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• European transactions grow in volume and diversity: Italy takes lead
  Added July 29, 2004
  Rating agency Standard and Poor's recently released a report on European structured finance market for first half of 2004.
• Malaysian securitisation to zoom as Govt decides to securitise mortgage loans
  Added July 27, 2004
  The Malaysian government has decided to go ahead with securitisation plans by which it may raise close to USD 5.5 billion.
• Whole business securitisation wasn't 3 cheers to M&C
  Added July 20, 2004
  Whole business securitisation did not prove to be three cheers for world's second largest champagne producer.
• Securitisation growing fast in China 
  Added July 20, 2004
  Though they have not started doing it a lot, but they are certainly talking it a lot – and talking precedes doing. Enter the dragon, in securitisation business.
• Structured finance CDOs score 90% growth in first half 2004
  Added July 10, 2004
  Midyear 2004 data reveal that structured finance CDOs have been quite a rage with investors.
• Abu Dhabi bank uses securitisation structure for power project funding
  Added July 7, 2004
  This could be a variant of a traditional securitisation structure, but the transaction is interesting indeed, and helps the bank to fund an infrastructure project.
• Basle II is here!
  Added July 1, 2004
  After nearly 4 years of drafting, detailing, refining, the new avatar of the rules that would regulate banks all over the World is here. Basle II has been laid out.
• Philippine bank may launch SME loans securitisation
  Added June 26, 2004
  The Development Bank of Philippines has launched an interesting program of securitisation of SME loans through an electronic transfer portal.
• Governments looking at ABS to fill fiscal holes
  Added June 26, 2004
  After the Hong Kong government's recen toll revenues securitisation, it seems there will be spate of issues from governments, wanting to fulfil fiscal dreams through securitisation.
• Taiwan kicks off CMBS as first deal flies
  Added June 11, 2004
  The first commercial real estate securitisation in Taiwan after the passing of the law recently was a success as the issue sold on the very first day.
• SEC proposals for disclosures on ABS/MBS
  Added May 6, 2004
  The SEC has come out with proposals for enhanced/revised disclosures for asset backed and mortgage backed securities.
• Chinese banks gear up to securitisation
  Added May 4, 2004
  As per a report in Financial Times London, several Chinese banks have shown interest in securitisation of both performing and non-performing assets.
• SEC prepares 400 pager on securitisation disclosures
  Added April 30, 2004
  The US SEC is likely to showcase next week a 400 page document containing proposals for enhanced disclosures for ABS/MBS issuers.
• Chinese bad loans to peddled via securitisation route 
  Added April 14, 2004
  Industrial and Commercial Bank of China has readied plans to sell its bad loans via securitisation route.
• FASB concerned about legal infirmities in isolation 
  Added April 12, 2004
  FASB has solicited public opinions as to whether presence of obligor right of set off or other legal infirmities may thwart true sale in securitization and therefore burn holes in isolation.
• Indian Supreme Court upholds securitisation law 
  Added April 8, 2004
  This law has very little to do with securitisation, but it is known as securitisation law, it has been affirmed by the Supreme Court.
• European securitisation market surged during Q1 2004
  Added April 8, 2004
  Market players expect that this year will be much stronger than 2003
• US SEC seeks more disclosure
  Added April 8, 2004
  Possibly alarmed by several defaults in the past few months, SEC might in future require more disclosures for asset backed transactions.
• Bowie bonds grounded, does it spell tough time for similar future flows?
  Added April 7, 2004
  As bonds backed by revenues of the British pop star bite dust, does it sound difficulties for future flows as a whole?
• Indian investors getting more comfortable with securitisation 
  Added April 6, 2004
  Securitisation is bound to climb an upward curve in India – the market is just right, with investors ready to lap it up.
• Japanese securitisation market looking for new assets
  Added April 6, 2004
  The Japanese securitisation market might be experimenting with new assets as investors are ready to lap up innovative deals for yield pickups.
• FASB to rewrite accounting rules on SPEs, isolation
  Added March 27, 2004
  The US accounting standard setter is looking at yet another spell of amendments to accounting conditions for special purpose vehicles and isolation, which would only add to the already-fat body of rules concerning securitisation.
• Singaporean firm to use securitisation for SME funding
  Added March 11, 2004
  A private initiative is trying to organise securitisation funding for Singaporean SMEs.
• E&Y identifies securitisation as a key trend to real estate globalisation
  Added March 11, 2004
  A recent report by Ernst and Young goes into the development of global real estate markets and identifies securitisation as a key trend.
• Islamic securitisation making headway in the Gulf
  Added March 11, 2004
  With Bemo structuring what is claimed as the first Islamic sukuk product, it seems Islamic securitisation is gathering strength in the Gulf region.
• Would SPEs undermine credibility of securitisation?
  Added Feb 10, 2004
  With the Parmalat collapse focussing attention once again on special purpose entities, it is time to stir the debate whether special purpose entities are required at all for securitisation, or do they pose a larger risk to credibility of securitisation?
• Practitioners and experts feel revised IAS 39 is bad news
  Added Feb 5, 2004
  Accounting experts and practitioners are still trying to analyze the impact that the revised IAS 39 might have on securitisation: the initial feedback seems to be more negative than positive.
• Q4 rating activity shows mixed signals: CDO rating volatility reduced
  Added Jan 17, 2004
  Standard and Poor's in its customary analysis of ratings changes in 4th quarter as also 2003 notes a mixed global picture, albeit much better looking at the CDO asset class.
• Basle II on securitisation: BIS announces proposed changes
  Added Jan 17, 2004
  As the BIS continues to inch towards finalising Basle II, it has listed out several changes to the proposals on securitisation, which sound like agreeing to larger industry representation.
• Synthetic CDOs lead growth in Europe
  Added Jan 15, 2004
  A staggering-high percentage of all CDOs in Europe is taking the synthetic route.
• CMBS company launched in the Gulf
  Added Jan 15, 2004
  Several UAE-based banks have joined hands to launch a major CMBS vehicle based in Dubai.
• Asian securitisation prospects looking promising: S&P 
  Added Jan 15, 2004
  In its customary assessment of the prospects of Asian securitisation, Standard and Poor's finds the picture rosy.
• Parmalat probe covers Citibank's ABCP conduit
  Added Jan 15, 2004
  It seems in any major corporate scandal, securitisation is there somewhere, as in the case of the Italian dairy giant Parmalat that recently filed for bankruptcy under suspicion of major funds siphoning.
• New international accounting standard makes changes in de-recognition rules
  Added Jan 5, 2004
  The international accounting standard dealing with de-recognition has been changed; the new rules make significant changes that both clarify as well as amend the existing approach dealing with securitisation transactions.
• Revised FIN46 issued
  Added Dec 27, 2003
  The US accounting interpretation on variable interest entities has been reissued.
• FASB to come out with a revised FIN 46 by year-end 
  Added Dec 18, 2003
  The US accounting interpretation applicable to several special purpose entities is all set to be revised, and the revised rules will be applicable in many cases for reporting periods ending after Dec 15, 2003.

European structured finance grows in volume and diversity: S&P

Giving its report card for the first half of 2004, rating agency Standard and Poor's says European structured finance transactions in first half of 2004 have grown both in volume and diversity. Both the scale and scope of European securitisation market has grown.

From oil to telecom receivables, the range of assets securitized in Europe in the first half of 2004 continued to broaden," said credit analyst Chris Such, a director in the Structured Finance group. "In addition, the mainstays of autos, credit cards, and leasing deals increased their use of the market in 2004 compared with 2003."

S&P expects the pipeline of transactions for the rest of the year to remain strong for most of the major European ABS sectors, such as leases, credit cards, and auto loans. While the established players in Europe continue to securitize more and diverse assets, new players are preparing to enter the market. Greece remains a potential source of future transactions and interest in structured financing is growing in previously untapped regions such as Eastern Europe and Scandinavia.

Issuance so far this year has proved strong. Funded European ABS issuance rose to €24.1 billion in the first half of 2004 from €14.9 billion in the corresponding period of 2003, with Italy accounting for approximately 43% of the total.

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

The Malaysian government to raise RM 25 billion by securitisation

In our recent write up, we wrote that governments World-over were awakening to the potential of securitisation; we also mentioned about Malaysia's plans for securitisation of housing loans. The plans are now firm.

Malaysian press recently cited Second Finance Minister Tan Sri Nor Mohamed Yakcop having said that the Govt is keen to securitise some RM 25 billion (approx USD 5.5 billion) worth staff housing loans. The move was to further develop the Malaysian bond market, in particular asset backed securities (ABS).

Cagamas, the government-promoted housing securitisation body would be used to carry out this securitisation. 

While the move could be a simply liquidity exercise for the govt and a device to cut its budgetary gaps, the government has been trying to find various justifications for the move. Nor Mohamed said the securitisation exercise would contribute to create a yield curve for MBS with longer maturities that will serve as a benchmark for other ABS issues and put in place a price discovery mechanism to enable investors to price more accurately other types of ABS. The move is also to foster a viable and active secondary market for the ABS issue and promote Malaysia as an issuer of Islamic ABS as the government's housing loan portfolio also constitutes Islamic financing debts.

Links For more on Malaysia, see our page here.

Training courses in Malaysia We hold regular training courses in Malaysia. For our forthcoming training course schedule, see here. 

Whole business securitisation wasn't 3 cheers for M&C

In our training sessions, when we used to talk about whole business and inventory securitisation, Marne et Champagne was always discussed as a unique example. The deal that won several prizes in 2000 as a landmark securitisation transaction claimed to have used a device that was discovered in 200 years' old French law of pledges. However, the transaction was almost about to hit the avalanche, leading to a near bankruptcy of Marne et Champagne (M&C), the world's second largest champagne producer, before it was rescued.

The rescue did not come free -Caisse Nationale des Caisses d'Epargne (CNCE), a French mutual savings bank took a 44 per cent stake and provided €410m ($508m) in new financing with which M&C could pay its securitisation noteholders. The holdings of the Mora family that owned M&C has been considerably diluted in the process.

A report in Financial Times [10th July] put it thus: "Its (M&C's) problems stemmed from its inability to repay a ground-breaking four-year asset-backed bond it had issued amid much fanfare in March 2000. In a securitisation designed by Nomura, it had over-borrowed, raising €396m against its stock of 60m bottles of champagne in various stages of production…Nomura spotted that wine in production – like many other esoteric assets – could provide attractive collateral for cheap longer-term finance and encouraged M&C to abandon its long-standing reliance on more costly bank finance. Four years later, however, in March 2004, projections made at the height of the stock market bubble had long been discarded. Investor confidence had also been shaken by overstocking prior to the millennium and an accountancy scandal that bankrupted the Bricout- Delbeck champagne house. Unable to roll over the securitisation facility, the Moras found themselves facing the loss of their company."

Since the entire stock of wine bottles had been pledged to trustees for the noteholders, the family could lose the entire stock. Usually there are also covenants in whole business deals for replacement of the servicer of the business – in this case, the existing management would have been removed.

Whole business securitisation device, a mid-way between loans and securitisation, could, in situations of adversity, prove to be noose round the neck for the operator of the business. In terms of ratings, as it does not often provide a ratings-arbitrage, the motives of a business to go for whole business securitisation should be examined carefully.

M&C is not the only example of whole business securitisation deals going sour – there are more examples in London.

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

Securitisation growing fast in China

China might soon emerge as the new growth centre of Asian securitisation. According press reports in Chinese papers, Wu Xiaoling, vice-governor of the People's Bank of China addressed a forum on MBS in China and said that China is gathering pace in the development of asset securitization to provide new financial and investment tools for domestic institutions and foreign investors. She said that the central bank had submitted a proposal on the MBS pilot programme to the State Council.The programme is being reviewed, she said at a forum on MBS in Beijing.

The official was well aware of the fact that current state of Chinese legislation is grossly incomplete to allow securitisation to happen. There is no law on assignment of receivables.

Law or no law, China is already making headway on securitisation of non-performing loans. China has already started some pilot programmes on asset securitization to help State-owned banks and asset management companies (AMC) dispose of non-performing loans (NPLs), including a pioneering deal by China Huarong AMC to repackage 13.2 billion yuan (US$1.6 billion) worth of NPLs into a trust programme last year. But the scale is very limited and MBS programmes are still not generally allowed.

However, the market potential is huge. Being the most populous country on planet earth, China must tap securitisation potential for housing programs.By the end of 2003, China's outstanding individual housing loans were close to 1.2 trillion yuan (US$144.9 billion).

Links For more on securitisation in China, see our country page here. Also, you might be interested to see the China page on our leasing site.

Structured product CDOs a rage in first half 2004

The first half of 2004 has witnessed approximately 20% increase in issuance of asset backed securities in general, but the structured finance CDO market is where the action lay. The issuance of structured finance CDOs, also sometimes known as CDO squared, was up 90% compared to the corresponding period over the previous year. Structured finance CDOs were only 20% of the total CDO issuance last year, but this year, they take about 50% space.

Structured finance CDOs are CDOs that invest, either in cash or synthetically, in other structured products such as CDOs, ABS, MBS or even REITs. They are also sometimes known as resecuritisation.

Structured finance CDOs, like all CDOs, try to capture the pricing inefficiencies of the structured products market.

A report by Nomura Research looking at the future growth potential of structured finance CDOs says: "While this trend (growing numbers) is likely to continue into the second half, we expect the new CDO sub-category to lose some luster in the latter part of the year. Here are two reasons for our skepticism: (1) Arbitrage opportunities may rapidly disappear as more deals get done, and (2) The inevitable rise in interest rates is likely to cause supply of structured debt to ebb in coming months. On the other hand, synthetic SF CDOs might come into vogue as a means of diversification for CDO investors, as liquidity improves and credit default swaps (CDS) referencing ABS become standardized."

Links For more on structured product CDOs, see our page here.

Abu Dhabi bank uses securitisation structure for power project funding

The National Bank of Abu Dhabi has structured what is called " power bonds" to finance a power project. The structure, as it appears from press reports, is either the same as securitisation, or close to it. The instrument is called "participation notes", which seems to be equivalent of participation certificates in syndicated lending.

The power project in question is the Taweelah A2 Power Project, and the total amount of funding raised is approximately AED 500 million (US $ 133.75 million).

The bond issue achieves maturities of 4, 7 and 8 years (three tranches). It is not clear whether typical structured finance principles of subordination or other forms of credit enhancement have been used for the project.

Press reports also suggest that the bond launch is expected to set the ball rolling for subsequent issues related to the power projects set up under the Abu Dhabi Water & Electricity Authority (ADWEA) Privatization Programme. The Issue shall open a new avenue for the pension funds, insurance companies and other institutional investors to participate in ADWEA power project credits which are otherwise limited to Banks. 

Basle II is here !

Travelling by road from Frankfurt to Interlaken, Switerland, and from there to Munich, on en route, you pass through Basle. You never get to realise that this not-so-busy place is abuzz with activity that would sleepless nights to many banks and banking regulators, and tons of cash to technology companies that would invariably be required to compute capital for banks under the new capital requirements. Finally, after 4 years of drawing, detailing, re-drawing, Basle II is here. End-June 2004, the final rules have been laid.

The new framework is to be implemented by year-end 2006, however, for certain advanced approaches one more year is allowed.

As for securitisation transactions, the rules are substantially similar to those in Consultative paper 3, as refined in Jan 2004.

We include a note explaining the capital provisions in Vinod Kothari's article here. In the said page, we also give link to the full text of the BIS II.

More to come Please do follow this page. We will be putting more industry opinions, articles and links on this most important regulatory development of the year.

Philippines bank may launch unique SME securitisation program

Securitisation of SME loans by synthetic transactions is quite common in Germany, but some Asian nations are creating a cash market for SME loans securitisation. Recently, we had reported a similar initiative in Singapore. In Philippines, where a securitisation legislation was passed recently, the state-owned Development Bank of the Philippines (DBP) is in the process of setting up an electronic marketplace where receivables of small and medium enterprises (SMEs) can be sold, thereby creating a secondary market for SME loans.

