and in the years to come.

Driven by Mexico's macroeconomic conditions, the dynamics of the commercial real-estate market are bound to change. Transactions that have typically been financed by private investments will most likely begin to be financed by debt issuances as market interest rates continue to be a competitive alternative for developers and construction companies. Therefore, commercial real-estate securitization will develop in the short term. It is very likely that these issuances will find an appetite among institutional investors who require instruments with tenors similar to the ones of traditional commercial real-estate securities.

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

Spanish securitisation grows 52%

Securitisation volume in Spain in year 2001 added up to Euros 17.673 billion, which is 52 per cent higher than the volume last year. This data was published by AIAF, the Spanish association of financial asset brokers.

According to the trade body, this year has been one of the best for the sector, which has seen the volume of issues increase more than fourfold since 1998, when this stood at Euros 3.96 billion. Securitisation has benefited from not being closely linked to stock markets and from its attractiveness to companies. Thus, difficulties in the equity market have not percolated down to the ABS markets.

In terms of composition, of the total securitised asset issues this year, 5.112bn euros correspond to securitised mortgage bonds; 6.684bn euros to other securitised assets and 5.876bn euros to securitised bonds. The securitisatio activity has benefited from a new law which allows assets other than mortgages to be securitised, which has opened up the sector to institutions other than financial ones.

Links For more on securitisation in Spain, see our country page here.

Citi tops 2001 ABS underwriter positions

It was a close one-on-one between Citigroup and Credit Suisse First Boston, but Citigroup finished as the top underwriter for 2001, for the second year in a row. According to data published by Thomson Financial [Investment Dealer’s Digest, Jan 7], Citigroup's Salomon Smith Barney ended up with a total underwriting volume of USD 49.232 billion, while CSFB added up to USD 48.793 billion. These numbers take into account public offerings as also rule 144A, including asset-backed and CDO deals.

The two top underwriters between them share about 30% of the US ABS market. JP Morgan Chase ended up with USD 43.4 billion.


Alternative investment CDOs to be strongest growth idea of 2002: S&P

CDOs that invest in private equity and hedge funds are going to be strongest growing CDO segment in 2002, says S&P. In a Press Release of 7th Jan, S&P expects alternative investment CDOs to be be the strongest growing segment in CDOs.

"In 2002 our biggest growth will come from alternative investments," said Soody Nelson, managing director of Standard & Poor's Structured Finance market value group in New York. "Specifically, the growth will be from securitizations of private equity fund of funds and hedge fund of funds, otherwise known as alternative investment collateralized debt obligations."

Such investments are an alternative to the capital markets, which include the public bond and equity markets and are generally open to all investors. The chief difference is that the capital markets are regulated and transparent and offer investors the same opportunities, while the private equity and hedge fund industries are opaque and unregulated, creating the opportunity for greater returns, though matched by greater and structured risks.

In the first half of 2001, Prime Edge became a notable CDO to invest in private equity. We covered this development in our report here. Subsequently, both S&P and Fitch came out with rating methodologies for such vehicles. Bouyed by the fast-growing hedge fund industry, the rating agencies are trying hard to push CDOs of hedge funds. The creation of hedge fund or private equity fund CDOs allows creation of debt investments that go into riskier equity investments.


Auto ABS should continue to grow in 2002: S&P

One of the majors drivers of the growth in ABS market in 2001 was the strong performance of the auto ABS – see our story here. Looking at 2002, rating agency S&P projects that "Current conditions in the auto asset-backed securities market should result in 2002 being another record year for the sector, with as much as a 7% rise in issuance over 2001 to $74 billion".

The Big Three automakers, General Motors Corp., DaimlerChrysler AG, and Ford Motor Co., were downgraded in late 2001 Resultingly, their cost of borrowing in regular debt markets went up, forcing them to look increasingly at the ABS market..

The securitization market also benefited from robust car sales in 2001 – the second best year ever, with sales supported by rebates and low-rate financing. The Big Three engaged in fierce competitive pricing, including the 0% financing deals designed to maintain or recapture market share. Zero-percent financing deals offered post Sept. 11 will also likely accelerate new car purchase decisions for many consumers and may cause auto ABS issuance to be front-loaded in 2002.

The current windfall will surely taper off as the reality of recession sets in, but would not have a detrimental effect on securitizations. Although the economy will put a damper on car sales and loan growth will likely decline, issuers will have a greater incentive to make securitization a larger share of the funding mix. Also, subvention, or below-market rate financing, popular among captive finance companies in a down market, should stimulate additional loan origination. Subvention rate financing will also attract loan obligors who may have otherwise made a cash purchase and improve the obligor mix, thus, at least, partially offsetting the adverse effects of a weaker economy.

Links For more on auto ABS, see our page here.

Australian RMBS holds promise: Fitch

Australian ABS market continues to be predominantly focused on RMBS, and the rating agencies project that in 2002, there may not be too much of non-RMBS activity, but RMBS holds a strong promise. RMBS issuance in 2001 added up to some USD 11.89 billion.

