[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:

• Sept 11 events put CDOs under strain, more downgrades likely
  Added on Oct. 22, 2001 
  Rating agency Moody's recently put up a report on rating downgrades in the CDO sector which sees more CDO downgrades following the Sept 11 incidents.
• European securitisation continues surge; Italy and Spain in focus
  Added on Oct. 22, 2001 
  Rating agency S&P recently put up data showing substantial increase in securitisation activity in Europe in the 3rd quarter.
• Life insurance securitisation to look up, says Swiss Re analyst
  Added on Oct. 17, 2001 
  Life may not be all that secure, but analysts are already talking optimistic about life securitization – on the lines of catastrophe risk securitisation.
• Cat bonds issuance to shoot up: Fitch
  Added on Oct. 16, 2001 
  Fitch expects that with the rise in reinsurance costs, cat bonds issuance will shoot up substantially.
• Fitch analyses Sept.11 risk on RMBS transactions
  Added on Oct. 16, 2001 
  Rating agency Fitch recently published a report analysing impact of Sept. 11 and its aftermath on securitisation transactions.
• British property company to launch UK's mega CMBS
  Added on Oct. 15, 2001 
  Inspite of the recent events affecting the US CMBS market, UK's largest quoted property company Land Securities is planning UK's largest CMBS deal.
• First securitisation deal in Israel
  Added on Oct. 15, 2001 
  Bank of America recently assisted an agro chemicals producer to securitise accounts receivables.
• Car rentals and air-travel-related ABS to suffer
  Added on Oct. 9, 2001 
  The Post-Sept.11 developments will adversely affect air travel and car rental industry, and consequently, securitizations drawing upon that collateral.
• Indian securitisation scene sees a flurry of activity
  Added on Oct. 9, 2001 
  The Indian securitisation market has recently seen a lot of noise and some deals coming to the market, though regulatory initiatives are still being blamed as the neck of the bottle.
• Philippines sees securitisation as key instrument to re-ignite its economy
  Added on Oct. 9, 2001 
  Two measures to re-ignite the economy were listed: residential housing and securitisation of non-performing bank loans.
• ICICI readying India's first balance sheet CLO
  Added on Oct. 9, 2001 
  Premier term lender ICICI is apparently all set to launch India's first CLO and raise Rs. 4.75 billion (approx. USD million) from the market.
• Accounting charges in 3rd quarter may pare securitisers' profits
  Added on Oct. 5, 2001 
  If Conseco's 3rd quarter charge offs are any indication, the write downs in IOs and CDOs may pare securitisers' earnings.
• Italian securitisation may reach Eur 30 billion this year
  Added on Oct. 5, 2001 
  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.
• Expert cautions against risks in Intellectual property securitisation
  Added on Oct. 5, 2001 
  Straightforward receivables such as loans and mortgages are fine but something like intellectual property receivables may be too complicated, warns Peter Banyard.
• S&P sees potential in fund of funds CDOs
  Added on Oct. 5, 2001 
  Recent success of fund of funds CDOs has prompted rating agency S&P to declare its willingness to rate funds of hedge funds for which it sees vast potential.
• French ruling casts doubt on securitization of future flows
  Added on Oct. 1, 2001 
  A recent ruling by French Supreme Courts casts doubt on transferability of future flows.
• First securitization deal in Bolivia concluded 
  Added on Oct. 1, 2001 
  A deal by Nacional Financiera Bolivianan marks the first rated securitisation deal in Bolivia.
• Leeds football club closes securitisation
  Added on Oct. 1, 2001 
  A leading football club in UK has securitised next 25 years' ticket sales in a landmark transaction.
• CMBS: investors get jittery on trophy property securitisations
  Added on Oct. 1, 2001 
  Investors in the coming months may be more selective in terms of CMBS collateral and may opt for vanilla transactions with a spread out portfolio.

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:

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 independent.co.uk, 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 active, click 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.

[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:

• Ferry revenues securitised in UK using whole business structure
  Added on Dec. 26, 2001 
  JP Morgan recently raised GBP 43 million for Red Funnel Ferries using whole business securitisation structure.
• New foreclosure norms in India to help securitisation
  Added on Dec. 26, 2001 
  National Housing Bank's new foreclosure regulations will help speed up securitisation in India which holds potential for Rs. 200 billion per year.
• Bond Market Association to discuss "notching" 
  Added on Dec. 21, 2001 
  The Bond Market Association announced plans to have industry roundtable on notching as Moody's has hinted at independent research on the issue.
• Corrigendum to news item on SIC 12
  Added on Dec. 20, 2001 
  Please see this important corrigendum to the news item posted yesterday.
• American Securitization Forum to be launched soon
  Added on Dec. 20, 2001 
  According to a report in Asset backed Alert, a trade body of the World's largest securitization market may be launched early next year.
• Largest rated subprime home equity loan securitisation launched
  Added on Dec. 20, 2001 
  Standard and Poor's have rated a USD 7 billion subprime home equity loan securitisation of loans originated by a Bank of America subsidiary.
• Accounting interpretation SIC 12 dropped
  Added on Dec. 19, 2001 
  This accounting interpretation was highly unfriendly for securitisation transactions – the International Accounting Standards Board decided to drop it.
• Securitization of government revenues booms in Italy 
  Added on Dec. 19, 2001 
  With securitization of gaming receivables recently and now real estate, securitization of government revenues booms in Italy like nowhere else.
• Colombia passes securitization law 
  Added on Dec. 6, 2001 
  The Latin American country which holds substantial potential for securitization has recently enacted the required legal framework.
• Philippines to push securitization law 
  Added on Dec. 6, 2001 
  The Philippines government has taken securitization law as one of the items requiring urgent attention.

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.

[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:

• Securitization SPVs to be out of FASB's new consolidation norms
  Added on Feb 28, 2002; updated March 1
  Finally, the ghost of Enron is not going to hit accounting for securitisation: the FASB's decision for now is not to include securitisation SPVs under the new consolidation norms.
• Indian Budget hints at measures to speed up securitisation
  Added on Feb 28, 2002 
  The Indian Finance Minister presented Union Budget for 2002-3 fiscal year, and spoke of securitisation and security foreclosure legislation.
• FASB meeting today for SPE consolidation draft 
  Added on Feb 27, 2002 
  The FAS board meets today to discuss a proposed draft for consolidation of SPEs.
• Superior Bank's residual interests fetch almost half the book value
  Added on Feb 27, 2002 
  As yet another example of the presumptive values put on residual servicing interests in securitization deals, the failed Superior Bank's residual interests sold for about half of the written down book value.
• Add scotch to your securitisation bar
  Added on Feb 27, 2002 
  If you had champagne-backed bonds before, fill your bar with scotch-bonds now!
• Bankruptcy professionals do not want securitization safe harbour
  Added on Feb 25, 2002 
  An on-going poll on the site of US bankruptcy institute does not want safe harbour to securitization transactions in section 912.
• World Bank opposes gas reserves securitisation in Philippines
  Added on Feb 25, 2002 
  World Bank alleges contractual violations if the Philippine government goes ahead with the oilfield revenue securitisation.
• Gain on sale accounting is tricky business: analysts
  Added on Feb 25, 2002 
  Analysts continue to point their guns to securitization accounting: this piece in Forbes says Washington Mutual is inflating profits upfronting imaginary profits on securitization.
• Securitisation can obfuscate and cheat
  Added on Feb 18, 2002 
  As the Enron saga unfolds, complex financial instruments such as securitization are coming under fire.
• European ABS rating transition shows resilience
  Added on Feb 15, 2002 
  Though there were several downgrades, the market on the whole shows resilience, Rating transitions also show some pattern on CDO downgrades.
• India's first CDO to take a mutual fund route
  Added on Feb 14, 2002 
  India's leading financial institution ICICI announced plans for a Rs 5.02 billion CDO, structured through a mutual fund.
• Consolidation accounting standard likely soon
  Added on Feb 14, 2002 
  As a first casualty of the Enron collapse, the US FASB may soon promulgate accounting standard on consolidation of SPEs.
• More on securitization and bankruptcy reform
  Added on Feb 14, 2002 
  We give more references to the raging controversy on the Bankruptcy Reform relating to securitization true sale.
• European telcos see flexible funding option in securitization
  Added on Feb 8, 2002 
  Going for corporate debt in current volatile markets may not be just right; so European telecoms operators are eying securitization markets.
• Philippine railway developer to get securitization funding 
  Added on Feb 7, 2002 
  In a deal to originate from Philippines after nearly 5 years, a railway development project will get funding from securitising build-lease-transfer payments.
• US ABS market prepares for rough ride
  Added on Feb 6, 2002 
  After years of continued surge, the ABS market is keeping fingers crossed for a rough ride.
• Operating revenues securitisation to be tried in USA
  Added on Feb 6, 2002 
  A device mostly limited to UK and allied legislations is making its advent in the USA in two projected deals.
• More on the Bankruptcy Reform on securitisation 
  Added on Feb 5, 2002 
  We bring to you the comments of Prof. Steven Schwarcz, one of the top academics on securitization regarding the Bankruptcy Law reform on securitization.
• Enron brings true sale issue to the fore?
  Added on Feb 1, 2002 
  As was apprehended in our last news piece, the true sale in asset securitisations is very much in forefront thanks to Enron..