There is a significant difference between the Filippino model, and those in other countries. In other countries, banks sell SME loans to a central agency, such as KfW in Germany. Under the Filippino model, SME's would sell their receivables to DBP.

90% of Filippino business is SME-based.

The particular securitisation exercise is called Market for SME Receivable Purchases (M4SME-RP). M4SME-RP is an electronic trading facility where SME receivables could be securitized and sold to retail investors and financial institutions. Arguaby, the cost of lending to SMEs will come down thereby, in addition to channelising capital market flows towards the SME sector. Under the M4SME-RP program, accredited SME's could use the facility to auction out their receivables to large company clients, who, in turn, could securitize them into financial instruments that could be sold to investors.

Thus, M4SME-RP serves as a clearing-house, where commercial documents are electronically passed, authenticated, and digitally signed conversion of these securities. The facility allows the exchange of commercial documents using electronic infrastructure. Under the program, SME's would act as sellers of their receivables, large company clients issuers of receivable-backed securities, with the buyers investor participants such as insurance companies, preneed firms, and financial institutions and their roster of retail investors and trust entities.

Governments fidgetting to fill fiscal holes: securitisation to the fore

The Hong Kong government recently securised toll revenues in a transaction that proved highly successful. Not that the message would have been as loud as to be heard in Germany, but there is a sudden awakening of governments to the power of securitisation, with at least 2 governments currently making noise about using securitisation to fill their fiscal holes – Germany and Malaysia.

Take the case of Germany first. The German government wants to raise close to Euro 5 billion by way of securitising Germany loan assistance to Russia. Later, officials deflected the number of Euro 5 billion and said, they don't know how much would the market be willing to offer for this debt, but it is clear that Germany's Paris Club debt to Russia would be securitised. The Berlin government obviously is fill up a fiscal hole – Germany's federal budget for 2004 originally envisaged a deficit of €29.3bn but last month the government said tax revenue for the year, which makes up 80 per cent of total revenues, would be €10bn lower than expected.

Since Margaret Thatcher's privatisation exercise about 20 years ago, governments World-over have used privatisation as the means to shore up government's finances. Securitisation is, in terms of fiscal impact, similar to privatisation. As a matter of fact, governments such as Lebanon perceive securitisation and privatisation as alternatives.

Press reports are not clear as to whether the German securitisation would be a cash securitisation or a synthetic one. Synthetic ecuritisation may only provide fractional funding.

The other government that might seriously considering securitisation is Malaysia. Malaysian press carried reports about Rating Agency Malaysia chief C Rajandram suggesting that the Malaysian government might raise RM 20 billion (approx USD 5.3 billion) by securitising the government's housing loan receivables. The Malaysian government is also facing the problem of successive budgetary deficits, which it has promised to balance out by 2006.

The question of how governments account for the proceeds of securitisation is tricky one. Eurostat has defined rules about securitisation of future flows by governments – that they should form a part of government's borrowing. IMF has also come out with an article that generally criticises collateralisation of future revenues by governments – see our page on future flows here. However, securitisation of existing revenues such as loans may be different. Privatisation accounting principles may apply here and the flows may be taken as a part of capital budget of governments.

Links For more on securitisation of government revenues, see our page here.

First CMBS deal in Taiwan flies

Taiwan had recently enacted a real estate securitization law, and in retrospect, the law has been quite successful. One of the very first issues of CMBS paper sold out on the very first day.

Reports in Taipei Times of June 11 say that the securitized seven-year bonds backed by rent from an office building in downtown Taipei owned by Tong Yang Chia Hsin International sold out on the very first day of the offer. Industrial Bank of Taiwan acted as the sole arranger.

The building is owned by Tong Yang Chia Hsin International Corp, an affiliate of Chia Hsin Cement Corp, and tenants include International Business Machines Corp, ABN Amro Holding NV and J.P. Morgan Chase & Co. Obviously, the building is in posh office area of the city.

The real estate securitisation law in Taiwan was passed in July 2003.

Links For more on securitization in Taiwan, see our country page here. For more on CMBS, click here.

SEC publishes disclosure document for ABS/MBS

The SEC has published the disclosure document that is to introduce a new regime of disclosures for issuers of mortgage backed securities (MBS) and asset backed securities (ABS). The paper is much shorter than expected – about 200 pages in HTM ormat. There is a 60 day period for comments.

The SEC says: "We are proposing new and amended rules and forms to address comprehensively the registration, disclosure and reporting requirements for asset-backed securities under the Securities Act of 1933 and the Securities Exchange Act of 1934. Principally, we are proposing to: update and clarify the Securities Act registration requirements for asset-backed securities offerings, including expanding the types of asset-backed securities that may conduct delayed primary offerings on Form S-3; consolidate and codify existing interpretive positions that allow modified Exchange Act reporting that is more tailored and relevant to asset-backed securities; provide tailored disclosure guidance and requirements for Securities Act and Exchange Act filings involving asset-backed securities; and streamline and codify existing interpretive positions that permit the use of written communications in a registered offering of asset-backed securities in addition to the statutory registration statement prospectus."

Among the major changes, there is a new definition of "asset backed security", which enhances the scope but still does not seem to include synthetic securitization. The document says: "Under our proposal, the basic definition of “asset-backed security” would be “a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the securityholders; provided that in the case of financial assets that are leases, those assets may convert to cash partially by the cash proceeds from the disposition of the physical property underlying such leases.” There are specific proposals relating to lease-backed ABS and the relevance of residual values thereto.

Master trusts have very commonly been used for several collateral classes. "Our proposal would allow master trust structures to meet the definition of “asset-backed security” without any pre-determined limits".

There are enhanced requirements as to disclosures in prospectus.

The proposal calls for disclosure of static pool data "if material to the transaction to aid in an investor's analysis of current and prior pool performance." The proposal covers the subject extensively under the topic of disclosure about a transaction's sponsor. More specifically, the proposal calls for three years of static pool data. The proposal for static pool data appears to include vintage performance data for revolving asset pools."

Mark Adelson of Nomura Research says: "The proposal includes nearly all of what we hoped to see, but not everything. A little room for improvement remains."

Link For the full text of the SEC document, click here

For detailed articles on the SEC disclosure document, please see our page on US securitization rules.

SEC to present 400 page disclosure document for securitisation

We had recently reported that the SEC might enhance disclosure requirements for MBS/ ABS issuances. And the proposal is shortly forthcoming. On 28th April, the SEC held a meeting wherein the Commissioners unanimously voted for publication of a proposal related to the enhanced disclosures. The publication, expected to run over 400 pages, is expected next week.

Some of the significant changes being proposed are:

• ABS/MBS disclosure would include static pool performance data.
• ABS/MBS issuers would be permitted to distribute loan-level data to investors.
• ABS/MBS disclosure would include expanded information on transaction participants, such as sellers and servicers.
• The proposal would broaden the definition of "asset-backed security"1 to include securities backed by more kinds of assets, including auto leases.
• Shelf registration (Form S-3) would be available to the newly expanded class of "asset-backed securities."
• Shelf registration would be more readily available to foreign ABS/MBS issuers.

In addition, it was indicated that the proposal calls for changes in the periodic reporting framework for ABS/MBS. Quarterly reports would emphasize changes in pool composition. The proposal would codify the annual certification requirements for ABS/MBS under § 302 of the Sarbanes-Oxley Act and would establish principles-based criteria for assessing servicing compliance.

The SEC paper is likely to have a 60 day comment period.

Watch out We would be watching out developments as they take place in this front; so, stay connected.

Chinese bank to securitise bad loans

In a novel deal from China, Industrial & Commercial Bank of China (ICBC) has signed up with Credit Suisse First Boston Corp whereby the latter will act as ICBC's adviser in a securitisation backed by non performing loans and sub performing loans valued at 2.6 billion yuan. Securitisation is yet to take off in China to any material extent.

Securitisation of non performing loans is not uncommon globally, but it is largely based on the legal environment for enforcement of security interests backing up the bad loans. Chinese non performing loans have been of global interest way of private sales, but this transaction makes a remarkable difference being by way of securitisation.

Chinese financial institutions had a total of CNY2.44 trillion in bad loans on their books at the end of 2003, or an average of 17.8% of outstanding lending. At 21.3%, ICBC's end-year nonperforming loan ratio was somewhat higher than average.

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

FASB concerned about isolation: seeks opinions

The US standard setter has set in motion yet another discussion on pre-conditions for off-balance sheet accounting – this time, on the legal certainty of isolation. This relates to the obligor's right of set off, or similar other legal infirmities that might quarrel against the unconditional rights of securitisation investors to transferred assets.

Set off right is essentially a right of netting off. If A owes B an amount, and B owes A an amount, A may net off his obligation aginst his receivable. In context of securitization, a transferor transfers a financial asset representing a claim against an obligor. If the obligor has a corresponding receivable from the transferor, the first receivable is subject to the potential netting off against teh second one. If that is the case, it would be wrong to treat the transfer of the first receivable as a sale. FASB has sought opinions on this issue. A FASB release of 9th April says that "the Board has become aware of an issue related to the isolation of transferred assets that apparently was not explicitly considered when Statement 140 was issued—the ommon-law right of debtors and creditors to set off (net) amounts due to one another if one of the parties defaults, becomes insolvent, or enters into bankruptcy or receivership." If the obligor's right of set off exists, the buyer of receivables buys the same subject to the potential netting off of the claims of the obligor against the originator.

One of the commonest examples of a right of set off is deposit a borrower from a bank holds in the lending bank. The borrower may require the bank to adjust the deposit against the loan.

The scope of the FASB request is not limited to set off – it goes into all the factors that might undermine a sale: "there may be other unidentified legal factors or conditions that transferors and their auditors should consider in reaching conclusions about isolation of transferred assets." The last date for the comments is 30th May.

Links For more on legal issues relating to securitization, click here. For more on accounting issues, click here.

US SEC seeks more disclosures for asset backed securities

We reported about Bowie bonds and similar future flows yesterday. That surely could not have triggered the following, but the nexus is interesting: an SEC official has stated that the SEC would like more disclosures in case of asset-backed securities (ABS). ABS firms would have to disclose more about their past performance under rule changes being considered by regulators. Paula Dubberly, associate director, said As part of an effort to formalize regulations that have grown up with the $1.7-trillion asset-backed market, the SEC staff plans to recommend requiring more disclosure so investors know more about the risks of these unconventional securities. 

The SEC staff plans to recommend disclosure of past performance by both asset-backed securities sponsors and servicers. Sponsors originate or buy assets and then sell them to trusts. Servicers collect the payments from, for example, car buyers and homeowners. 

Recently, the ABS landscape has been marred by frauds, lax servicers, and asset collateral collapse. Investors have also been increasingly concerned that the collateral being pumped into the ABS market is subprime.

European securitisation markets surge

During the first quarter of 2003, Eurpean ABS market surged by some 26 per cent, on the back of a 38 per cent increase last year. A news item in Financial Times, quoting Deutsche Bank, says that this year, securitisation volumes will be bigger than regular bond issuance.

Much of the surge in the first quarter can be attributed to some mega issues during March. Abbey, the UK bank, sold £4bn of mortgage-backed securities. Before this, Volkswagen, the German motor vehicle manufacturer, issued nearly €1bn of securities, backed by vehicle leases.

The European securitisation market expanded by 26 per cent to €54bn in the first quarter of the year, compared with the same period last year, according to preliminary figures from the Forum. Residential mortgage backed-securities account for the majority of the market, with €34bn, or 63 per cent, of the first-quarter issuance having been backed by property mortgages.

The growth extended the trend from 2003, a year in which overall securitisation issuance reached a record level of €217.2bn.

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

Supreme Court of India upholds securitisation law

In a litigation challenging the legal validity of a recent legislation challenging the Constitutional validity of a law called Securitisation Act (briefly, the actual name is much longer), the Supreme Court in an order passed today, upheld the validity of the law.

Lest there should be mistakes, this law does not hold much about securitisation, and securitisation transactions were not the subject matter of the legal debate. The legal debate centered provisions relating to enforcement of security interests (similar to Article 9 of UCC, USA or the PPSA legislation in Canada and New Zealand). These provisions allowed a creditor being a bank to seize collateral in case of a defaulted loan without going to a court. These provisions have been upheld by the Supreme Court.

The law is known as securitisation law because the 3-part legislation also has a part dealing with securitisation transactions. That part, in market parlace, has been largely ineffective because most transactions in the marketplace circumvent the regulatory tone of those provisions.

Links For more on the enforcement of security interest provisions of this law, see our page here. For securitisation in India, see here. 

Bowie bonds grounded, does it spell tough time for similar future flows?

Bowie bonds, at one time regarded as a brilliant new idea to hit Wall Street, have been grounded. The rating agencies recently reduced them to near-junk grade. Is it just a limited problem, or does it signal tough time for bonds backed by similar cashflows out of assets such as lotteries, music, beauty parlours, food chains, etc?

Bowie bonds, backed by royalty income of rock star David Bowie made headlines in 1997 when USD 55 million was raised against securitisation of future cashflows. David Pullman claimed authorship of the idea, though that claim itself was later dismissed in legal proceedings. Recently, Moody's downgraded the bonds to just one step above junk, citing reasons such as depleting sales and the situation in the music royalty industry.

The trouble with future flows of this nature is that it is almost like equity investment by the investors as they take all the operational risks of an operating business, but it does not have any of the upsides of equity investment. Bond investors get into future flows investments lured by higher returns, but the experience has been quite mixed. While in straight forward asset backed bonds, one is backed by identified pool of assets, future flows are backed by income which is to arise in future, with no certainty today.

Links For more on securitisation of cashflows backed by intellectual property, with several new articles on Intellectual property securitization, see our page here. For more on future flows, see here.

Market ripe for upward securitisation growth curve in India

Indian investment banks have been talking about it for years now, but securitisation was still the mental sport of a very limited coterie of investors, primarily the insurance companies and some mutual funds. But now it seems the commercial banks with their huge liquidity position are ready to accept securitisation. Thus, 2004 may see both increase in volume as also, and more significantly, a growing investor class.

Recently, Citibank wrapped an SME working capital securitisation. The idea of an SME loan securitisation is not new: several countries have done it already. But working capital, which does not have identified cash inflows and works like a revolving credit, is structurally a new thought.

The best part is that not only are institutional investors flocking into the securitisation market, even larger corporate treasurers are finding it interesting. In a recent mortgage backed securitisation issue, for example, a corporate making cables is said to have made investment.

There are several tax infirmities yet to be cleared to enable securitisation to reach a safe harbour – the government made an enactment which is more like a statement of good intentions rather than of any legilative use to securitisation transactions.

Links For more on Indian securitisation market, including recent article by Vinod Kothari, see our page on India here.

Japanese securitisation market looking for new asset classes

The Japanese securitisation market is prepared to look out for new asset classes this year, as interest rates seem to be rising, and hungry for yield-pickups, investors might be prepared to lap up new transactions.

During 2003, the biggest asset backed class in Japan was CDO/ CLOs. According to a recent Moody's report on the state of the Japanese securitisation market, CDOs took Y4,400bn ($42bn) of the Y8,300bn total market last year. Of notable transactions in this segment, Mizuho came out with a mega CLO transaction involving 150 obligors. Most of the CLOs were done more for risk management than for liquidity, and therefore, as problem of bad loans becomes a bit easier, the need for risk management through CLOs might be bit less intensive this year.

Leaving the CDO segment, there were deals of about Y 2200 bn in the asset-backed market, involving lease payments, auto loans and consumer loans.

However, with interest rates of nearly zero, investors are looking for riskier assets. The investor universe is fast expanding: the investors include insurers, mega banks and even shinkin, rural credit associations at home, and hedge funds and investment banks from overseas. There have already been pilot deals in non-traditional classes, involving future flows. For example, annual membership fees of English-language schools and even beauty parlours have been securitised. Bowie Bonds might have been grounded elsewhere in the World, but Japanese investors are still wanting to take a loot at these.

Links For more on the Japanese market, see here. 