2001 witnessed historically one of the lowest interest rates in the country.. As the domestic economy begins to pick up over 2002, interest rates are likely to rise and that will probably dampen demand for new home loans. However, Fitch believes any reduction in the demand for new home loans will be offset by more of them being securitised thus ensuring 2002 issuance is comparable with 2001 levels.

Offshore issuance is expected to continue to be the dominant factor in the market, although new entrants are unlikely at present. RMBS is also expected to benefit from changes in withholding tax, which will enable Australian owned offshore companies to repatriate more dividends locally, should help the RMBS market also.

In the non-RMBS market the outlook is a little more cautious. CMBS and ABCP may not be quite as popular as the RMBS. The CMBS market is expected to struggle Australian investors are not comfortable with low-rated CMBS tranches. The ABCP market is expected to be maintained with corporates accessing it to facilitate funding requirements, accessing arbitrage opportunities and watching balance sheets. While the market is expected to grow there is concern about the depth in the market which may lead to the establishment of some US dollar ABCP.

Links: For more on securitisation in Australia, see our country page here.

Korean ISP's future revenues securitised

The strong current of activity in Korean securitisation market [see our story below] was kept going by a remarkable future flows deal where an ISP's future revenues were securitised to raise Won 120 billion.

Korea Thrunet Co., Ltd. ("Thrunet"), Korea's largest cable modem broadband Internet-access services provider and a major provider of enterprise network services, has issued in Jan 2002 asset-backed securities in adding up to Won 120 billion. Bank of America's Asian Asset Securitization Team in Hong Kong acted as structuring agent, while Hyundai Securities privately placed the ABS amongst Korean institutional investors.

The securities are backed by Thrunet 's future receivables from certain corporate customers in the Enterprise Network Business for the next three years and were offered to domestic institutional investors. It is not known if the deal was rated.

Thrunet is a major provider of broadband Internet access services and enterprise network services in Korea. The first to offer broadband Internet services in Korea, with 1,267,516 paying end-users at the end of November 2001, Korea Thrunet's network currently passes over 8.3 million homes. Thrunet service features "always-on" Internet access at speeds up to 100 times faster than traditional dial-up Internet access.

There have not been many future flow deals in Asia so far – so this one is a remarkable precedent and adds up to the bevy of deals originating from Korea.

Links For more on securitisation in Korea, see our country page here. For more on future flows, see our page here.

ABS one of the best investment options in 2001

Amid faltering markets and deteriorating corporate credit, investing in asset-backed securities was one of the best investment option in 2001. A Financial Times [Jan 7] story by Jenny Wiggins says investors ended up with some 10 per cent return on asset backed investments, which is slightly less than what could be expected out of corporate bonds, but in a year of overall uncertainty, the protection that asset-backed investments provided held a strong appeal with the investors. That is how 2001 ABS volumes ended with a strong performance – see story below.

There have been some weak spots in 2001. One of the most disturbing features was the rate of downgrades. According to rating agencies, most of the downgrades came from 3 sources: CDOs, franchise loans and manufactured homes segment, and airlines related securities. Several EETCs based on aircraft funding have been downgraded recently. The downgrades in CDO tranches are obviously connected with declining corporate credits.

Credit card delinquencies are rising, but so far, the performance in this sector has been quite strong. Barring the bankruptcy of Heilig-Myers [see our page here], there were no defaults duing the year.

All said and done, investor demand for ABS continues to be strong.

Your views please As a participant in the structured finance industry, how do you see the ABS market behaving in 2002? Write your views.

Links There are several articles on investing in ABS on our articles page – see here.

Lehman commits USD 1 billion for Philippine market

Philippine media quoted House Speaker Jose de Venecia, Jr. as saying that Lehman Brothers has committed to invest USD l billion in a Philippine Recovery Fund will invest in securitisation of mass housing projects in the country, as also acquire the non-performing assets of the commercial banking system. The Fund would be used to participate in the securitization of the Malampaya natural gas and housing mortgages and to finance new housing projects and new economic development programs of the government.

If this proposed investment materialises, it will surely be a major boost to the government's ongoing efforts to introduce securitisation in the troubled economy. Efforts are on to implement a securitisation law in the country -see our news report here.

BusinessWorld (Philippines) of Jan 2 also notes the progress of the securitization bill. The Philippine Stock Exchange has reportedly supported the Bill. The House economic affairs committee is conducting hearings on House Bill 2733, which provides for a legal and procedural framework for securitization. In addition, the stock exchange has also recommended tax incentives for investors investing in the securities.


High hopes on 2002 as yet another year of high growth closes

In an otherwise insecure world, securitisation continues to prosper. Year 2001 ended with impressive growth in securitisation volumes on both sides of the Atlantic, and market players have rung in the new year with the same optimism.

Website which tracks securitization data regularly reported a total (US and non-US) issuance of USD 418.3 billion for 2001, as compared to USD 354.5 for 2000. The US volume grew from little over YSD 270 billion in 2000 to above USD 306 billion in 2001.