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 (abiworld.org) is an indication, the Congress may be forced to scrap the safe harbor protection it intends to provide against true sale question in bankruptcy proceedings to securitization transactions.

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

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

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

The poll is still on.

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

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

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

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

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

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

Links: See related links here.

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 here. Here is yet another link. On this site, see our true sale page.

[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:

• Nomura article says FAS 140 gives misleading picture of real risks
  Added April 24
  Nomura Research's Mark Adelson has joined in criticising securitisation accounting standards in a recent article.
• India's maiden CDO flops
  Added April 24
  India's financial institution ICICI's first Indian CDO is reported to have flopped and is being dropped.
• First toll road securitisation in Japan
  Added April 24
  In what is seen as a template for forthcoming transactions, a road developer securitised a toll road in Japan..
• Indian accounting body mulls guidance note on securitisation
  Added April 24
  The Research Committee of the Institute of Chartered Accountants of India has come out with a draft guidance note on securitisation accounting.
• Malaysian consumer financier to hit market with mega securitization
  Added April 24
  European securitization volumes grew almost 78% in the first quarter of 2002, co
• European securitisation registers major growth
  Added April 24
  European securitization volumes grew almost 78% in the first quarter of 2002, compared to same period last year. But larger part of that is synthetic issuance.
• Securitization biggies have a big chunk off the books
  Added April 12
  The data revealed in a recent S&P article shows that the top 30 securitisers have a sizeable chunk off their books, over 100% for some of them.
• Chinese banks may securitise soon 
  Added April 12
  According to reports, the Chinese government is likely to permit 4 banks to securitise in few weeks hence.
• Current accounting rules do not truly reflect securitization risks, says S&P
  Added April 12
  S&P deliberated at length with risk transfer and substance of securitisation transactions and the move by regulators to put several securitisation transactions back on the balance sheet.
• WSJ article lambastes use of SPEs and securitisation accounting standards
  Added April 10
  An article in Wall Street Journal of the 10th April comes sharply against securitisation, Wall Street lawyers, and securitisation accounting practices.
• 1st quarter downgrades dwarf upgrades:
  CDOs, Argentina, Enron take heavy toll of the ABS market
  Added April 10
  As per a rating migration report from Standard and Poor's, the first quarter 2002 downgrades were 26 times the upgrades during the same period.

Securitisation>News on Securitisation> Asset Classes> SME Loans

Possible rehabilitation measures for European SME securitisation

Shambo Dey

1 March 2014

The main problem with the recovery of the Small and Medium Enterprises securitisation market in Europe has been the burdensome and inconsistent treatment of securitisation for regulatory capital and liquidity purposes.

But rehabilitation may be on the cards for the European securitisation market. The European Commission recently announced it could allow banks to use more securitisations in their liquidity buffers. The Commission's desire to revive Small and Medium Enterprises lending through securitisation seems to be very strong at the moment, unlike in December 2013 when the EBA reviewed liquid assets for the Commission and reported that some RMBS were liquid but put most securitisations in the lowest possible liquidity category.

The Commission is in the process of setting the standards for high quality assets in the LCR ratio and to ensure differentiation of "high" quality securitisation products. If included in the LCR, banks could be encouraged to buy RMBS and ABS, since they will then serve a regulatory, as well as economic purpose, and this could be crucial in reviving the market. To encourage investor involvement in the asset class, it was important to ensure that broader regulatory treatment was practical and consistent. Including a wider range of real-economy assets will also help securitisation to play its role in funding Europe's economic recovery.

Further, the ECB made public its willingness to start reviving plain vanilla securitisation, stating that it is critical that the regulatory treatment of asset-backed securities is based on real data and not the legacy of the US sub-prime disaster. Between mid-2007 and the first quarter of 2013 the default rate on ABS in the EU was only around 1.4%, whereas it was 17.4% in the United States. The ECB, the European Investment Bank and the Commission, have been exploring options that do not change the regulatory environment, but simply channel more funds to securitisation in the hope of boosting bank lending to Small and Medium Enterprises. The Commission published a paper called "Increasing lending to the economy: implementing the EIB capital increase and joint Commission-EIB initiatives" in June 2013, which explored earmarking EU structural funds to invest in ABS, using the European Investment Bank as the conduit for the funding. This would complement existing official support offered by the European Investment Fund, which guarantees securitisation tranches and offers credit enhancement to encourage Small and Medium Enterprise lending.

For more news on Securitisation, click here.