FASB to rewrite FAS 140 on qualifying SPEs

Accounting for securitisation seems to have become a familiar mental sport at the FASB, and it seems it would years before the complexities, not all of which are warrantd, and certainly not wanted, of this accounting standard would be resolved. End-March 2004, the FASB staff has undertaken yet another project to rewrite accounting rules on qualifying SPEs and the condition for isolation of assets, required for off balance sheet treatment to securitization transactions.

A FSAB press release says that the objective of this project is to amend FAS 140, to (1) specify the conditions under which a qualifying special-purpose entity (SPE) is permitted to issue beneficial interests with maturities that are shorter than the maturities of the assets held by the qualifying SPE and roll over those beneficial interests at maturity; (2) clarify or amend other requirements of Statement 140 related to commitments by transferors, their affiliates, and their agents to provide additional assets to fulfill obligations to the beneficial interest holders; and (3) address other issues related to transfers of financial assets that arose during deliberations.

The FASB has reached the following decisions related to legal isolation and accounting for undivided interests:

1. Legal isolation requirements would be applied only to those affiliates included in the consolidated financial statements in which a transferor is reporting the results of a transfer. In some circumstances, the accounting for a transfer in the financial statements of a parent company would be different from the accounting in the separate financial statements of a subsidiary (September 24, 2003 Board meeting).

2. Paragraphs 80–84 and various related paragraphs of Statement 140 would be amended to require that an entity that issues either beneficial interests or undivided interests be a qualifying SPE in order to satisfy the criteria in paragraph 9(b) of that Statement. The Board noted that one implication of its decision would be that a qualifying SPE would be required for any transfer of a portion of a financial asset, not just for multiple-step transactions (October 1, 2003 Board meeting).

The Board has reached the following decision related to transferor support commitments and derivatives:

1. If transferors of financial assets provide support commitments or derivatives either directly to beneficial interest holders or in connection with the beneficial interests, those obligations should be considered in the same manner as if they were provided directly to the qualifying SPE for purposes of evaluating legal isolation. That requirement would include support commitments entered into with third parties who provide “back-to-back” guarantees to beneficial interest holders (October 1, 2003 Board meeting).

Links For more on accounting for securitisation, see our page here. 

Singaporean firm to promote securitisation for SME funding

Action Crucible for Financing, a private initiative that focuses on SME development, is trying to use the securitisation template for promoting SME funding in Singapore. Singapore is known for its multinationals and global investment banks, but not for its approach to development of SMEs.

Singapore's approximately 100,000 SMEs face difficulties getting loans from banks which, although flush with cash, can be conservative in their lending to untested companies. The government is also keen to promote entrepreneurship to reinvigorate an economy which is struggling to get back onto its feet.

Currently, the government typically supports smaller firms through the Local Enterprise Financing Scheme, under which the government guarantees 80% of qualifying bank loans. The exact form which the Action intends to use is not clear for now.

Vinod Kothari comments: One of the best examples of use of securitisation for SME funding is the German KfW template. Using either synthetic or cash securitisation structures, KfW does not provide refinance and the developmental agencies in most countries do – KfW merely facilitates the ultimate securitisation of pools of qualifying SME loans.

Links For more on SME funding by way of securitisation, see our page here.

E&Y report identifies securitisation as key real estate trend

A recent report by accounting and consulting major Ernst and Young went into the developments in the global real estate market. Titled Real Estate: The Global Local Economy, E&Y states that in an otherwise globalised economy, real estate is still a local market as there are several factors still inhibiting the globalisation of real estate.

There are, however, several factors contributing to the globalisation of real estate, and securitisation is one. Securitisation and REITs are permitting commoditisation of the ownership of real estate. "One of the key trends prompting increased global investment is the steady march of securitization and transparency in real estate ownership. In fact, REIT legislation — often along the lines of the very successful US format — is now common in both developed and developing nations around the world. In the last three years, France, Korea, Japan, Singapore and Taiwan have all adopted legislation allowing creation of REIT-style investment structures. In addition, the European Union has proposed creation of a EuroREIT and the UK government is also mulling REIT legislation. Not only is this legislation spurring expansion of commercial real estate markets in these countries, it's also promoting more offshore investment by US REITs. This trend is leading to the creation of important joint ventures with local owners and investors. Simon Property Group has entered into a joint venture with Italy's Rinascente Group to develop malls in Italy. Maguire Office Trust, an Australian-listed property trust, and Brandywine Realty Trust, a US REIT, have agreed to invest in office properties on the US East Coast", says the report.

The securitisation of non performing real estate loans is also highlighted as a significant development.

Links For more on securitisation of commercial real estate, see our page here.

Islamic securitisation making headway in the Gulf

Several recent events suggest that Islamic finance in general is gathering strength, and that Islamic securitisation seems like a reality.

On March 10, Beirut (Lebanon)-based BSEC Investment Bank, and the Bahrain based Shamil Bank announced today the groundbreaking launch of a SR 102 Million Shariah compliant investment Sukuk. Caravan I Limited is the region's first inventory fleet securitisation transaction. The three-year maturity Shariah compliant transaction offers investors a right of recourse to the underlying assets. The SR 102 Million Sukuk is backed by a pool of vehicles and vehicle lease agreements purchased from Hanco Rent A Car, a leading Saudi Arabian car leasing and rental company. BSEC acted as the deal arranger and structurer, while Shamil Bank was the underwriter. 

Bemo Securitisation is one the few securitisation-focused entities in the MENA region. Bemo's managing director Iyad Boustany is also the author of a treatise on securitisation written for this market, in French.

Apart from securitisation, other Islamic finance products are also making a strong headway. In a recent Islamic finance meet in Dubai, bankers and investment bankers from all over the World stressed the relevance of Islamic finance, not merely as a theological concept but as one that truly goes near to the concept of asset-based financing known to the entire world.

Islamic finance is based on contracts which do not have interest, and is usually based on sharing of risks and/or rewards.

Links On this site, we have interesting articles on Islamic finance. See our page here.

Are SPEs a risk to credibility of securitisation?
Vinod Kothari

As the Parmalat scandal unfolds, special purpose entities are under a scanner once again. There are lots of similarities between Enron and Parmalat, except for the fact that unlike Enron where US standards did not require consolidation of the special purpose entities, lots of Parmalat SPEs formed a part of the group balance sheet under IAS 27. However, the issues are not limited to consolidation – at stake is a larger issue as to whether special purpose vehicles are inevitable in securitisation, or their existence does damage to the credibility of securitisation.

Writing at CFO.com, Tony McAuley writes: "the fragile situation shows how abuse of SPEs has undermined public confidence, putting development of securitisation markets, one of the great capital markets phenomena of the last two decades, at risk."

Special purpose vehicles imply separation of legal entities, which is presumably required for two purposes: bankruptcy remoteness and off-balance sheet accounting. Bankruptcy remoteness is a concept of law and there is no reason this has to necessarily and permanently depend on legal isolation. Off balance sheet accounting is a means to an end – which is quite often capital relief or higher gearing. If the latter objectives can be achieved by on-balance sheet means, there is no need to devise structures that result into off balance sheet funding. Therefore, SPVs are not quint-essence of securitisation.

On the contrary, SPVs do a lot of damage. As assets and underwritings shift from the balance sheet of the parent bank, the bank's manuals, procedures and discipline becomes less relevant. Much as a bank might see the SPV as a mere extension of the bank's books, the very change of entity does result into relaxed credit. It is a fact that most bankers would agree that bank-sponsored ABCP conduits end up with lots of assets that would have never found their way on the bank's balance sheet. It is not a surprise if it is proved that Parmalat's bankers knew of bogus receivables being sold to the ABCP conduits. It is not that non-existing assets are not funded by banks – but internal controls developed over centuries save the bank – which are unknowingly or deliberately relaxed in case of the conduits. Off balance sheet is off the radar, and therefore, off the discipline, and that makes a tremendous difference. Sleazy assets are funded by securitisation vehicles – doing a double damange – promoting undesirable funding or over-capitalising larger clients, and posing a long-term challenge to the very credibility of securitisation.

So, it is time to think hard whether these phantom entities are required at all?

Links There are several SPV-related materials and links on our page here. For more on accounting for securitisation, click here.

IAS 39 rouses mixed reactions: more bad than good

While accounting experts and securitisation practitioners across the world are still trying to understand what the revised IAS 39 means to them, the initial feedback has more tears than cheers.

The revised IAS 39 was issued recently by the International Accounting Standards Board, and replaces the existing IAS39. The revised standard contains accounting rules for financial instruments in general, including derivatives, securitisation, etc. The revised standard has changed the basic approach to one in which a transfer is reviewed under various steps in a hierarchy, including transfer of risk and rewards, surrender of control and continuing involment. The last approach arises where there is no surrender of control, and the latter arises where there is no complete transfer of risk and rewards. Accounting professionals carry a feeling that the last condition of continuing involvement, coupled with consolidation rules of IAS 27/ SIC 12 will block off balance sheet accounting for several real life transactions.

Martin Rosenblatt, international accounting expert, along with Jim Mountain, published a recent article detailing the revised derecognition requirement. Martin feels that revolving transactions would particularly seem to fail the required derecognition tests: "Provision (c) above will likely have the effect of causing all revolving structures to fail to qualify for derecognition. Although it has been argued that revolving structures effectively represent the investors' purchasing new assets with the proceeds of those that have been collected, the new assets would not be investments in cash or cash equivalents. Also, transactions in which the transferor receives the float from temporary investments will not qualify for derecognition."

Accounting firm Price Waterhouse Coopers also recently released a publication titled Financial Instruments under IFRS. In case of securitisation transactions, the publication claims that "The new derecognition model will probably have a significant impact on securitisation structures. A classic receivables securitisation programme, where a company sells its receivables
to a multi-seller vehicle on a revolving basis, is likely to encounter .. difficulties"

Links For more on the revised IAS 39 including Vinod Kothari's quick notes, Martin Rosenblatt's article and link to the PWC publication, see our page on accounting issues.

Rating volatility in Q4 much lesser

Rating agency Standard and Poor's recently produced its customary tally of ratings activity during the 4th quarter of 2003, as also for 2003 as a whole. Though the picture on a holistic basis is mixed, Q4 was much more comfortable than the rest of 2003.

CDOs: The major source of ratings volatility is the CDO sector. In Q4 of 2003, the US CDO market had a total of 103 downgrades, which is considerably less than the nearly-250 downgrades in the previous quarters. This reflects the reduced extent of ratings downgrades of the corporates whose obligations these CDOs buy. Across the Atlantic, European CDOs registered both upgrades and downgrades, the former largely due to transaction seasoning. In the downgrades, a major contributor was the bankruptcy of Parmalat, which was a reference entity for several CDOs. The S&P report says that Parmalat was a reference entity in some 80 CDO transactions (note, not classes) which reiterates the high degree of correlation existing in the CDO market. Parmalat affect not merely European CDOs but those in the Pacific – 12 CLNs from Australia and New Zealand got lowered due to Parmalat.

Defaults: From the viewpoint of defaults, 2003 was particularly a bad year. This year alone accounted for nearly 33% of all defaults to date in US ABS/CDO transactions. There was a total of 48 defaults across 40 transactions from 7 issuers in the US market. Most defaults (37) during 2003 emanated from the manufactured housing segment, followed by synthetic CDOs (4) and franchise loans (4).

CMBS and RMBS The US CMBS market registered a record number of upgrades in the 4th quarter. The RMBS continued to have a great year with 319 performance-related upgrades. "The outstanding rating performance of RMBS securities during 2003 was largely due to a record level of prepayments that resulted from unprecedented low mortgage rates in the U.S. In addition, while there is concern about many areas of the economy, the housing market has been, and continues to be, very strong", notes the rating agency. Upgrades were noted in the European market as well.

Basle II on securitisation: BIS makes changes in proposals

As the Bank for International Settlements continues to inch its way toward finalising Basle II, set to replace the way in which and extent to which banks around the world maintain capital, there is already a quick idea of the far reaching changes related to securitisation. This is possibly the n-th time the proposals relating to securitisation have been amended. The initial draft of Basle II that came in mid 1999 had only a few paragraphs on securitisation, culminating in the latest consultative paper CP 3 which contained pages and pages dealing with securitisation. Implicitly indicating that the global banking supevisor does not have a handy tool to regulate the complex and highly innovative securitisation market, the latest set of proposals on securitisation indicate a high degree of acceptance of the demands made by securitisation industry.

In the consultative paper CP3, the computation of capital and capital relief in case of securitisation transactions where the underlyng assets were risk weighted under the internal ratings-based (IRB) approach was unduly complicated particularly in case of unrated exposures. There was a complex and recursive formula for working out the capital charge in such cases called supervisory formula (SF). The present changes simply the supervisory formula, and introduce a new approach called Internal assessment approach (IAA) in case of credit enhancements and liquidity support to ABCP conduits.

In addition, the changes also seek to introduce consistency between capital treatment applicable to an originating bank and that for the investing bank.

The proposals fortify the principle found in CP3 that the capital relief in case of securitisation will be applicable only where there is a risk mitigation by the originating bank.

The BIS has promised to "shortly" come out with the details of the changes.

Links For Vinod Kothari's article on the proposed changes, see here.

For full text of the BIS press release, click here.

Reading material A methodical discussion of the Basle II and other regulatory standards (upto CP3) is available in Vinod Kothari's book on securitisation. See here for details and orders.

Europe CDO volumes go synthetic

The European synthetic market has registered strong growth in 2003, and very largely, due to synthetic structures.

About 93% of European CDOs in 2003 were synthetic – up from 85% in 2002. Of that too, most synthetic CDOs were arbitrage transactions – with balance sheet transactions taking merely 5% of all.

Another prominent fact that underscores European arbitrage CDO growth is the prevalence of single-tranche synthetic CDOs – approximately 64% of the arbitrage issuance used single-tranche methodology. These trends, according to a recent report by Standard and Poor's, are likely to continue.

CDOs are essentially leveraged investment vehicles that invest in specific debt assets, either bonds or loans or similar obligations, with the objective of making arbitrage returns on the equity investment in the vehicle. Synthetic CDOs acquire these assets synthetically – that is, by selling protection under credit derivatives trades [see more on our site http://credit-deriv.com]. When a CDO acquires the assets off the balance sheet of a specific seller, it is a balance sheet transaction; where the assets are pooled from the market, it is an arbitrage deal. Single tranche synthetic CDOs are a relatively new product where the CDO issues only a specific tranche of investment product (credit linked notes) transferring risk of a particular level, and manages the rest of the risk using its own risk-management policy.

Another notably developing segment is the CDO of ABS, also sometimes called CDO squares. There were several issuances of CDO squares in both the cash and the synthetic segment.

A major concern in the CDO investments is the rating volatility – which is understandably for a highly leveraged product. The rating performance of European synthetic CDO transactions improved in 2003, with increasing numbers of upgrades toward the end of the year. To the end of November, 84 classes of synthetic CDOs were downgraded, representing 18% of the classes outstanding at the beginning of the year. This compares favorably with 28% for 2002. Moreover, 4% of classes received upgrades, compared with only 1% in the previous year. Overall, this brought the downgrade-to-upgrade ratio to 5.6x for the year to date, an improvement on 38.7x for 2002. It is noteworthy that this ratio improved to 2.5x for the second half of the year from 18.0x for the first half.

Links For more on synthetic CDOs, see our site here. For more on CDOs, see our page here

Workshops: Vinod Kothari offers standard as well as customised training courses, public and private, on CDOs. See our calendar of courses and contact us for any privately-tailored course.

CMBS company launched in the Gulf

A joint venture between three leading UAE banks has created a consortium for commercial real estate securitisation and mortgage lending. Dubai Islamic Bank, Istithmar and Island Capital Group have launched a major initiative which will draw in $1 billion in the next six months to boost mortgage lending and the local property sector.

The trio have linked up to set up Emirates National Securitisation and Finance Corporation (ENSFC). ENSFC will issue commercial mortgage backed securities (CMBS) that are listed and traded on regional and international markets, including the US and Europe.