A news report in Financial Times of Jan 2 quotes market practitioners who expect the US volume to reach USD 365 billion in 2002, inspite of pressures on credit quality and corporate earnings. As to general decline in credit quality, in auto receivables segment, rating downgrades of the auto majors only increased their presence in the securitisation market to reduce costs.

Most impressive growth in global securitization in 2001 was achieved in Europe where volumes grew by 126% to Euros 42.1 billion. With more European governments passing pro-securitization laws, the growth may only accelerate in 2002.

The primary drivers of growth in Europe were a near tripling of volume in the Italian market, strong performance from France, Germany and Portugal, and some particularly large new transactions in the Netherlands, Greece and Austria.

Asian markets are also expected to wake up 2002, as more investment bankers realise arbitrage opportunities and banks use securitisation as a tool to tidy their balance sheets.


Korean securitisation growth exemplary

The growth of securitisation in Asia, minus Japan, has been tardy – everyone agrees. And everyone also agrees that the news emanating from Korea is very heartening. Korea has been at the centrestage of Asian securitisation scenario over 2001. In an article in AsiamoneyNov. 2001, Fiona Haddock reviews the developments in Korean market and remarkable deals in the recent months.

In October 2001, Hanvit Bank deal was brought into the market by ABN Amro bank. This USD 216 million deal was the 10th securitisation deal by the originator, and was the first Korean ABS issue to be backed by documentary credits granted by the bank to its manfacturing clients. Remarkably, this deal also included certain non-performing loans granted by the originator, and unlike the deals in the past, there was no third-party guarantee to back up the deal. The three tranche deal's senior class was rated AA and was sold 20 bps above likeable corporate bonds. The second and third class were rated BB- and B- respectively and were sold at 12% and 13% respectively. The main investors were pension funds, investment trust companies and two life insurance companies.

A little later, Morgan Stanley brought a real-estate NPL deal to the market. This Won 174.9 billion Korean deal was issued through the Resurgence Korea One special purpose vehicle. The underlying assets consisted of a pool of loans and properties purchased from Kamco. Morgan Stanley, it is notable, has bought non-performing loans in Japan for securitising them, and they have been doing it Italy as well. This was the first securitisation of non-performing loans bought on a commercial basis for securitisation. The AAA tranche of this deal was sold at 5.57%. See article by Rob Davies on this deal here.

Investment banks in Korea are upbeat on future prospects as more cross border investors indicate appetite for Korean assets.

Links For more on securitization in Korea, see our country page here. There are a number of recent links on this page. For securitization activity in Asia [updated Jan 2002], see our page here.



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FASB's consolidation norms to exclude securitisation SPVs

As per decisions reached at the meeting on 27th Feb (tentative and unofficial), the new accounting standards on consolidation are intended to exclude qualifying SPVs under securitization accounting. FAS 140 puts certain conditions in order for an SPV to be treated as a qualifying SPV. For details, refer to our page on accounting.

The new consolidation norms are being made in the wake of Enron which used several SPVs to hive off assets and liabilities and thereby made the balance sheet illusory.

Under the new norms under making, a primary beneficiary will consolidate an SPV unless it can establish itself to be "sufficiently independent". The sufficient independence criteria will be satisfied if the SPV has the ability to fund or finance its operations without reliance on the Primary Beneficiary or a related party for guarantees or other forms of support. Besides, at least 10% of the total funding of the SPV, meaning debt and equity, should be form of legal equity which is subordinated to all other funding. Such substantive equity must not be guaranteed or protected and must carry uncapped risks and rewards.

Update on March 1 One of the conditions for an SPV to be a qualifying SPV is business restrictions. SPVs should be completely brain-dead and should not have a power to decide.

CDO conduits, which are managed by conduit managers, often have a power to add to the collateral, replace collateral etc. Many of actively managed vehicles which are run like hedge funds based on certain triggers. Certainly, CDO vehicles will not be QSPEs under FAS 140 and therefore, they might be affected by the new accounting rules. However, the most difficult thing would be to identify the "primary beneficiary" for a typical arbitrage vehicle as the equity ownership of a CDO is likely to be dispersed. So, even if it is hit by the new consolidation norms, it will not be easy to identify the entity with whom it should be consolidated.

Links For more on accounting, see our page here. See related, earlier story below.

Indian Budget proposes securitisation legislation

Indian Finance Minister Yashwant Sinha presented his Budget 2002-3 today before the Parliament, and among other banking sector reforms, hinted at a forthcoming legislation that would enable banks to securitise their loans.

Sinha talked about a banking reform legislation which will allow banks to securitise their loans, as also provide for foreclosure of private property security interests. There was no time specified for introduction of the Bill. However, a related proposal for which he fixed 30th June 2002 as the time limit was the setting up an asset reconstruction company which will buy NPLs from Indian banks and securitise the same. Assuming that the proposed securitisation legislation will also be needed for the NPL securitisation, it may be likely that the proposed bill may be moved in the current sesssion itself.

Besides, though Sinha talked about the foreclosure law and the securitisation law, the impact of both is not limited to banks only.

A draft securitisation law has been around for quite some time -see the text on my site here.