Currently, mortgage securitisation, either residential or commercial, is conspicuous by its absence in the Gulf. There have been stray attempts at Islamic securitisation, but nothing to be of a globally noticeable scale. This itself should be surprising, given the fact that enormous amounts are invested by high net worth individuals based in the Gulf into US CDOs and private equity funds.

Asian securitisation market for 2004 look impressive: S&P

Rating agency Standard and Poor's (S&P) in its customary outlook of securitisation for 2004 evinced optimism. "Asia's debt markets will continue to be transformed in 2004 by securitization using innovative products for raising capital, alternative risk transfer, and the creation of customized investment opportunities. Moreover, Asia-Pacific, excluding Japan, has reached the stage in which the markets are finally primed to fully exploit the benefits of structured financings, especially synthetic structures and CDOs," says Diane Lam.

Talking specifically of the pockets of growth, S&P sees a revival of activity in Hong Kong, once viewed as the mecca of Asian securitisation, where the Lion Synthetic deal (synthetic securitisation of bus and taxi receivables) and several RMBS deals from HKMC were noted in 2003. The REIT activity, promoted by the recent law, might spur CMBS deals in the country.

The focus of attention in Asia was, however, Taiwan, where recent legislation resulted into clear spurt of activity all around – CLOs, RMBS, credit cards, etc. "Taiwan's securitization is quickly scaling the learning curve, and numerous new asset types are being considered", says S&P.

Singapore continues to be the hub of Asian securitisation, particularly in the synthetic sphere. Several CDO transactions hit the market in 2003 -, with OCBC Asset Management, UOB Asset Management, DBS Asset Management, ST Asset Management, and HVB Asset Management sponsoring transactions.

Philippines with some introductory transactions and the Malaysian market also look promising. 

A sad spot in this picture is the Korean credit card market where credit problems have already stranded some transactions.

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

Parmalat probe covers Citibank's ABCP conduit

If there is a fallen corporate or financial debacle, there might be a securitisation angle somewhere or the other. Enron exposed the special purpose vehicles, and Parmalat, it seems, is going to do a damage to asset backed commercial paper (ABCP) conduits. The Parmalat probe is examining whether there were sham sales of receivables by Parmlat affiliates to Eureka Securitization Plc, an ABCP conduit being run by Citibank.

Parmalat is the Italian dairy company that recently filed for bankruptcy – this case is popularly dubbed as the Enron of Europe. There are apprehensions that several billions of Euros are missing from Parmalat assets. At least 10 arrests have been made by Parmalat investigators so far.

Asset backed commercial paper conduits typically buy trade receivables of corporates. They are backed, and often liquidity-supported by banks, but most ABCP conduits are off the balance sheet (leave aside FIN 46) of the sponsoring bank. Eureka Securitization Plc and Eureka Securitisation Ltd are European ABCP conduits sponsored by Citibank.

The ABCP angle in Parmalat debacle is as under: there are apprehensions that Parmalat affiliates raised inflated invoices to create dummy trade receivables which were then sold to Eureka. This funding was used by the affiliates to create paper profits in Parmalat. There are reports of some 30 such affiliates having sold receivables to Eureka.

The Parmalat probe, in a brief period after Enron, exposes the susceptibility of securitisation conduits to sham deals. Truly, Citibank or Eureka would most likely be victims rather than perpetrators or accomplices in this fraud but the issue that would remain is one of vulnerability. Since ABCP conduits or securitisation vehicles are not banks and are not covered by mainstream banking discipline, can they be used by unscrupulous clients, possibly with the help of optmistic or aggressive bank officers, to acquire debts that the bank wouldn't have bought itself.

In the meantime, the BIS is currently meeting in Basle, Switzerland to complete the process of finalising BIS-II, which is likely to be affected by the shadow of Parmalat.

International accounting standard on de-recognition changed

There is an all-new accounting standard now that deals with accounting for financial instruments, and hence, rules relating to acconting for securitisation have also been changed.

Securitisation accounting in many countries earlier followed an international accounting standard called IAS 39, issued by International Accounting Standards Board. Proposals were issued several months back in form an of exposure draft for re-writing of IAS 39 (and a related accounting standard on presentation, IAS 32). The revised IAS 39 was issued in late December. The revised standard is applicable for accounting periods beginning on or after 1st Jan 2005.

IAS 39 deals with both derivatives accounting and de-recognition. De-recognition is applied for most securitisation transactions, as these transactions relate to sale of financial assets. De-recognition principles determine whether and when financial assets should be removed from books on their sale.

The rules relating to securitisation partly introduce a new approach, and partly amplify the existing guidance on fractional transfers, computation of gains on sale, etc. A significant change is the synthesis of the approach based on transfer of risks and rewards, characteristic of the UK standard FRS 5, and that based on surrender of control, found in the US standard FAS 140. The revised IAS 39 applies both these approaches, in a step function.

A quick note by Vinod Kothari on the provisions relating to securitisation is here. We will come out with more material in due course.

Links For more on accounting for securitisation, click here.

Revised FIN 46 issued

The US standard setters have re-issued accounting interpretation FIN 46 applicable to variable interest entities. The full text of the revised interpretation is available on FASB website – click here

The accounting standard on variable interest entities has been as obscure as variable interest entities themselves. Shortly after its promulgation, various doubts began to appear leading to several clarifications in form of staff positions. Lots of issues were debated and discussed, and finally the Board decided to reissue the interpretation.

The Board explains the revised statement as intended to provide more guidance required on the subject. The revised statement runs over 92 pages including 6 appendices.

Links For more on FIN 46, see our page here.

FIN 46 in for a rewrite

Neither the standard-setters nor the standard-followers have had any sleep at all on accounting for special purpose entities. With several FSPs relating to several issues on FIN 46, we are going to have a new FIN 46, to be called FIN 46-R.

At its recent meeting, FASB decided by a 5 to 2 vote to proceed towards issuance of an FASB Interpretation which will be called FIN 46-Revised (FIN 46-R), by the end of December. There was open acknowledgment that the SEC strongly urged fasb that fin 46-R be effective this year-end for public companies, with the exception of small business issuers.

Public companies who are not small business issuers must apply the provisions of either fin 46 or fin 46-R, at their choice, to all variable interest entities of the type that would have been considered to be “SPEs” under EITF D-14, 96-12, etc. at the end of the first interim or annual period ending after December 15, 2003 (in other words, 12/31/03 for calendar year public companies who are not small business issuers). If the company elects to apply fin 46, rather than fin 46-R, there would have to be a true-up at the end of the first quarter of 2004.

Public companies who are not small business issuers would have to apply the provisions of fin 46-R to all variable interest entities of the type that would not have been considered to be “SPEs” under EITF D-14, 96-12, etc. (i.e. operating entities that do not qualify as voting interest entities) no later than the end of the first interim or annual period ending after March 15, 2004 (in other words, 3/31/04 for most public companies who are not small business issuers).

Earlier application is encouraged and restatement of prior period financial statements is permitted but not required.

The transition rules applicable to public companies who are small business issuers and to private companies will be described in a notice to be posted to the FASB website. [Source: Martin Rosenblatt]

We will be tracking and putting a link to the notice on this site.

Vinod Kothari comments: I am aware that it is not for the first time that I am saying this, but it is important to say. In the labyrinth of rules relating to special purpose entities, we seem to have lost track of some very basic issues. "Do we need those special purpose entities at all?", is a more fundamental question than "do we need separate set of rules for special purpose entities". After all, special purpose entities are not structurally different from other business entities. If they are needed, it is time to create a separate orgainsational structure called "special purpose entities". If they are not structurally different from other entities, there is no scope for a discrimination in the rules that apply to these and other business entities. For example, if the accounting rules recognise, as FIN 46 seeks to do, that beneficial interest in the company is different from its legal equity, then the legal equity is a myth and should be ignored for all purposes, not merely for accounting purposes. At the same time, if the legal equity in commercial entities does not represent its beneficial ownership, there is no reason why the legal equity should still be the basis for consolidation of those entities.

Joint stock companies emerged sometime in the 16th century: and since then, we have still had the same forms of business organisations. If a new organisational forms such as special purpose entities are needed, they need to be created as distinct organisational forms, not merely a company that is treated differently for accounting purposes.

Links For more on FIN 46, see our dedicated page here. For more on accounting issues, see our page here.

[This page lists news and developments in

International securitisation markets – please

do visit this page regularly as it is updated

almost on a daily basis.]

IMPORTANT All news added on or after 9th November has been posted in a separate page – click here  For News items added prior 3rd August, 1999, click here to access

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

• Largest franchise loans securitisation deal 
  Added on 5th Nov., 1999 
  Franchise Finance Corporation of USA recently closed a franchise loan securitisation deal which is the largest issue of its kind so far.
• Malaysia to scrap stamp duty on securitisation 
  Added on 5th Nov., 1999 
  In a bid to encourage securitisation, Malaysian Budget 2000 proposes to scrap stamp duty on real estate securitisation from Oct 31 onwards.
• Securitisation changing the face of retail lending in Europe 
  Added on 28th Oct., 1999 
  The decision of Abbey National to securitise large part of its mortgage portfolio is only a signal of the changes securitisation is surely and steadily causing to mortgage lending in Europe.
• Lehman Re pools catastrophe risk for securitisation 
  Added on 28th Oct., 1999 
  This is a further remarkable development in the risk securitisation market – Lehman Re has acquired catastrophe risks, and intends developing a portfolio, similar to Fannie Mae in the USA, for securitisation.
• After cat bonds, it is weather bonds now 
  Added on 28th Oct., 1999 
  Two US companies, Enron and Koch Industries, are in the market with bonds that seek to protect against weather risks. Though they are finding it difficult to market the offer, it surely indicates a move that would lead to development of risk securitization.
• New York launches tobacco bonds 
  Added on 28th Oct., 1999 
  As was predicted in the news item yesterday, New York has announced USD 700 million worth tobacco bonds.
• Pakistan Telecom deal downgraded 
  Added on 27th Oct., 1999 
  Political uncertainty in Pakistan has led to downgrading of the Pakistan Telecom future flows securitisation transaction by Duff and Phelps..
• Mortgage securitisation takes off in Hong Kong 
  Added on 27th Oct., 1999 
  Securitisation of mortgage loans by Hong Kong Mortgage Corporation has taken off with an inaugural issue of mortgages originated by Dao Heng Bank..
• US Tobacco bonds rated A by S&P 
  Added on 27th Oct., 1999 
  The tobacco bonds to be issued by various US states have been rated A by Standard and Poor – this will now clear the way for issue of tobacco bonds.
• UK infrastructure owner to securitise rent income 
  Added on 27th Oct., 1999 
  Railtrack, railway infrastructure owner in the UK, proposes to securitise rental income from arches it has rented out.
• Abbey National to launch 4 billion stlg MBS issue 
  Added on 12th Oct., 1999 
  Abbey National, a UK-based mortgage bank, is to launch a 4 billion pound mortgage-backed bond issue to take approximately 10% of its mortgage portfolio off its books.
• Barclays Bank to launch European credit card securitization 
  Added on 12th Oct., 1999 
  Barclays PLC is to launch a credit card securitisation bond issue of 1 billion pounds, close to 1.66 billion USD, which would be the largest issue by a European issuer.
• Fully electronic mortgage lending closes legal documentation in 5 hours 
  Added on 8th Oct., 1999 
  This could well be a major innovation leading to e-commerce – legal documents leading to creation of mortgages and lending thereon can now be completed in totally electronic format and the whole process would take just 5 hours, instead of 45 days in the manual mode.
• New York to issue tobacco settlement bonds in November 
  Added on 8th Oct., 1999 
  The New York City's the Tobacco Settlement Asset Securitization Corp. proposes to issue USD 680 million bonds backed by tobacco settlement dues in November this year..
• Model Cat bonds law approved in USA 
  Added on 7th Oct., 1999 
  A report says that the National Association of Insurance Commissioners have approved a model law for Catastrophe bonds for the USA.
• Pakistan to have SPV law by end of October 
  Added on 4th Oct., 1999 
  A report in Business Recorder, a Pakistani financial paper says Pakistan's securities regulator has constituted a body to finalise securitisation SPV law by end-October.
• Ever heard of securitisation of air? 
  Added on 1st Oct., 1999 
  This really has nothing to do with securitisation in the sense capital markets view it, but next time, someone talks about securitisation of air, you should not be stunned.
• Italian bank to securitise all its non-performing assets 
  Added on 1st Oct., 1999 
  Italian securitisation market continues to be 4th gear with major securitization deal by yet another bank – Italfondiario SpA.
• Mexican steel company defaults on future flow securitization 
  Added on 29th Sept., 1999 
  This is apparently the first case of default on future flow securitization – Ahmsa, a Mexican company recently defaulted on a future flow securitization of export receivables.
• Obligations fonciers in France on recent legal support 
  Added on 28th Sept., 1999 
  The French mortgage securitisation product, obligations foncieresis coming of age. In this report, we discuss salient features of this market, the law that backs them, and compare them with US pass throughts and German pfandbriefe.
• CIBC World Markets named best securitisation bank in Asia 
  Added on 28th Sept., 1999 
  Journal Global Finance  has named CIBC World Markets the best bank for securitisation and was handed over an award at the IMF/World Bank meeting in Washington on 27th Sept.
• Securitisation of exchange risks holds potential: Peter Drucker 
  Added on 25th Sept., 1999 
  The noted management and business economics expert, Peter Drucker, sees potential in securitisation of foreign exchange risks and in outsourcing financial arrangements for mid-sized firms. Drucker stresses on the need for innovation in financial services, in an article in The Economist, Sept. 25, 1999.
• Yet another bank goes bust on securitisation accounting lapses 
  Added on 25th Sept., 1999 
  The reasons for the collapse of First National Bank of Keystone included, according to FDIC, wrong accounting for residuary interests in securitised loans.
• CRIIMI MAE applies for reorganisation 
  Added on 25th Sept., 1999 
  CRIIMI Mae, the US commercial mortgage securitisation company that filed for protection under Chapter 11 has now applied for reorganisation.
• David Pullman securitises Ron Isley catalogs 
  Added on 25th Sept., 1999 
  The father of music industry securitisation, David Pullman, has pulled Ron Isley's catalogs into his Pullman Bonds series, with over 200 songs in it.
• DCR sees potential in Indian securitisation market; identifies problem areas 
  Added on 23nd Sept., 1999 
  Duff and Phelps Credit Rating recently released a report on securitisation market in India: a market that has a lot of potential but still constrained by several trifling problems.
• Bank closed for securitisation accounting fraud 
  Added on 22nd Sept., 1999 
  A bank that did not remove from its balance sheets loans which had been securitised has been closed by US bank regulators.
• First tax ruling on FASIT law 
  Added on 22nd Sept., 1999 
  This is the first-ever ruling on the US FASIT law, and it would have far reaching impact on tax treatment of investors in FASIT-based securitizations.
• First soccer revenues securitisation 
  Added on 22nd Sept., 1999 
  In the first reported case of soccer club revenues, a UK football club sold its future ticket sales and corporate hospitality receipts.
• Pakistan International Airlines in the first domestic future flows securitisation 
  Added on 21th Sept., 1999 
  In a remarkable development, Pakistan International Airlines has signed a Rs. 3 billion future flows securitisation with Citibank.This is reportedly a local future flows securitisation of aviation revenues.
• First securitisation of personal credit receivables in Canada 
  Added on 21th Sept., 1999 
  Bank of Nova Scotia, Canada will use a special purpose trust to securitise its personal credit receivables in a transaction priced at $ 905 million.
• World Bank to promote securitisation in Bangladesh 
  Added on 21th Sept., 1999 
  The World Bank on 20th Sept. announced a USD 46.9 million credit to Bangladesh for development of financial institutions in the country – this includes a proposal to promote securitisation by such institutions.
• FASB issues technical bulletin on consolidation of SPVs 
  Added on 21th Sept., 1999 
  The US FASB has issued the draft of a Technical Bulletin to clarify situations in which consolidation of securitisation SPVs will be made with the originator. This report also gives link to the FASB site for downloading the FASB document.
• Philippines to securitise amusement park revenues 
  Added on 20th Sept., 1999 
  The Philippines government proposes to issue asset-backed notes in the last quarter with revenues from an amusement park and a gas project under implementation.
• Massive bank securitisation deal in Italy 
  Added on 20th Sept., 1999 
  Reports indicate that an Italian bank Banca Nazionale Del Lavoro is planning securitisation of Lira 3000 billion – this would certainly be the largest deal in Italy, and perhaps the largest single transaction in Europe.
• Explosive growth in Japanese securitisation 
  Added on 20th Sept., 1999 
  Japanese securitisation market is witnessing explosive growth and analysts contend that the level of interest is even higher than was seen in USA in early 1990s.
• Gain on sale accounting confounding finance companies' accounts 
  Added on 17th Sept., 1999 
  A recent article in American Banker Online claims that upfront recognition of gains on securitisation as per FASB 125 is confounding financial statements of companies that are regularly into securitisation.
• US MBS issuance in first half '99 exceeds USD 400 billion 
  Added on 16th Sept., 1999 
  Volumes in agency mortgage-backed securities in the USA surged in first half of 1999 to over USD 400 billion, registering a 29.6% increase over comparable period in the previous year.
• Charles Schwab to set up mutual fund to invest in asset-backed market 
  Added on 16th Sept., 1999 
  Indicating the increasing investor demand for diversified ABS portfolio, Charles Schwab, the noted US fund manager, has unveiled plans to set up a mutual fund to invest in mortgage and asset-backed securities..
• Thailand Secondary Mortgage Corporation starts buying mortgage loans 
  Added on 16th Sept., 1999 
  The Secondary Mortgage Corporation of Thailand, modelled on the pattern of US Fannie Mae, has started acquiring mortgage loans for the purpose of securitising them.
• Asian securitisation yet to gather pace 
  Added on 10th Sept., 1999 
  The securitisation market was completely snuffed out in the Asian crisis of 1997, and while there are strong recovery signals in equity and debt markets, securitisation is yet to emerge from the shadows where it was consigned..
• Re-insurers in securitisation 
  Added on 10th Sept., 1999 
  A report in Financial Times recently discussed how re-insurance companies are taking increased exposures in credit risk insurance thereby helping securitisation.
• And securitisers in re-insurance 
  Added on 10th Sept., 1999 
  Read this news with the one right above, and you see a fusion of insurance and capital markets – a recent article in Financial Timestakes a look at how securitisation is serving a notice to traditional reinsurers.
• Italy the new mecca of securitisation 
  Added on 22nd August, 1999 
  A feature on CNN recently carried a detailed report on how securitisation is capturing tremendous interest in Italy.
• India's apex housing finance body to try pilot mortgage securitisation 
  Added on 18th August, 1999 
  National Housing Bank, India's apex mortgage finance body, may soon come out with a pilot project of mortgage securitisation, as various taxation bottlenecks are being removed.
• Downgrades galore in US ABS markets 
  Added on 18th August, 1999 
  The rate of downgrades in US ABS market is alarming, and there is a new trend visible – downgrades due to internal weaknesses in the portfolio.
• US mortgage financiers taking over UK market 
  Added on 17th August, 1999 
  David Pullman, the father of intellectual property securitisation who first brought Bowie Bonds to the Wall Street considers his own IPO.
• David Pullman to bring IPO 
  Added on 16th August, 1999 
  David Pullman, the father of intellectual property securitisation who first brought Bowie Bonds to the Wall Street considers his own IPO.
• First ABS transaction in Poland 
  Added on 14th August, 1999 
  BRE Bank, based in Warsaw, Poland recently launched the first ABCP deal in Poland. This is also reportedly the first ABS transaction in the country.
• Why mortgages do not attract capital in China 
  Added on 13th August, 1999 
  In sharp contrast to United States, lenders in mainland China do not love mortgage lending – this article in South China Morning Postexplores reasons which include poor mortgage foreclosure laws.
• Hong Kong Mortgage Corporation to issue RMBS 
  Added on 10th August, 1999 
  The Fannie-Mae type body set up by the Hong Kong authorities has already begun acquiring mortgage receivables and is likely to issue RMBS in last quarter.
• New political insurance product to boost emerging market investments 
  Added on 10th August, 1999 
  Overseas Private Investment Corporation has launched a political risk insurance which will enable emerging market corporates to substantially eliminate sovereign risk.
• US ABS volumes rise marginally in first half of 1999 
  Added on 6th August, 1999 
  The ABS volume in USA grew about 4.5% in first half of 1999, while growth outside USA has been very impressive.
• CMBS volumes are falling 
  Added on 6th August, 1999 
  There is a fall in volume of commercial mortgage backed securities and the total issuance is 1999 is expected to end up about 25% lower than volumes last year. 

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Largest franchise finance securitisation

Franchise Finance Corporation of America priced and sold approximately $607 million of secured franchise loan asset-backed securities. The securities are backed by 996 loans originated by FFCA, all of which were held in a loan sale facility with a third party pending securitization. The loans, having an outstanding aggregate principal balance of approximately $674 million, include 929 chain store mortgage loans, 61 chain store equipment loans, and six commercial loans secured by real estate, equipment or other property related to the operation of chain store facilities.

This is the largest reported transaction in franchise loans segment.

Malaysia to scrap stamp duty on securitisation

Malaysian government presented Budget 2000 which is hailed as expansionary and growth oriented. Among a number of measures to boost capital markets, there is a proposal to encourage companies to opt for securitisation.

Securitisation involves transfer of receivables for which the instrument of assignment to be executed is currently subject to stamp duty at ad valorem rates and if the asset involves real property, real property gains tax (RPGT). Budget 2000 proposed that the instrument used in the transfer of assets be exempted from stamp duty and RPGT from October 30 1999 to December 31 2000.

For details of securitisation activity in Malaysia, see our country profile – link on the Index page.

Securitisation changing the face of retail lending in Europe

Abbey National recently decided to securitise a large chunk of its mortgage loans portfolio – see news item below. This was only an indication of the steady but sure change securitisation is bringing about in mortgage lending in Europe. A report in European Report of 27th Oct says that to keep their low-cost competitive edge, direct mortgage lenders are being impelled towards securitisation to raise their funding. Also, retail banks will be pushed in the same direction. They have traditionally raised much of their funds for retail lending by taking retail deposits. But recent entrants into the personal deposit market – particularly with the emergence of banking activities by non-bank operations with high consumer throughput, such as supermarkets – are absorbing much of the traditional banks' traditional deposit sources, forcing them to raise their interest rates to attract savers, or to seek alternative funding sources. In addition, the booming consumer credit market across much of Europe is also pushing banks to clean up their balance sheets as much as possible so they can take advantage of the boom – and securitisation offers them a way to do this.

With the advent of the Euro, the potential for securitisation has tremendously gone up in Europe – the size of the potential Pan-European market is now being estimated at 1 1/2 times that of USA.

This site has comprehensive resources on securitisation in Europe. An editorial is devoted to Europe – see the front page. See also the Index page for country profiles and a special write up on Europe. 

Lehman Re to pool and securitise risks

This is application of the mortgage-backed securitisation technique to cat bonds, and the result is a unique product that would be securitisation of a bundle of risks, not just one risk. In a ground-breaking move for the Lloyd's market, a syndicate has reinsured a substantial property catastrophe exposure with Lehman Re, based in Bermuda, for onward securitisation in the capital markets.

Due to its structure as a reinsurance company, unlike many corporate finance players involved in such deals, Lehman Re does not have to transform the risks which it underwrites into a capital market product immediately in order to pass it on to investors. Instead, it can hold risk like a conventional reinsurer and gather together a portfolio of similar risks from different cedants until sufficient scale has been achieved to warrant a securitisation. In this way, Lehman Re is using a similar concept to that which was used by US mortgage lenders in the very early to mid-1980s and British mortgage lenders in the mid- to late-1980s, when mortgage-backed securitisations first started to take off.

For references to further materials on cat bonds, see the news item exactly below this.

After cat bonds, it is now weather bonds

Some say they are in rough weather as they have not been finding investors. But it surely indicates a new development in risk securitisation technlogy that was first developed in the catastrophe risk insurance market.

Two US companies, Enron and Koch Industries are in the market with weather bonds, which pass on to the investors weather-related risks. The technlogy is the same as has been used in case of cat bonds some years ago. [See the Risk securitisation section of this website for more article and links on cat bonds. See also several news items on this page].

Enron, based in Houston, provides weather risk management services to clients such as snowmobile manufacturer, an ice-cream maker and a computer services company. Koch is based in Kansas.

Enron's Dollars 105m deal is being underwritten by Merrill Lynch. Koch Industries' USD 200 million offer is underwritten by Goldman Sachs.

Reports in Financial Times 27th Oct. indicate that both the issues have not found active investors interest, perhaps due to a complex set of instrument features, and possibly because they are in the market at almost the same time.   
 

 New York announces tobacco bonds

A groundbreaking deal in issue of tobacco bonds has been announced by New York to open on 3rd November. We predicted yesterday (see news item below) that with S&P rating already in place, New York may be the first to issue the bonds.

Tobacco bonds represent securitisation of the sums that major tobacco companies in the USA will pay to the governments of 46 States as a settlement of the court suits against the tobacco companies. This site contains more details of tobacco bonds – click here and here.

The issue, which would be the first of its kind, is likely to be followed shortly by Nassau County in New York state, which desperately needs the funds to plug a hole in its finances.

Pakistan Telecom securitisation downgraded

The political uncertainty has taken its toll on the only future flow deal already transacted so far by Pakistan Telecom. Duff and Phelps has downgraded the transaction from BB+ to BB with rating watch down.

The downgrade reflects the increasing financial pressures that could arise out of the current political situation in Pakistan, namely the potential loss of multilateral loan disbursements, as well as the uncertainty regarding the government's ongoing debt reschedulings.

The rating agency believes that the transaction might weather the current stress through which Pakistan is passing.

This website contains ample resources about securitisation activity in Pakistan – see Pakistan country profile on the Index page and the draft rules for securitisation on the Securitisation laws page.

Mortgage securitisation takes off in Hong Kong

The Hong Kong Mortgage Corporation has begun securitisation of mortgages. The inaugural transaction was launched on 23rd October with the Corporation buying mortgages originated by Dao Heng Bank. Under the agreement, Dao Heng will sell eligible mortgages on a back-to-back basis to the corporation, which will transfer them to a special-purpose company, the HKMC Funding Group. The company will then issue the securities to Dao Heng Bank, with a guarantee from the corporation for timely payment of principal and interest. Dao Heng can keep the securities as part of its investment portfolio or trade them with professional institutional investors.

The corporation has plans to issue USD 5 billion worth of securities collateralised on mortgage loans next year.

Click here for an earlier news about RMBS issues in Hong Kong.

Tobacco bonds rated A by S&P

The tobacco bonds that securitise the tobacco settlement proceeds payable by 4 leading tobacco companies to various US states have been rated A by Standard and Poor. 46 US states are to receive USD 205 billion in tobacco settlements.

See earlier reports on tobacco bonds – click here and here.

Nassau County in New York state and New York City are expected to be the first to issue the tobacco-backed bonds, with many of the 46 states involved in the settlement waiting in the wings. Nassau County urgently needs the funds to plug a gap in its finances, and is already said to be marketing a Dollars 275m offering to investors.

UK infrastructure owner to securitise rent income

Railtrack, owner of the UK's rail infrastructure, is studying plans to raise up to pounds 400 million by parcelling up the rents it receives from 6,000 arches in south-east England and swapping that income stream for a lump sum.

Rents from the arches traditionally used by motor mechanics, small engineers and businesses unconcerned by condensation and lack of light total around pounds 40m a year. The money raised in the form of a securitised bond would be used for improving the rail network.

Abbey National in 6.5 billion USD MBS issue

Mortgage-securitisation wave hitting UK market

Abbey National, a leading mortgage bank in the UK, is to launch a 4 billion pounds mortgage-backed securitisation issue, in a bid to free up about 10% of its balance sheet portfolio of mortgages.

The bank is planning to bring a series of MBS issues spread over the year. The bond issues will allow Abbey to free up extra capital and reduce the cost of funding mortgages. Abbey is understood to be planning to use securitisation, which is widely used in America, to allow it to offer a range of new and more competitive products, reports The Sunday Telegraph.

The trend to securitise mortgage loans is catching up fast among British housing financiers. Last month Northern Rock, the former building society turned bank, launched a £600m mortgage securitisation, giving it a new source of funding and the chance to increase its share of new lending. Woolwich has also announced a joint venture with Countrywide Credit, the American lender, to securitise mortgages. 

Barclays Bank to launch largest European credit card securitisation

British banking group Barclays Plc is set to launch a bond secured against debt owed by customers of its credit card subsidiary, based on a report in the Financial Times.

The bond issue is likely to be 1 billion pounds, or 1.66 billion USD which makes it the largest issue by a European issuer.

Market analysts feel that this is only the first of what will be a series of securitisation issues by European banks.

Fully electronic mortgage lending announced

Legal documents completed over the Net in 5 hours

eOriginal Inc. announced on 7th October the implementation of a fully electronic creation, processing, recording and closing of a mortgage transaction that takes 5 hours flat, whereas the same process in the manual mode takes 45 days and costs USD 750 per deal more.

This patented legal documentation procedure creates legally enforceable mortgage rights and completes the required public recording of documents, in a completely electronic form, via the Net. The pilot project was carried out in Florida, USA and is the first electronic creation of a mortgage document.

The pilot program envisages an Electronic Original mortgage paper. The mortgage documentation was delivered via the Internet to the consumer who signed all the traditional forms for the mortgage and conveyance of the home, but the signing was performed online–not with pen and ink. The deed and mortgage instruments were then transmitted on the Internet to the Broward County Recorder's Office where they were registered. Once recorded, the Electronic Original documents were returned to the consumer and instantly accessible on the mortgage recording  system, via the Internet, to secondary market participant GMAC-RFC. While all homebuyers elected to receive a paper copy of loan closing documents, the authoritative Electronic Original documents were stored digitally in a trusted repository.

For more about e-original's Internet-based work, click on their website –http://www.eoriginal.com 

 New York to issue tobacco bonds in November

The New York City local body formed specially for the purpose of securitizing tobacco settlement proceeds,  Tobacco Settlement Asset Securitization Corp. , proposes to issue USD 680 million worth bonds in mid to late November this year. The agency is likely to issue circulars regarding the forthcoming offer today, that is, 8th October. The agency will hold road shows during the third week of October.

Salomon Smith Barney will serve as book-running senior manager on the agency's initial bond issue. Bear, Stearns &Co., J.P. Morgan & Co. will be co-senior managers on a rotating basis. In addition, the designated senior co-managers are Goldman, Sachs & Co., Morgan Stanley Dean Witter and PaineWebber Inc.

The tobacco settlement is the result of litigation against 4 major tobacco companies which resulted into a settlement on Nov 23, 1998. According to the temrs of the master settlement agreement, the tobacco majors are to pay $206 billion over the next 25 years to 46 US states.

For more news on the tobacco bonds, click here.

Model Cat bonds law approved in the USA

A report on BestWire says that the National Association of Insurance Commissioners have approved, recently in Kansas City, a model law for catastrophe bonds. This law is a model law, supposed to be enacted by individual states.

The law would make it possible for US insurance companies to use securitisation SPVs to sell re-insurance contracts to the capital markets using the catastrophe bond instrument. The model law among other things also clarifies the tax issues on such bonds.

Reports indicate that the model law is similar to the one already enacted by Illinois in July.

Catastrophe insurance securitisations originate from the United States but are mostly carried through jurisdictions like Cayman Islands for tax reasons.

This site has comprehensive resources on insurance risk securitisation.Click here to visit section on insurance risk securitisation. Click here to read briefly about what are cat bonds.