The foreclosure of private security interest law refers to a special legislation whereby enforcement of security claims on movable property will be allowed through recovery officers rather than through Courts – we have commented on this draft law on this site.

Asset reconstruction companies are specialised bodies that buy bad loans from banks with the sole brief of resolving the same. There are similar bodies in Korea (Kamco), Malaysia (Danaharta), China (Huarong) etc.

Links For more on securitisation in India, click here.

Workshops For a 2-day securitisation training on legal, regulatory and acccounting issues in New Delhi, click here.

FASB meets today for consolidation of SPVs

The FASB is meeting today to revise its interpretation on consolidation of SPVs. It is expected that the Board will finalise a draft interpretation on consolidation of SPVs that will cover the scope of the interpretation, the meaning of SPVs and the tests to identify an SPV as different from an operating company, tests for identification of the primary beneficiary (sponsor) of an SPV, laying down the test of sufficient independent economic substance, substantive equity investment at risk and substantive risks and rewards of ownership of an SPV.

The interpretation is expected to increase the present required minimum of 3% independent at-risk investment in the SPV to 10%.

We will post you more news on this issue we get to know developments.

Links For meaning of an SPV in the context of securitization and other deals, as also for brief of the existing accounting rule, click here.

Superior Bank's residual interests fetch far less than their book value

Superior Bank's failure was blamed partly on wrong accounting for residual values in form of servicing and end-period interests in securitised mortgage portfolios – see story on our site here for details. Now inspite of several forced write downs, the servicing rights recognised in books at a value of USD 800 million have actually fetched only USD 471 million, leave aside an earning of USD 46 million received during the intervening servicing period.

Superior Bank, a thrift, went bust last year and the FDIC took over its assets. Out of a securitized subprime mortgage portfolio of USD 3.7 billion, the bank had recognised residual interests of USD 800 million, after a series of regulator-forced write downs. Subprime residual interests are obviously more credit risk sensitive and therefore, their valuation has to be very cautious, but the Superior Bank's track record proves that when it comes to securitization accounting, accountants have long forgottten the age-old rule of conservatism.

Links Securitisation accounting has been a hotly debated issue, particularly after Enron. See discussion, several links and articles on our page here.


If you had champagne bonds before, high time to buy some scotch bonds as well!

Let us say three cheers to the innovative pace at which securitisation markets are growing. The other day, a US inventor wanted to use a mix of the Bowie Bonds method and the cat bonds device to securitising lottery jackpots.

With Marne et Champagne deal, where you buy bonds backed by champagne stocks, it is only but natural that you will like to add scotch, and may, over time, wine, vodka and tequila as well.

Evening Standard UK reported that Glasgow-based Kyndal International, maker of Whyte and Mackay, is preparing to raise GBP 188 million by securitising inventory of scotch maturing in its cellars. The issue might be in the market by mid-April or so.

The funding is being raised to repay a loan of an equal amount taken from WestLB for taking over the distilleries from a US company. Thus, you have leveraged buyout in a different form.

The methodology of the deal is apparently sounding similar to the Marne et Champagne deal. Stocks of scotch at various stages of making will be pledged to a security trustee who would realease the same against sale proceeds. The sale proceeds will be used partly to pay off investors in the bonds and the balance to buy fresh stocks from the company.


Bankruptcy professionals do not want securitization safe harbor

If a poll running on the website of the American Bankruptcy Institute ( is an indication, the Congress may be forced to scrap the safe harbor protection it intends to provide against true sale question in bankruptcy proceedings to securitization transactions.

At the time of visit early today, 48% of the visitors were opposed to any such safe harborm while only 25.6% favored it.

The question for the poll was: Section 912 of the pending legislation creates a safe harbor from bankruptcy for certain borrowing transactions that are recast as sales and structured in a securitized SPV. In your opinion, this provision would:


  • appropriately increase legal certainty in the event of a bankruptcy for legitimate asset securitizations, got 125 or 25.61% clicks.
  • lead to sham and/or secret transactions that inappropriately shield assets from other creditors, got 236 or 48.36% clicks; and
  • don't know/no opinion got 127 clicks.

The poll is still on.

While the size of the polling visitors is not large enough to be reflection of a popular mood, it needs to be realised that the subject is extremely specialised and not too many people could be visiting ABI's site, or voting on the technical issue. Besides, it is also natural that the visitors to the site are mostly bankruptcy professionals, lawyers or legal professionals, whose views are anyway known in the matter.

Links: See below for a related item with background material. See also our page on bankruptcy reform on securitization.

Cast your vote The ABI website is understandably visited mostly by bankruptcy professionals. Let us take the views of the securitization industry – go to the Index page and cast your vote on this very important issue concerning securitization.


World Bank opposes gas revenue securitisation by Philippines

According to news reports in BusinessWorld (Philippines), the World Bank (WB) is opposing government's plan to use earnings of the Malampaya Gas Project which has been talked about for quite some time now. According to the WB, such a plan will relegate the WB to the status of a less preferred creditor while the country has promised a preferred creditor status to the WB.