Pakistan to have SPV laws by month-end

Business Recorder dated 4th October 1999 reports that Pakistan's Securities Exchange Commission (SECP) has constituted a board under the chairmanship of the head of Pakistan Credit Rating Agency to finalise securitisation rules for the country by the end of October '99.. Under these rules, it is likely that securitisation SPVs will be organised as companies under the Companies Ordinance and will issue debt securities in the nature of term finance certificates to investors. Withholding tax will also be applicable to the payments made by the SPVs. The securities issued by the SPVs will be allowed to be listed on recognised stock exchanges.

Analysts see a Rs. 16 billion potential in securitisation business in the country, taking care of receivables of modarbas, leasing companies, credit cards, housing finance etc. Obviously, the volume does not take into account the tremendous potential in bank securitisation and future flows securitisation.

More on securitisation in Pakistan: Draft rules earlier framed by the SEC Pakistan are on our securitisation laws section  – click here to visit. See also our country profile on securitisation in Paksitan – click here. News about Pakistan International airlines securitising its receivables was flashed on this site – click here. 

Securitisation of air !

Exchanges trading in securitised "rights to pollute"

About a couple of years ago, a journalist said – Wall Street can securitise anything! He did not mean air, but it is a fact that clean air and environment are being securitised and traded on commodities exchanges.

The concept goes something like this -the State or a private initiative makes investments in forests. The investment is funded by issuing emission credits or sequestration credits in form of units or securities. Typically, one credit certificate allows the holder to pollute the environment equal to 1 ton of carbon dioxide. These credits are bought by highly polluting industries. Therefore, the more the required emission by an industry, the more the number of certificates it exhausts. The purchase of credits or creation of credits by investing in forests is the creation of a "pollution asset" or the right to pollute, and the actual emission of gases into air is the consumption of the credits. Hence, there is placed in the market a security representing clean air, used by leaving unclean air.

Recently, the Sydney Futures Exchange announced plans to allow trading of such certificates. Already, trading in these certificates is on on the Chicago Board of Trade.

A few years ago, Costa Rica, by agreeing to protect a portion of its rainforest from logging, issued certificates that bestow the right to pollute.

So, in some time, clean air will be a product to be traded in, hoarded and speculated!

Italian bank to securitise its non-performing loans

Earlier on this page, we have reported fervent activity in securitization taking place in Italy. The Italian newspaper IL SOLE 24 ORE reports that Italfondiario SpA, the Italian bank that deals with credit and leasing, is to securitise all of its non-performing credits, worth around L2,500bn, with the assistance of Greenwich Natwest Ltd.

More on securitisation of non-performing assets in Italy  – On our Italian securitisation page, new inputs have been added dealing specifically with securitisation of non-performing assets in Italy. 
Click here to visit.

Mexican company defaults on future flow securitization in a first noted case of default

No securitization structure is iron-clad, and investors must appreciate the risks, particularly the legal fragility of the structure, before exposing themselves.

This is a loud and clear signal from the recent case of default on a securitization of future flows. Ahmsa, a Mexican steel company had securitised future export receivables in a transaction worth USD 300 million. The company recently defaulted on the deal. This was an unrated securitisation transaction.

Generally speaking, in asset-backed securitization, investors would not be concerned with the default or distress of the originator – however, not so in case of future flow securitization. In future flows deal, investors are exposed to risk of performace of the originator, as also possible action, deliberate or forced, in diverting the exports to an entity which has not affirmed the deal. Typically, in export receivables securitization, the originator assigns future revenue from export proceeds from importers. The importers abroad sign an acknowledgment of the assignment thus binding them to pay to the overseas collection account. If the exporter diverts the exports to other importers, who have not given any such acknowledgement, legally they cannot be bound to pay into the collection account as the assignment of a future flow takes place only prospectively and does not create rights of the investors against the obligors.

The irony is that in such a situation, the investors may not even have a fall-back option against the originator's assets.

The above case of default is the first reported instance of a future flow securitization deal going bust, and may be it is only such difficult situations that the legal strength of such transactions can be tested.

Oligations fonciers developing in France

Recent legislation responsible for the development

Obligations fonciers (OFs) are French mortgage-backed securities. These on-balance sheet debt securities are essentially mortgage-backed bonds, with the important feature that the bondholders have a issuer-bankruptcy-protected right to the mortgages. OFs are issued by Societé de Crédit Foncier (SCF), a specialised lending institution. SCFs have a restricted sphere of operation to acquiring and granting of mortgage loans only. OFs are essential debt securities and they appear on the books of the SCF, unlike the US mortgage pass throughs. In this sense, OFs are similar to German pfandbriefes.

The legal framework for SCFs and OFs is set out in Law 99-532 of June 25, 1999 relating to savings and financial security, published in the Journal Officiel on June 29.

The quality of the loans originated by SCFs is tightly regulated by law: for example the loans have to be secured by first mortgage on real estate, with a certain minimum loan-to-value ratio. Regulations are also in place to control the asset liability mismatches, reporting, real esatate valuation, etc.

SCF under law is a separate entity, distinct from its owner or manager. The law provides a protection that the bankruptcy of the owner of the SCF cannot lead to the bankruptcy or liquidation of the SCF. Upon the bankruptcy of the manager of the SCF, the management contract can be assigned to another manager. The bondholders are priority creditors and other creditors have a suboridinated claim over the assets of the SCF.

The supervision of SCF is primarily with the bank supervisory body, Commission Bancaire.

Two issues of OFs are notable in France: Crédit Foncier de France and Crédit Foncier et Communal d'Alsace et de Lorraine.

For more on securitization in France, refer to the country profile on our Index page – click here to visit.

CIBC named best securitisation bank in Asia

Global Finance has named CIBC World Markets the "Best Bank in Securitization in Asia". The award was made to David Bonsall, Head of International Securitization on behalf of the firm at a ceremony held today at the IMF/World Bank meeting in Washington. Global Finance canvassed its readers and did extensive research among major users of banking services and analysts who follow the banking sector in order to select CIBC.

CIBC set up its Singapore office in 1998 and currently has over 100 professionals looking after securitisation.

Securitisation of exchange risks holds potential: Peter Drucker

Visionary guru laments lack of innovation in financial services

The noted management guru Peter Drucker has written an article in The Economist [25th Sept., 1999]  where he feels there is tremendous potential for someone assimilating exchange rate risks and securitising the same.

Innovate or die, says Drucker, who is going to celebrate his 90th birthday this November. The guru of what he calls "creative self-destruction" ( a modification of the famous phrase coined by Schumpeter)  laments the fact that over past 30 years in the financial services industry, there has been no major innovation except the euro-dollar and the euro-bond, which were essentially forced by regulation. Credit card was the third major innvoation of our times. Drucker, however, does not regard derivatives as any sustainable innovation, since these are "not designed to provide a service to customers. They are designed to make the trader’s speculations more profitable and at the same time less risky—surely a violation of the basic laws of risk and unlikely to work. In fact, they are unlikely to work better than the inveterate gambler’s equally "scientific" systems for beating the odds at Monte Carlo or Las Vegas—as a good many traders have already found out."

Talking of the opportunities for innovation, the visionary management thinker gives examples of 3 possible areas of innovation: 2 out of the three involve securitisation.

Drucker sees potential in outsourcing the financial management of medium sized enterprises. These enterprises form the backbone of most economies, and it is common today for most of them to outsource their EDP, housekeeping, routine personnel management, etc. "How long will it be before they are ready to outsource the management of the money in their business?", asks Drucker.

There lies an opportunity: "The rewards for building a firm providing these medium-sized businesses with financial management might be enormous—not only from fees but also through substantial profits from "securitising" the financial needs of the clients, ie, converting them into investment products that should be particularly attractive to the ageing middle-class "retail" investor."

The other opportunity lies in assimilating catastrophic exchange risks and securitising them: devising "financial instruments that protect a business against catastrophic foreign—exchange losses by converting currency risks into an ordinary cost of doing business, with an affordable and fixed premium, maybe no more than 3-5% of a firm’s currency exposure." A firm that provides such catastrophe risk protection "would also be able to "securitise" its portfolio and thereby create attractive investments for the new financial retail market."

For full text of the article, go to The Economist website: click here.

Yet another bank goes bust: securitisation accounting lapse cited as reason

We had recently carried, on this site (click here), news of a bank forced to close by regulators due to a faulty securitisation accounting practice. We had also carried extracts from an article that US banks are not as healthy as they look, as they have securitised their prize assets and are possibly sitting on inferior quality assets. A similar concern was expressed in case of finance companies.

Here is yet another case of bank going bust: First National Bank of Keystone. In this failure that is going to cost the government upto USD 800 million, the FDIC blamed the unusually high losses on the disappearance of $512 million of loans that bank officials had counted as assets, and on the bank's inflated estimate of the value of its residual interest in loans it securitized and sold. 
 

What is residuary interest in loans sold?: In most CLO/ CBO structures (see our section on CBOs/CLOs – click here), the originating bank issues bonds collateralised on the loan portfolio that it transfers, but retains residuary interest in the portfolio, essentially a subordinated, equity-type interest. The size of the retained residuary interest depends upon the level of rating for the senior notes. According to accounting standards, the bank is supposed to retain on its books the fair value of the retained interest, and remove the rest of the loan portfolio. As the valuation is subjective, it is likely that a bank may place unfair values to the retained interest.  Recommendations from BIS, still under consultative state, suggest that if the retained interest is either unrated or rated below B+, it should be completely deducted from the bank's capital. This, however, is regulatory accounting and may not be followed in the general financial statements of the bank.

 

CRIIMI MAE applies for reorganisation

CRIIMI MAE, the US commerical mortgage securitisation company that applied for protection under Chapter 11 of Bankruptcy Code last October has now applied for re-organisation.The Plan contemplates recapitalization financing of approximately $910 million consisting of $50 million  of a new series of convertible preferred stock to be purchased by an affiliate of Apollo Real Estate Advisors IV, approximately $435 million of debt financing, a portion of which would come from certain existing debtholders, and $425 million of additional amounts, the bulk of which would result from the sale of certain commercial mortgage-backed securities (CMBS).

Before applying for protection against potential bankruptcy, the company was engaged in acquisition and securitisation of commercial mortgages. Named after US govt.-backed residential mortgage securitisation agencies (Ginnie Mae and Fannie Mae), the company ran into problems due to bad assets.

This website has a separate section devoted to CMBS: click here.

 David Pullman securitises Ron Isley catalogue

David Pullman, the father of securitisation in entertainment industry, announced on 24th Sept. the signing of Ron Isley and his Isley Brothers catalog. Isley joins the band of music-securitised bonds created by Pullman: others who have signed by Pullman before include David Bowie, Holland Dozier Holland, Ashford & Simpson and James Brown.

David Pullman created sensation in capital markets when he introduced, for the first time, bonds backed by music royalties. David Bowie was his first case in 1997. Since then, Pullman did not have to look back. In 1999, he claims to have finalised deals worth USD 1 billion.

This website contains a special section on intellectual property securitisation: click here. 
 

DCR comments on Indian securitisation potential

Duff and Phelps Credit Rating (DCR) issued on Sept. 22 a report on securitisation in India. The following is largely an extract from DCR press release. Please see Vinod Kothari's comments below.

India's securitization market is in a nascent stage, exhibiting only elements of established securitizations, according to DCR. To date, all completed transactions have utilized onshore assets and distributed into the domestic market; no international capital markets securitization has yet come to fruition.

The regulatory constraints, as well as overall sluggish Indian international-capital-markets issuance over the last two to three years, have been a barrier to the growth of cross-border securitization in India. The Reserve Bank of India (RBI) has strict rules for companies that would like to borrow from abroad, and the lack of a well-developed swap market prevents the long-dated swaps necessary for certain cross-border transactions.

The relaxation of regulatory guidelines and a focus by issuers to explore securitization financing alternatives–once they realize its benefits — should provide a boost to cross-border securitizations. This is in light of the fact that although cross-border securitization is possible within the current ambit of the legal environment, the existing regulations restrict the universe of companies that can securitize.

Though still in a developmental stage, DCR believes international securitization in India holds potential. "India's credit rating is not investment-grade, but the same structures used in Latin America (i.e., future-flow transactions, preferred-creditor transactions and political risk insured transactions) could pave the way for Indian issuers to achieve investment-grade ratings," said Gregory J. Kabance, a DCR vice president.

There have been several completed domestic securitizations in the Indian market, but these structures do not incorporate all the characteristics a typical securitization structure used in developed markets. A large proportion of domestic transactions involves the direct sale of receivables to a single buyer. This variant of traditional securitization structure is utilized, as the traditional route of forming a special-purpose vehicle (SPV) and issue of securities is yet to be widely recognized in India due to regulatory and tax constraints.

The market is dominated by consumer finance securitization — particularly auto loan receivables. Infrastructure receivables such as electricity and tolls are also being increasingly securitized. Mortgage-backed securitization, though holding vast potential, has yet to gain a firm foothold in Indian markets due to regulatory difficulties such as inadequate foreclosure norms and high stamp duty on immovable assets.

Though it is possible to achieve a true-sale structure, most transactions remain linked to the credit quality of the originator. This linkage stems from issues including the lack of backup servicers and the co-mingling risk inherent in these structures. This reliance on the originator could cause potential problems in the event of an originator's bankruptcy. Therefore, transactions should be done with only creditworthy originators. This dependence on the originator could limit the depth of the market as the benefits of securitization cannot be realized by all potential originators.

While there remains certain legal and regulatory constraints, the market should be a securitization-friendly environment. The Indian legal system is based on a common law system primarily derived from English law, and is more securitization-friendly than civil law countries. The issue of true sale and bankruptcy remoteness is well accepted by Indian laws. Due to the growing interest in securitization, the regulatory authorities are drafting guidelines that should reduce some of the existing hurdles that prohibit the full development of the product. Included in the outstanding issues that should be addressed are:

The difficulties and uncertainty regarding the registration of charge on the underlying assets; Further clarification on the legal nature of the SPV; Uncertainty surrounding the SPV's ability to act as a receiving and paying agent and its ability to file legal suits in certain circumstances; and Foreclosure of mortgage-backed loans remains difficult and thesecurity of the underlying asset is not available for practical purposes.

In addition to these legal issues, there are certain tax issues as well as the lack of accounting standards that properly address the treatment of securitization. DCR notes that certain Indian states have reduced stamp duty on securitization transactions. However, to facilitate greater participation, the initiative should be extended to other states as well. In regard to international issuance, the hurdles are more on the economic side and, with the lack of a developed swap market, dollar-funded existing asset transactions will be a challenge. Rather than the traditional asset-backed transaction, the market is more conducive to future flow transactions, preferred-creditor transactions, and political risk guaranteed transactions. Each of these transactions can allow the originator to achieve investment-grade ratings that could be a way for these companies to access long-term low cost funding.

The depth of the future-flow market is limited because these transactions rely on the generation of offshore receivables and are dependent on the originator's performance risk. There are not that many companies with turnover that is large enough for these transactions. For some of these companies with the requisite size, the performance risk could be an issue.

But for certain strong Indian corporates with large exports, future flow can be a very attractive financing option. From a legal perspective, DCR has performed initial reviews of some cross-border future-flow transactions and believes structuring should be achievable with the Indian legal framework.

Vinod Kothari comments:

True, Indian securitisation market is still nascent but tremendous interest is being shown in various parts of the country. The only SPV structure has been 1997 Citibank's securitisation of auto loans. Privately, there have been number of deals but most of them border on secured lending. The State electricity monopolies are soon likely to securitise their revenues.

Mortgage foreclosure laws in India are essentially the same as in common law countries, but enforcement is a great hassle. However, inspite of these snags, there have been rare instances where housing financiers have had to legally foreclose a mortgage: moral persuasion is found to be a better way. What stifles mortgage securitisation in India is the fact that there are limited mortgage financiers existing today, the Govt.-sponsored housing finance body National Housing Bank prefers to see itself as a financier rather than facilitator of securitisation.

As a common law country, the legal framework is generally supportive and there are no serious tax or legal issues that should hamper securitisations. Future flows documentation should be very careful to prevent the investors from being eventually worse than even a secured lender.

Bank closed for alleged securitisation accounting fraud

First National Bank of Keystone, West Virginia was closed by US bank regulators after finding evidence of an apparent fraud that had depleted the bank's capital.

The Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency took the action after finding $515 million in loans still being carried on the bank's books that should have been removed after they were securitized and sold.

First tax ruling on FASIT investor tax treatment

District court contrasts FASIT with a mutual fund

A US District Court has contrasted a Financial Asset Securitization Investment Trust (FASIT) with a mutual fund and has framed principles that would affect the tax treatment of a FASIT investor. The case is significant as this is the first ever ruling on tax treatment of securitisation investors in FASITs. 
 

What is a FASIT:  A FASIT is essentially a securitisation SPV under the US Financial Assets Securitization Investment Trust law. The law is basically certain sections in the Inland Revenue Code (sections 860H onwards) The law was enacted to create tax transparent entities for non-mortgage securitizations, similar to real estate investment trusts (REITs).

In Community Trust Bancorp, Inc. v. U.S., Civ. Act. No. 98-249, (US DC ED Ky. 1999), the Kentucky Court considered whether a bank which invested in mutual fund scrips could claim the loss on sale thereof as a business loss rather than capital loss. The bank's contention was that the mutual fund in turn had invested in debt securities, and the mutual fund was nothing but a collection of various investors: therefore, the nature of the loss suffered by the mutual fund would determine the loss suffered by the fund investors.

Disallowing the bank's claim, the Court contrasted a mutual fund from a FASIT: the court held that the two were distinct as that is the reason why the Congress created a separate law for FASITs while the regulated investment company law (for mutual funds) already existed. By implication, this means that in case of FASITs, the tax treatment would be applied to investors based on the nature of their own activity. A FASIT for tax purposes would be taken as a mere conduit: therefore, the loss suffered on FASIT securities by a bank or an investment company would be a trading loss while a corporate would take it as a capital loss.

UK soccer club securitises revenues:

First securitisation of its kind

You have read about securitisation of revenues from songs to be sung, or races to be run: the ever-increasing application of securitisation now reaches the sports arena. A UK soccer club is arguably the first to securitise its future ticket sales.

According to a report in Financial Times London, dated 21st September '99, Newcastle United has become the first club in football to securitise its commercial revenue streams by issuing a £55m bond that will be backed by income from future ticket sales and corporate hospitality receipts.

The financing will help pay for the reconstruction of the club's St James Park stadium, which is already under way. Previously funded by a £40m bank loan, the development will increase the stadium's seating capacity from 38,000 to 51,000 by next August.

Note that Formula -1 was among the first cases of securitisation of receivables in the sports area. However, sports businesses are regarded as promising vehicles for securitisation issues because their revenues from TV rights and sponsorship deals tend to be secured by long-term deals. Ticket sales are also seen as a dependable source of income.

The 17-year Newcastle United bond has a weighted average fixed interest rate of 7.43 per cent and is repayable in annual instalments of £6m – initially representing £4m of interest and £2m of capital – between 2001-2016.

 

Pakistan International Airlines signs first domestic future flows deal

[This report was contributed by Dr Tariqullah Khan from Saudi Arabia]

According to a report in Business Recorder, Pakistan International Airlines on Monday 20th September signed with Citibank Pakistan for a Rs. 3 billion future flows securitisation deal. This is the first local current future sales receivables securitisation in Pakistan and banking circles believe that such structured finance facilities will go a long way in developing securitisation and 
factoring in Pakistan.

The United Bank is the lead manager and Muslim Commercial Bank and Citibank are the co-lead managers. Other participants include ANZ Grindlays Bank, Askari Commercial Bank, Bank Al-Falah, Saudi Pak Investment Company, Pakistan Kuwait Investment Corporation and Mashreq Bank.   
 

More on securitisation in Pakistan   This website has rich resources about securitisation in Pakistan:  For a profile of the transactions done, etc., see country profile of Pakistan on the Index page. For the securitisation rules of SEC, Pakistan, click our securitisation laws page.

The facility is structured so that all ticket and cargo sales of PIA in Karachi and Lahore, for a three-year period, will be assigned and routed through a collection account with the agent bank of the syndicate.

Vinod Kothari  comments: 
The deal is remarkable from many viewpoints:

• Pakistan is quite a novice in securitisation market: the only reported transaction so far is the international future flows securitisation by Pakistan Telecom.
• It is only in June this year that SEC, Pakistan announced draft securitisation rules. Securitisation activity is yet to gather pace in Pakistan: in this backdrop, a future flows securitisation is an outstanding achievement.
• Domestic future flows securitisation itself is a rarity. International flows are securitised using a trapping mechanism in a foreign country. But in  a local transaction, it is the laws of the country that will matter. Given the fact that Pakistan is a common law country, assignability of a future flow itself is a serious legal issue, and it would be interesting to know how the local lawyers have viewed the transaction. But then, chalti kaa naam gari (what is a car? – well, what runs is a car), as they say.

First securitisation of personal credit receivables in Canada

Bank of Nova Scotia will be issuing $ 905 million worth notes to securitise its receivables from personal credit loans. According to a report in Financial Post, Canada, the Bank will use Hollis Receivables Term Trust, a special purpose trust created to securitize portfolios for this purpose.

The issue was a public offer and was led by ScotiaMcLeod.

From the bank's perspective, the financing helps it achieve some of its securitization goals of facilitating greater access to funding and liquidity; of optimizing its capital structure and of being pro-active about the management of its balance sheet. 
 

 World Bank gives credit to promote securitisation in Bangladesh

The World Bank on 20th September announced USD 46.9 million credit for Bangladesh for development of financial institutions in the country. Called the a Financial Institutions Development Project, the credit aims at improving financial intermediation in banks, non-bank financial institutions, and capital markets in general.

The Facility granted by the World Bank will also support issuance of bonds and securitised instruments by the banks and financial institutions participating in the scheme. The government has also agreed, as a preliminary requirement, to create a suitable regulatory framework for regulation of financial institutions in the country.

The facility will seek to encourage financial institutions to stand on their own by either a direct debt issue or by securitisation, but provide a standby support till the market is able to accept the securitised instruments. Total project costs are US$57.69 million. The US$46.9 million equivalent credit is provided by the International Development Association (IDA), the World Bank's concessionary lending arm, on standard IDA terms with 40 years to maturity and a 10 year grace period. The Government of Bangladesh will contribute US$5.41 million. Financial Intermediaries will also contribute US$5.08 million to the project costs. Assistance has also been provided by the International Monetary Fund for the development of the government bond market that will have a positive impact on the project.

FASB issues bulletin on consolidation of securitisation SPVs

[I have been a little in catching up with this news, but it is important. ]

The US Financial Accounting Standards Board (FASB) the draft of a Technical Bulletin no 99-a on Classification and Measurement of Financial Assets Securitized Using a Special-Purpose Entity.

Issued on August 11, 1999, the FASB has invited comments on the draft Bulletin. The last date for comments is September 25, 1999.

Essentially the draft deals with situations in which transfers of securitised assets to SPVs will be treated as transfers, or will retain their original character. The bulletin talks of 4 situations with various parameters.

Full text of the proposed bulletin is available for download upto 25th Sept – click here for download.

Philippines proposes to ses to securitise amusement park revenues

Securitisation is gathering lot of interest in Philippines. The government of Phiippines itself has evinced interest in using securitisation to partly cover its budgetary shortfall. The government proposes to issue asset-backed securities in the fourth quarter to raise up to USD 500tfall. The government proposes to issue asset-backed securities in the fourth quarter to raise up to USD 500 million, reports  Inquirer daily, quoting Finance Secretary Edgardo Espiritu.

Among the options being looked at are the future earnings of the Philippine Amusement and Gaming Corp and potential revenues from the Malampaya natural gas project, which the government is implementing in partnership with the Shell Group.

Massive bank securitisation transaction in Italy

Banca Nazionale Del Lavoro proposes the largest ever issue in Italy

We had commented sometime back on this page that Italy is fast emerging as the mecca of European securitisation (see here) . The recent spate of transactions and the levels of interest in Italy reaffirm the statement.

According a report in Corriere della Sera 17 Sept., 1999, the Italian banking group Banca Nazionale Del Lavoro SpA (Bnl) is looking to perform a massive securitisation operation for a value of around L3,000bn. This would understandably be the largest securitisation issue in Italy and arguably the largest single issuance in Europe.

It is notable that Italy had passed an enabling law on securitisation in April this year, and since then, there has been tremendous interest in securitisation both among bank as well as non-bank issuers.

This website has comprehensive resources about Italian securitisation. For a country profile on Italy, click here. For text of Italian securitisation law, click here. For several news items on Italian securitisation, browse the present page and the previous securitisation page.

Do you know more about the above transaction, or about securitisation in Italy? Your contributions will be appreciated: click here to send an e-mail.

Explosive growth in Japanese securitisation

Analysts compare the rate of growth with US early 1990s

The Japanese securitisation market is growing at an amazing pace. Though Japan was a late starter, the present levels of interest have even belittled the US growth rates in the early 1990s. The Ministry of International Trade and Industry (MITI) has put annual issuance during financial year 1998-99 at USD 15.5 billion which is still a fraction of the US annual volumes, but given the fact that the Japanese volumes have grown at the rate of over 80%, all eyes are drawn to the Japanese market.

The burgeoning market for asset-backed securities is a sign of the times in Japan: With bank lending on the decline, companies and financial institutions are starting to explore ways to wean themselves from reliance on bank credit. Those firms are turning to the asset-backed market for their capital lifeblood.

Among those who are particularly interested in securitisation in Japan are the Japanese banks. These banks' needs for regulatory capital relief and corporates' needs for non-bank liquidity have led to record issuance of securitized transactions in the Japanese capital market. First-time issuers and new asset classes are emerging as issuers and arrangers innovate.

This rapid development can primarily be attributed to regulatory support, the urgent need for financial institutions to meet capital guidelines, and companies’ demand for alternative source of funds.

Gain-on-sale accounting on securitisation making finance companies' accounts unreadable

Article comes down heavily on FASB 125

A recent article in American Banker Online [16th Sept., 1999] has come down heavily on the gains-on-sale accounting for securitisation transactions by finance companies. Lawrence M. Benveniste, the author, says: "After a series of missteps and failures by several specialty finance companies that depended on asset-backed securitization as their primary funding source and "gain-on-sale" accounting, the equity markets have become wary of the quality of earnings reported by these companies". The author seemingly agrees to some analysts who favour the view of "forcing all finance companies to account for profit on a "flow" or "portfolio" basis (and perhaps even stop funding their business via securitization)" as this  is the only way to accurately represent earnings and restore investor confidence.  
  
 

What is gain-on-sale accounting:   The accounting method talked about in this article is the one prescribed by FASB 125 on securitisations: accourding to FASB 125, if certain conditions are fulfilled, a securitisation of assets should result into removal of the assets from the balance sheet and recognition of upfront gain/loss on the transfer of assets. The conditions have to do with whether the originator has retained any significant control on the assets, and whether the transfer is to a qualifying SPV.  The other accounting standard relevant to securitisation is IAS 32/39 which adopts retention of risks/rewards approach. FASB is considered to be more liberal in allowing originators to book upfront gains as compared to IAS.

 

The author claims that securitizers that apply gain-on-sale accounting have the power to fool the markets (and themselves) by booking illusory profits based on error-plagued and unrealistic assumptions and projections about future losses and prepayments. But, as we have seen recently in the specialty finance industry, investors can quickly identify and punish these companies. When their investors withheld capital, several of these companies failed and are no longer in business.

US MBS issuance exceeds USD 400 billion in first half 1999

While the asset-backed securities market remained dull, there was a surge in volumes for agency-backed mortgage backed securities. The first half of 1999 data recorded an issue of USD 420.3 billion, marking an increase of over 29% over the comparable period in the 1998. The total volume for 1998 was USD 726.9 billion: the second half of 1999 may not see a very impressive business due to Y2K concerns, but there is a good potential to cross the issuance levels of 1998.

Data published in a research paper of the Bond Market Association state that all the three agencies, Fannie Mae, Ginnie Mae and Freddie Mac registered double digit gains in their issuance levels. Fannie Mae led the way, with $185.0 billion in issuance in the first half of the year, a 30.2% increase over the $142.1 billion sold in the year-ago period. Issuance by Freddie Mac rose 34.4%, to $152.2 billion, as compared to the $113.2 billion issued in the same period last year. Ginnie Mae reported a 20.7% increase over year-earlier levels, with issuance totaling $83.1 billion in the first half of this year, up from the $68.8 billion sold in the first half of 1998.

Another interesting side of the story is the secondary market activity. Trading in mortgage-related securities remained vibrant in the first half of this year, with daily trading volume averaging $73.7 billion in the period, a 9.9% increase over the $67.1 billion average reported for the first half of last year.

Charles Schwab setting up mutual fund to invest in asset-backed instruments

Charles Schwab and Co. proposes to introduce on Oct 1, 1999 a mutual fund that will in part invest in asset-backed and mortgage backed investments. Schwab, managing a USD 66.8 billion of funds, targets initially raising a corpus of USD 100 million for asset-backed investments for this mutual fund.

The YieldPlus fund is a step away from Schwab’s usual money-market funds, dealing with slightly larger risks and more diversity. Until now, Schwab’s investment strategists have shied away from asset-backeds outside the commercial-paper market, and have focused primarily on commercial mortgage-backed securities. Asset-backed securities are riskier than money market instruments, but investors do not perceive them as equal risk since the average life in small maturity instruments is one year or less.

Thailand Secondary Mortage Corporation starts buying mortgage loans

The Secondary Mortgage Corporation (SMC) of Thailand has started buying mortgage loans with the intent of securitising them. SMC expects strong interest among local financial institutions in its four-billion-baht securitisation deal to purchase mortgage loans. The scheme is part of the August 10 economic stimulus package of the government.

The sale of the mortgage loans by the loan originators, mainly banks and financial companies, will be a swap against government bonds. Thus, on one hand, SMC does not have to shell off any cash for the loans, on the other hand, the selling institutions get a long term government paper which helps them to take care of their maturity mismatches as well as capital adequacy requirements.

The loans to bonds swap scheme is an innovative exercise as it frees up regulatory capital for the selling institutions, and at the same time does not allow the selling institution any freed liquidity to be used at its discretion.

SMC, modelled on the US Fannie Mae pattern, will be shortly going for securitisation of the loans thus acquired.

Securitisation in Asia still feeble

The securitisation market was snuffed out completely in the SE Asian crisis of  1997 and while there are strong recovery signals in equity and debt markets, securitisation is yet to come out of the shadows where it was consigned. During the haydays of Asian boom, investment banks, institutions and law firms had sent securitisation experts to settle in Hong Kong: they have now been relocated to Japan or simply called back, says a report in Financial Times August 31.

Apart from a smattering of deals, mainly in Hong Kong, all the recent Asian issuance has come from Japan. The problem with Asian countries is the complexity of local laws – unlike Europe, or say, even Latin America,  most of the governments are yet to take any positive measures to promote securitisation by legislative action.

The development has been feeble inspite of the fact that the crisis was the surest proof of securitisation ring fencing. Transactions in Thailand and Indonesia have survived the crisis. Analytics quoted in the report look at China as the next most important securitisation stop for Asia, after Japan.

For more about securitisation in Asia, see our country profile – click on the Index page where you find country links. 
 

Re-insurers in securitisation

Credit risk reinsurance is a big business and these companies guarantee repayments on secuiritisation structures, particularly in case of banks CLO/ CBOs. A report in Financial Times Sept. 3, 1999 says that the turmoil in capital markets last year as a result of the continuing Asian crisis, Russia's default and the collapse of Long Term Capital Management's hedge fund led to a higher risk premium in bond markets – and a new role for reinsurers.

With conditions in the casualty insurance market remaining soft, re-insurers are likely to look at credit risk insurance. This is so inspite of the fact that most insurance companies know very little about credit markets.