According to the WB, WB's general loan conditions bar member countries from supporting state borrowings with collateral since the bank itself extends loans without security. The securitization scheme aims to convert the Malampaya Gas Project's revenues into collateral. This will violate the WB's 'negative pledge' clause which is a part of general lending documents, under which no other creditor could be put at a better status by charge over the public property..

The Philippine government was planning to raise something like USD 500 million by securitisation of the gas revenues from the Malampaya project. The project itself is a USD 5 billion investment.


Securitization accounting can be tricky: analysts

There were such voices all the time, but Enronitis has only brought it to fore: the possibility of imaginary gains on sale sitting on the balance sheets of frequent securitizers.

For example, a recent article in Forbes March 4 titled Is Accounting Dead lists 4 stocks to avoid, which includes Washington Mutual: the largest thrift (Savings and Loans Assocation) in the USA. It has a market capitalisation of USD 31 billion. and asses of USD 243 billion. As for many other mortgage players, the company adopts the gain-on-sale approach to accounting its securitization profits, which in a layman sense means somewhat as follows: the company writes mortgages that it would service for up to 30 years, and yet books some of the profit up front when it sells the future income stream by way of securitization. While this sounds perfectly normal and legitimate for any securitizatio professionals, the analysts smell a rat in this. In the case of Washington Mutual, these upfronted gains more than tripled last year to just shy of USD 1 billion, or 22% of pretax earnings before extraordinary items. .

As the yearly gains on sale went up, so also did the value of retained servicing and residual interests, an asset under FAS 140. In this case, the cmmpany has booked a USD 6.2 billion in such assets, which is up more than sixfold in a year and equal to 44% of shareholder equity.

The analyst compares this with a patent company booking its future stream of income on the patent the day it is issued. There is no question of the legimacy of the gain-on-sale practice under the current GAAPs: but it the GAAPs itself which are under fire right now.

"Calling future profits an asset is a tricky business", says the analyst. To reflect the volatility of these pre-supposed earnings, the analyst points to the revaluation of the retained interests which in the current scenario almosts invariably leads to write down there was USD 1.7 billion by the company last year.

Links There is quite a lot of material on this site on gain on sale accounting and accounting rule EITF 99-20 under which firms like Washington Mutual might have had to write down retained interests.See our page on accounting issues.

"Securitisation can obfuscate and cheat"

The biggest casualty of the Enron debacle is that analysts, journalists and social thinkers have pointed their guns at complex financial instruments. On our credit derivatives site, we have carried news of the opprobrium building against derivatives in general and credit derivatives in particular. Securitization is no better – as the following shall reveal.

Martin Hutchinson, Business and Economics Editor of the United Press International wrote last Friday that securitization has a very wholesome purpose, but it can be used to obfuscate and cheat, and in the 1990s, it was too often employed for that purpose. Martin's peace ends with the bottomline: "reforms are urgently needed".

Martin goes into the history of securitization into the 1970s where it was invented as a device for affording tradability to government-guaranteed mortgages, that is, prime mortgage loans. The device was later used for selling down prime credit cards, and further down, subprime mortgage loans, and then subprime credit cards. Evidence is clear that more and more originators have used securitisation to create and sell the assets that they would not like on their balance sheets. "The two principles of sound securitization, of diversification of securitized assets and of first class securitized asset quality, have been violated time and again in the last 10 years, for transactions involving hundreds of billions of dollars. Consequently, the balance sheets of many of the largest banks, and of heavy participants in the securitization market such as GECC, have hidden deposits of financial "toxic waste" — risk exposures that, in a deep recession, are far more concentrated and more intense than might be expected from a casual reading of the balance sheet and knowledge of the institution's overall loan portfolio", says the author.

According to the author, there must be stringent regulatory checks before securitised portfolios are allowed to go off the books. First, the quality of the portfolio, clear of any credit enhancements, must be good to stand on its footing. Two, if the portfolio is undiversified, it must be sold as in bilateral deals with no participation of the seller.

The author is also in favour of restricting off balance sheet treatment and adopting something similar to the UK's linked presentation approach.


European ABS undergo high downgrades but resilient, says S&P

Rating agency Standard and Poor's came out with a rating transition history for European asset-backed issuance covering period from 1987 to 2001. While there have been several downgrades in year 2001, the overall scene is still one of resilience, and the rating agency expects the trend to continue through 2002.

The major highlights of the study are:


  • The market expanded substantially in 2001. At the end of the year, there were 1,299 rated classes and 702 transactions remained outstanding.
  • Though Europe has traditionally been an RMBS-dominated market, for the first time in 2001, CDOs took over RMBS on year-to-year basis. CDOs took 32%of the total classes rated. See more on our page on Europe here.
  • No European ABS transaction rated by S&P has defaulted since the market's inception. Market information is that no other Euoprean ABS has defaulted.
  • There were several downgrades during the previous year and some of them were related to collateral deterioration.The number of ABS classes downgraded in 2001 was the highest since 1992, a period when the majority were caused by the downgrade of U.K. insurers providing credit enhancement to U.K. RMBS issuances.
  • The majority of ABS downgrades affected CBO/CLOs and the majority of upgrades were of RMBS transactions. The CBO downgrades took 72% of the total downgrades, affecting 8 out of 13 classes.

As regards the CDO market in Europe, S&P reports that a number of features are beginning to emerge although the market both in numbers and maturity is too small to give definitive signals:


  • CBO/CLO tranches backed by portfolios containing a small number of assets are likely to exhibit higher ratings volatility than those backed by large, well-diversified assets.
  • Active management of portfolios–-recently introduced in some CBOs–-gives the CBO asset manager the ability to reduce this potential volatility, but it remains to be seen how successful managers will be in achieving this.
  • On the evidence of the small number of downgrades to date, CLOs have remained almost entirely unaffected, although one revolving pool CLO transaction was subject to downward rating action in 2001. This is a direct result of most CLOs being backed by large, well-diversified pools of corporate loans.



As for outlook for 2002, S&P expects that the themes apparent in 2001 will continue in 2002. It is likely that there will be further downgrades of CBO/CLOs as they are affected by negative rating movements in their underlying assets. With the increase in managed transactions, the effectiveness of collateral managers in maintaining the quality of their portfolios may be a developing theme

Links For more on European market, see our page here.


India's first CDO to take mutual fund route

India's leading financial institution ICICI has lined up a Rs 5.02 billion [approx USD 105 million] CDO that will be structured as a mutual fund scheme. To called Indian Corporate Collateralised Debt Obligation Fund , the mutual fund would be regulated just like any other mutual fund by the securities regulator.

According to the proposal, a pool of debentures and loans of ICICI and ICICI Bank originating from 24 accounts would be sold to the mutual fund. The fund, would in turn issue units with a face value of Rs 5 million each to qualified institutional investors.

The securities will have a tenure of two years and will be available in two options the growth and dividend option.

Though structured as a mutual fund, the scheme will have a tranching similar to a usual CDO. In a usual CDO fund, debt securities are collateralised based on a pool of bonds, supported by an equity tranche. The debt is itself classed into multiple tranches with the senior tranches getting a higher rating on the enhancement provided by the subordinated tranches. The very basic economics of a CDO lies in the cost advantage given by a structured funding.

The CDO will be tranched in 3 tranches. The first tranche of Rs 3.74 billion (AAA) would be sold to institutional investors. The mezzanine tranche of Rs 0.59 billion would be sold to the International Finance Corporation. The third tranche of Rs 0.70 billion would retained by ICICI.

The issue is expected to be in the market in March.

Links For more on Indian securitization market, see our country page here. For more on CDOs, see our page here.

Consolidation accounting standard likely soon

The use of special purpose entities (SPEs or SPVs) by financial institutions and others, for hiving off assets or operations into a separate vehicle so designed as not to be consolidated with the parent has been a core issue raised by the Enron debacle. The accounting standard body FASB in the USA is at present in the process of finalising a new accounting standard on consolidation of SPEs. 13th Feb, the FASB met and discussed issues relating to identifying and consolidating SPEs.

As an offshoot of the SPE discussion, the Board is likely to meet again on 20th Feb to discuss measurement and disclosure of guarantees. Financial guarantees are not treated as derivatives under current accounting standards and are not measured and disclosed as assets/liabilities. The guarantee project is a separate project, unrelated to SPE consolidation.

It is likely that the consolidation accounting rule (interpretation) would be ready in draft form by 27th Feb. The rule is likely to provide for consolidation with the "primary beneficiary" of entities that lack sufficient independent economic substance.

SPEs accounting rule is not limited to securitization SPEs – there are SPEs for synthetic lease transactions [see more on Vinod Kothari's leasing website], reinsurance, derivatives, etc.


More on bankruptcy reform on securitizatio true sale

Apropos the raging controversy regarding the proposed Bankruptcy Reform legislation that seeks to give a safe harbour to securitization transactions [see our item below], we give you more materials.

Prof. Steven Schwarcz recently spoke on Enron and the off-balance sheet controversy. A webcast of his lecture is here and text of his talk is here.

Our page on the Bankruptcy Reform Act of 2001 gives details of what is the proposed reform all about. After the collapse of Enron, the legal academia consisting of 35 law professors and deans wrote a letter of Jan 23 to the Senate group opposing the proposed reform which seeks to give a safe harbour to securitization transactions. The text of the letter is here. Yet another letter was sent by some more, on Jan 28 – it is here.

The Bond Market Association, representing the fixed income industry, opposed the letter and supported the intended reform of bankruptcy laws, claiming that such safe harbour would be in the interest of securitization transactions, which are premised on bankruptcy remoteness, and securitization is essential to capital markets. The BMA letter is here.

On Feb 1, the professors gave a rejoinder, replying to the contentions of the BMA. Here is this letter. This letter pleads that sec. 912 of the Bankruptcy Reform Act would insulate any nominal securitization from a substantive judicial review. On Feb 5, yet another letter was shot by another professor, supporting the views of the 35. Here is this letter, contending that sec 912 results into an unlevel field between different modes of capital raising. This letter, among others, also contends that the lower cost advantage in case of securitisation is merely shifting of costs and not reduction.

More European telecom operators eye securitization for flexible funding

The success of Telecom Italia's Euros 700 million securitization last year is not the only reason which makes European telecom operators bullish on securitization: it has to do with the volatile and difficult corporate debt markets across Europe. Rating agency Standard and Poor's recently released a report according to which telecom operators will continue to look at the ABS market for financial flexibility. Investors in telecom ABS appreciate the well-established, long-term operating assets of telcos, such as fixed-line networks of the incumbent (former state-owned) telecoms operators, in particular, which continue to generate very strong, relatively stable, and predictable cashflows.

Among the telcos looking at securitization funding are: France Telecom which is planning to securitise cashflows from its fixed-line business, and has appointed SG and Deutsche Bank as arrangers, and Deutsche Telekom, which is working on a deal with ABN Amro and Dresdner Kleinwort Wasserstein.


Philippine railway build-lease-transfer payments to be securitised

Rob Davies writing for reports [7 Feb] that a Philippine deal to fund the development of a railway track on build-lease-transfer basis will be the first securitisation deal to emerge from Philippines after nearly 5 years. HypoVereinsbank is going to raise the funding of approximately USD 170 million.

The structure of the deal is likely to be as follows: MRTC is a consortium comprising Anglo-Philippine Holdings Corp, Allante Realty and Development, DBH, Fil-Estate and Ramcar which is building a 16.8 kilometer railway that runs over the EDSA highway in Metro Manila. MRTC has a 25 year build-lease-transfer contract with Department of Transportation and Communication (DOTC).

The rental payments under the build-lease-transfer contract are being assigned to HypoVereinsbank which in turn is taking the securities to the capital market. Payments by DOTC are equivalent of a sovereign guarantee, which will act as a strength factor for the deal.

The deal is likely to be broken into a 5-year tranche paying a nominal coupon with a bullet repayment, and two zero coupon tranches, one of which will mature between 2008 and 2014, and the other in 2025, with amortization from 2015.

Philippine ABS law is still in the making but the present deal is not likely to have to wait for the new law.

Links: See related links here.


ABS market prepares for rough ride

An article in Investment Dealers' Digest [4th Feb.] by Adam Tempkin beautifully sums up the present scene of the ABS market in the USA. "As consumer credit continues to deteriorate and unemployment spikes to alarming levels in the midst of recession and the events of September, the 16-year-old asset-backed sector-for the first time as a mature, diverse and large capital market, reaching a record- breaking supply of $350 billion in 2001-has been swiftly kicked out of its comfort zone", says Tempkin.

It is everyone's knowledge that ABS market has been responsible for much of the riskier part of originated funding such as subprime credit cards, manufactured housing loans, high-yield bonds, etc. Where bankers were wary of putting assets on their balance sheets, they chose to do it through the ABS markets. Now when unemployment rates are scaling new heights, delinquencies in these riskier asset classes are unavoidable, as already reflected in the downgrades history in 2001 [see our report here] As a matter of fact, there have been more defaults in 2001 than in 16 years of ABS history together. Of course, Enron has been responsible for many of these, but exactly that name might also lead to some adverse regulatory developments in the current politically charged scenario against off-balance sheet funding. That the legal academy has used Enron as the alibi to plead against securitisation safe harbour is clear from the reports below; adverse accounting and regulatory developments therefore cannot be ruled out.

ABS analysts compare the current scene with what prevailed in 1991 – securitization fared through the recessionery pressues in 1991. But clearly investors are not willing to take that risk. This has led to steep yield differentiations in ABS tranches.

The lull in activity is visible from Jan 2002 issuance: it ended with only USD 19 billion compared to USD 31 billion for the same period last year.

Links For more on US ABS market, see our page here.

Operating revenues securitisation to make its advent in USA

These would be among the very few, if not the first, whole business securitisations to be tried under the US laws. Bondweek of 5th Feb reports that two US companies are preparing to raise a total of USD 550 million via securities backed by projected future cash flows of their respective operating businesses.

The whole business cashflows or operating revenues securitization is a device mostly limited to UK or countries with similar bankruptcy laws. The bankruptcy laws in these countries uses the secured loan structure that allows for appointment of an administrative receiver by the lending SPV in case of certain trigger events. US securitizations, based on true sales, have not used the future flows device, except for some rare instances such as Arby's deal closed last year.

The reference deals are being underwritten by SG Cowen, a subsidiary of Société Générale. One of the two companies is a communications service provider, which will securitize its future flows from voice mail and such other services. The other is a construction company which will securitise its revenues from building toll plazas, power plants and pollution control equipment.

The report says that the underwriting fees here are 10 to 20 times the usual fees.

Links For more stuff on whole business securitizations, please see our page here.

More comments on bankruptcy law reform on securitisations

In response to our news story below, we got the comments from Prof Steven L. Schwarcz, Professor of Law, Duke Law School & Prof. (Adj.) of Business Administration, The Fuqua School of Business; Founding Director, Global Capital Markets Center. Prof Schwarcz is one the World's most respected academics on securitization and structured finance and has several books and articles to his credit. See more on our site here.

Prof. Schwarcz favours the safe harbour proposed in the Bankruptcy Reform Act of 2001. As a matter of fact, Prof Schwarcz has written a letter to the senate judiciary committee saying he is troubled by the January 23 letter by the law professors. "The suggestion that section 912 would encourage the types of off-balance sheet financings that Enron abused is misleading for two reasons. First, section 912 addresses only securitization transactions, which are not the types of off-balance sheet financings that caused the problems in Enron. Second, the problems in Enron do not appear to have been caused by the creation and use of special purpose entities, per se, but rather by the off-balance sheet accounting treatment of such entities and their specially lobbied exemptions from the investment company act. Accounting treatment is governed exclusively by generally accepted accounting principles, promulgated by the Financial Accounting Standards Board and having nothing whatsoever to do with section 912."

While using Enron as the alibi for opposing sec. 912 is clearly wrong, what about the idealogical basis behind section 912 itself? Does he favour the idea of safe harbour which is essentially in a way scuttling the scope for judicial review by mutual agreement between parties to a contract, to the exclusion of the rest of the interested or concerned parties? Prof. Schwarcz says – he supports the safe harbour.

Detailed article on Bankruptcy Reform on securitization by Prof Schwarcz is here [word file].

Links See our page devoted to the Bankruptcy Reform on securitization transctions. This page gives you all that you would need to know about the proposed reform.

Enron issue brings securitisation true sale to the fore: law professors press for bankruptcy law amendments

In our last piece on the previous newsletter, we had carried the apprehension that the Enron debacle will rake up the true sale issue in securitisation transactions, as was done in LTV Steel. In fact it is turning out to be worse, as several law professors have jointly pleaded with the Congress to relook at the true sale involved in securitisations generically.

On Jan 23, several law professors wrote letter to the congress representatives pleading the Congress to reject a proposed amendment in US Bankruptcy law under which an asset transfer in a securitization transaction could not be challenged in bankruptcy proceedings. This amendment is sought to be made by sec. 912 of proposed bankruptcy law amendment.The purpose of the amendment is to give a safe harbour to securitization transactions.

The law professors allege that in number of securitization transactions, lenders are seeking to reclassify themselves as buyers, so as to stay out of the bankruptcy court's jurisdiction. "Not every asset securitization is a disguised loan transaction, and asset securitization is a valuable financial tool. Yet it is essential that the Bankruptcy Code not be amended to open a massive loophole so that parties interested in dealing with certain assets who simply rename a “loan” a “sale” will be exempt from bankruptcy because the property was no longer part of the debtor’s estate", claim the professors.

The professors claim that if working assets of corporations are securitised and hence moved out of the bankruptcy court's regime, any possibility of reorganisation of the corporation will be ruled out, as was the case with LTV Steel. A number of airlines have securitised their receivables, and if the cashflows into their business belongs to securitization investors, "we could face the spectacle of the government giving the airlines billions in tax dollars, only to have substantial assets of the business removed from the company in “off-book” transactions for which no one would be held accountable."

Enron itself has some USD 4.2 billion worth assets which are off the balance sheet. If the proposed regulatory regime were in place, these assets will be out of the purview of the bankruptcy judge.

As could be expected the Bond Market Association has reacted to the professors' letter. In a letter of 31st Jan, the Bond Market Association claims that the amendment would define circumstances in which assets conveyed for purposes of certain securitizations are removed from the transferor's bankruptcy estate. These amendments have been debated in Congress for a number of years. The BMA harps on the need to give predictability to properly structured securitization transactions. It builds upon the benefits of securitization for the global economy as a whole: "The multi-trillion dollar securitization market has played a significant role in the growth of the American economy. Companies that use securitization have been able to significantly reduce their cost of funds, increase liquidity, and obtain greater and more diversified access to the capital markets. The market efficiencies created through securitization are passed on to both consumers and businesses, in the form of lower interest rates for home mortgage loans, automobile, student and home equity loans, credit card debt, and other extensions of credit. Absent an efficient securitization market, the cost of obtaining this credit would likely increase, as would be more costly for lenders to finance their activities."

What do you think? Do you agree with the law professors that the right to question a purported sale as a true sale should be vested in Courts and we should trust them for coming out with a just answer?Write your views.

Links: The full text of the law professors's letter is hereHere is yet another link. On this site, see our true sale page.



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Yet another fund of funds hits market

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

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

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

UK proposes to scrap administrative receivership but saves securitisations

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

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

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

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

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


Securitisation SPVs are a feared lot, thanks to Enron

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

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

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

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

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

Malaysian loan reconstruction company to securitise again

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

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

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

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

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

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

Macquarie floats JV for securitisation in China

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

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

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

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

Securitization is good, says Nomura

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

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

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


Securitization is still good, says Moody's

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

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

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

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

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


American Securitization Forum's leadership elected

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

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

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