And securitisers in re-insurance

Read this news item with the one directly above, and you see the strange way securitisation and re-insurance markets are making roads into one another. While insurance is providing a credit support to securitisation, securitisation is placing the reinsurance product in the capital market.

A recent article in the Financial Times Sept. 3, 1999 noted this trend when it said: "Reinsurers are waking up to the fact that far from being just one of the latest industry buzzwords, securitisation of insurance risk is here to stay. When, in April this year, the owners of Tokyo Disneyland bypassed the traditional insurance and reinsurance markets and sought earthquake protection in the form of catastrophe bonds, reinsurers were served another warning that insurance securitisation is a form of risk transfer that simply cannot be ignored."

Right as of now, casualty re-insurance rates are going soft and there is little incentive for reinsurance companies or other users to look at insurance securitisation, but most reinsurance companies are looking at the securitisation option in some way or the other.

Securitisation may not replace traditional reinsurance, but it is certainly a force to reckon with. Most of the risks securitised so far have been catastrophe risks, but motor risk, life insurance risk, and credit risk have also been taken to the capital markets.

On this website, a number of news stories on insurance risk securitisation have been carried. Also see our insurance risk securitisation page  – click here.

Italy the new mecca of securitisation

New law heightens interest, says CNN feature

Securitisation has been the money spinner of 1990s everywhere in the world, except Italy. But it is only after the new law was passed [see our Securitisation law page – click here] that Italy has joined the bandwagon. In fact, a feature on CNN August 20, 1999 described Italy as the new mecca of securitisation activity.

The potential is enormous: raising cash on the back of anything from sports stadium receipts, rock stars' royalties or pub rents to film revenues, mortgages and catastrophe insurance — anywhere where there's a flow of money.

But the most exciting prospect for Italy right now is the simple securitisation of loans — giving banks with some of the highest non-performing debt in Europe the chance to clean up balance sheets at a critical time for sector consolidation.

Until now, a lack of legal framework for securitisation has seen Italy lag its euro-zone fellows. As a result, while the U.S. and Britain have been churning out deals since the 1980s, the first Italian bank securitisation came less than two years ago.

But a tax-friendly law passed in May gives issuers a new blueprint to work from. [See securitisation laws page] Now, a bank contemplating a loan securitisation can simply park a portfolio of loans in a new Italian company which then issues asset-backed securities.

Previously, the bank would have had to patch together its own complicated ad hoc rules which would have involved setting up a new company abroad and provided no tax perks.

The Italian government has valued the potential market at some 100 billion euros ($105.4 billion) and banks are already diving in.

Among non-bank issuers, the Italian government is leading the pack. [This news was featured on this website – click here] In what is expected to be one of Europe's largest operations, Italy is planning to securitise delinquent social security receivables to help cut its mammoth deficit. In its 1999 budget, Italy promised to raise 5.3 trillion lire ($2.9 billion) from securitising outstanding pension contributions belonging to state pensions body INPS.

INPS had around 54 trillion lire of outstanding pensions contributions in 1998 and the Treasury expects to eventually recover 20 trillion of that.

For more on securitisation in Italy, refer to our country profile – click here.

For more news items on Italian securtisation, refer to our past securitisation news page – click here.

India's housing finance body plans mortgage securitisation

Stamp duty hurdles being cleared in most states

National Housing Bank (NHB), India's apex housing finance institution, plans to create a secondary market in mortgages by issuing mortgage backed bonds or pass through certificates. This will be the first mortgage backed securitisation in India.

NHB will buy mortgage loans originated by individual housing finance bodies, pool them and issue the securities. A team at the instance of NHB visited Fannie Mae, USA and other securitisers there to study their systems. However, it is stamp duties and legal hurdles back home that is holding NHB from coming out with the pilot project. Stamp duties apart, there are certain clarifications that NHB wants from tax authorities as well. This concerns the continuing eligibility of a housing finance customer to claim tax benefit for repayment of a housing loan, as post-securitisation, the loan gets transferred to an SPV which may not be an eligible housing finance body.

Stamp duties on securitisation in several states has been reduced to 0.1%.

Rate of downgrades in US ABS market increasing

Far more downgrades than upgrades

There has been an alarming rate of downgrades in US ABS market, according to a report by Moody's. Between August 1, 1998 and June 30, 1999, there have been 137 downgrades and 81 upgrades of asset-backed securities, according to the rating agency.

Of the 137 ABS downgrades, 69 were the result of poor asset performance. Downgrading of ABS due to weak asset performance continues a trend that began in 1997.

In the period surveyed, credit enhancer downgrades remained a significant factor, resulting in 57 of the 137 ABS downgrades.

Since the market's inception in 1986, there have been 234 upgrades affecting $14 billion in ABS and 311 downgrades covering $42 billion, according to Moody's.

US mortgage financiers capture UK markets

Technology and experience help the US firms

US companies such as Countrywise and HomeSide have made forays into the UK mortgage finance market and given their tremendous back office skills, technology and experience, they are likely to capture the UK mortgage market. A recent report in American Banker Online says that " U.S. lenders view the United Kingdom today in much the same way Britain once viewed its colonies — as a market for more civilized procedures and technology."

The entry of US majors has triggered competition in UK markets bringing down rates. At the same time, the US firms have started something that they practice widely back home, that is, subprime lending.

David Pullman considering IPO

The father of Bowie bonds eyes New York SE

DAVID Pullman, the Wall Street financier who brought the world "Bowie bonds", is planning to bring part of his star-studded business empire to the New York Stock Exchange, says a report in Financial Times, UK.

The 37-year-old millionaire caused a sensation two years ago by raising $55m by issuing bonds secured upon Bowie's future royalties. He has since secured similar deals for the Godfather of Soul James Brown, Motown songwriters Holland-Dozier-Holland and rhythm and blues duo Ashford & Simpson.

Mr Pullman says he has future deals lined up to securitise West End and Broadway shows and TV, films and literary assets.

He is also confident of further music deals, and says he has established good contacts with legendary names ranging from Michael Jackson to the Rolling Stones.

For more on intellectual property securitisation, click here.

 

First ABCP offer in Poland

BRE Bank launches the first issue

On 13th July 1999 Urtica Finanse S.A. launched via BRE BANK S.A. first issue of Asset – backed Commercial Papers under The PLN 50 Mio trade receivables securitisation programme.

URTICA Finanse SA is a bankruptcy-remote Special Purpose Company (SPC) established only for buying ("true sale") and administrating of trade receivables from URTICA SA. These receivables arise from delivery of medicines and drugs to hospitals located in Poland. In order to refinance the purchase of receivables, URTICA Finanse SA will issue asset backed CP. The ABCP are collateralized by trade receivables previously bought from URTICA SA. Proposed structure contains recommended by Standards and Poor's credit enhancements like: overcollateralisation, spread account, limited recourse to URTICA S.A. and liquidity enhancement like put option that gives SPC right to sell receivables to liquidity provider and liquidity line granted by BRE BANK S.A.

The ABCP has been granted short term credit rating – CP-1 (the highest domestic short term rating) by local rating agency – CERA S.A.- subsidiary of Thomson Financial BankWatch.

This information has been provided by Martin Tarnicki, Project Manager of the above Bank. Martin is a participant in our e-mail list.

Why lenders do not like mortgage funding in China

Mortgage funding is considered to be the safest in USA and most popular among small lenders, while lenders in mainland China do not value them much. Patrick Randolph in an article in South China Morning Post[12th August 1999] examined the reasons.

Apart from problems in enforcing mortgage foreclosures which involve anecdotal delays, there are other possible explanations. "The most obvious is market uncertainty. Lenders value security that is "counter-cyclical" – that it will have value precisely at the time that the economic fortunes of their borrowers have drooped", argues the author. This means that mortgage lenders look at real estate as a hedge against cyclical movements in industry.

Another significant reason is the lack of experience – "Western lenders have a long experience with the device, and rely upon armies of specialists who appraise, underwrite and, where necessary, seize and manage real estate security". This is lacking with lenders in China.

The author feels that a buoyant mortgage market is created out of financial crisis. For example, much of the development in US securitisation market came about with the efforts of the Resolution Trust Corporation taking over assets of failed lenders in 1980s.

RMBS issue likely by Hong Kong Mortgage Corporation

The Hong Kong Mortgage Corp, which was set up in March 1997 to acquire mortgage loans from banks and free up their books for new lending, had acquired HK$10.33 billion in mortgages as at end June 1999.

It will issue its first mortgage-backed securities of about HK$1 billion in size in the fourth quarter of this year.

In the meantime, there is a growing interest in mortgage funding both by the banks as also the non-banking finance companies such as  GE Capital and General Motors. Banks find mortgage funding one of their safest invesment options.

For more on securitisation in Hong Kong, see our Hong Kong country profile – click here. 
 

 New insurance product to cut political risk in emerging market investments

One of the reasons for development of emerging market future flows securitisation was the ability to eliminate sovereign risks by trapping cashflows outside the country of origin. Overseas Private Investment Corporation (OPIC) has launched an insurance product that would allow emerging market corporates to pierce their sovereign rating. The product entails the following methodology – an emerging market company wanting to issue debt securities to foreign investors would issue the securities to an SPV ( a trust) in an investment grade country. The trust in turn would issue its own securities to the investors. The trust buys an insurance with OPIC, which obliges OPIC to make payments that the original issuer could not make to the SPV on account of foreign exchange control or a debt moratorium slapped by the originator's sovereign. Thus, the investors continue to get serviced inspite of the sovereign's redirection or moratorium orders.

OPIC is an agency of the US government.

The insurance policy does not cover any credit risk. Investors bear the full risk of default because of credit reasons.

US ABS issue shows modest growth in first half 1999

Markets outside the USA take the shine

Growth of any financial innovation is seen to follow the S-curve – the evolutionary or introduction phase shows low growth rate; followed by abrupt increase in explosive growth phase, finally slowing down to a plateau in the stabilisation stage. Has US securitisation issuance reached its plateau? Not sure, but markets in Europe and Asia, also Latin America, have surely reached the explosive growth stage.

US ABS issue in the first half of 1999 grew about 4.6% to a volume of USD 101.1 billion, as compared to USD 96.7 billion during the same period in 1998 (as per data published in Structured Finance Monitor). As against this, there has been surge in volumes in Japan, Australia and Europe – see reports on our Securitisation news page.. US data traditionally exclude mortgage-backed securities.

The data reveals that the highest share in total ABS issuance (about 32%) is taken by home equity loans. About 22% each is shared by credit cards and auto finance receivables.

CMBS volumes seen declining sharply in 1999

Moody's Mortgage-Finance analysts project that 1999 commercial mortgage-backed securities (CMBS) will total around $60 billion, roughly 25% below last year's level. For the rest of 1999, they expect an active third quarter, with a possible fourth-quarter slowdown in reaction to Y2K-related concerns.

As deals have become smaller and the overall quality of credit has improved, commercial mortgage-backed securities (CMBS) volume for the first half of 1999 was down 20% from the volume of the first half of 1998, as deals became smaller and overall credit quality improved, say Mortgage Finance analysts in a recent report.

[This page lists news and developments in International

securitisation markets – please do visit this page regularly as it is

updated almost on a daily basis.]

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

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

 

• NEC Japan to securitise its office building 
  Added on 19th Jan, 2000 
  NEC Japan will sell its head office in Tokyo to securitize the same, and raise Yen 90 billion, booking a profit of Yen 60 billion.
• Cheers! It is securitization of champagne now! 
  Added on 19th Jan, 2000 
  Securitization asset classes get a "kick" as a French company launches an innovative securitization where champagne bottles will be used as the collateral.
• Securitisation activity heats up in Canada 
  Added on 19th Jan, 2000 
  Canadian securitization activity is heating up with a recent issue by Genesis Trust. The report also gives data about Canadian volumes for last 5 years.
• Chinese company likely to securitise 
  Added on 17th Jan, 2000 
  An Australian bank, Macquarie, has tied up with Chinese Construction Bank for the latter's securitisation proposal.
• Philippines economic body moots securitisation 
  Added on 17th Jan, 2000 
  Statements by policy-makers and regulators in Philippines are optimistic about securitization developing in the country even though no significant amount of transactions has happened still.
• Traditional insurance securitization by Hanover 
  Added on 17th Jan, 2000 
  Hanover Re continues to securitise reinsurance exposures in life, health and personal insurance sector.
• Europe enthusiastic 
  Added on 17th Jan, 2000 
  European participants in securitization are gung-ho on prospects of securitization, as apparent at a recent get-together. This report also gives an overview of the developments.
• Australia looks forward to a busy 2000 
  Added on 17th Jan, 2000 
  Year 1999 saw Australian securitization volumes soar by some 66% and Moody's expects year 2000 to be even a brighter year.
• Turkish leasing firm assigns rentals 
  Added on 5th Jan, 2000 
  Garanti Leasing, a leasing entity of the Garanti Bank in Turkey, assigned its future rental receivables to IFC Washington and Rabobank.
• Malaysia's CAGMAS bonds rated AAA 
  Added on 5th Jan, 2000 
  CAGMAS, the Malaysian agency engaged in acquiring mortgage loans, issued bonds in Dec., 1999 which have been rated AAA by the Rating Agency Malaysia.
• US ABS volumes slide a bit 
  Added on 5th Jan, 2000 
  The asset-backed securities volume in USA in year 1999 dropped to USD 260 billion from USD 271 billion as in 1998 primarily due to the Y2K worries in the last quarter.
• Electricity receivables securitised in India 
  Added on 30th Dec. 1999 
  The Karnataka Electricity Board has securitised power receivables and sold them through an SPV to Housing and Urban Development Corporation, making this the first electricity receivables securitisation in India.
• European Securitisation Forum officials appointed 
  Added on 30th Dec. 1999 
  Office bearers of the European Securitisation Forum have been appointed for year 2000. The forum is a body of the Bond Markets Association.
• Korean housing finance company to securitise loans 
  Added on 30th Dec. 1999 
  Korea recently passed a law to permit securitisation of mortgage loans.
• Korea enacts mortgage securitisation law 
  Added on 30th Dec. 1999 
  Korea recently passed a law to permit securitisation of mortgage loans.
• India: RBI working group suggests legislative changes to promote securitisation 
  Added on 30th Dec. 1999 
  An in-house working group within the Reserve Bank of India has suggested legislative changes to promote securitisation in India. This report also gives link to Vinod Kothari's detailed commentary on the working group's report.
• Catastrophe bonds issuance in 1999 data 
  Added on 28th Dec. 1999 
  Tabulation of catastrophe bonds transactions in 1999 was recently published in Reinsurance.
• Another US bank dogged by securitisation accounting losses 
  Added on 28th Dec. 1999 
  This may be the n-th instance of arbitrary values being recorded for securitisation residuary interests – Community West Bancshares in Goleta, California, will be writing off some USD 8 million off the securitisation retained interests on its books.
• Housing bank in India finalises first MBS 
  Added on 28th Dec. 1999 
  National Housing Bank, the apex housing finance body in India, has finalised a pilot securitisation project with mortgages originated by HDFC.
• Home loans securitisation proposed in South Africa 
  Added on 24th Dec. 1999 
  SA Home Loans, a company that recently started home financing, is to launch its first securitisation in February 2000.
• ABN Amro launches largest consumer loans securitisation in Europe 
  Added on 24th Dec. 1999 
  Recently, ABN Amro Bank launched securitisation of Dutch consumer loans that is the largest transaction in this asset class all over Europe.
• Brazilian oilfield project funded by securitisation 
  Added on 24th Dec. 1999 
  Brazilian company Petrobas recently issued USD 200 million notes securitised on oil income to part finance an oilfield.
• First securitisation of life policy loans in Italy 
  Added on 24th Dec. 1999 
  The largest life insurance company in Italy, Alleanza Assicurazioni, recently securitized loans granted to life insurance policyholders. This is the first transaction of its kind in Italy.
• Pakistan notifies new securitisation rules 
  Added on 24th Dec. 1999 
  The regulator in Pakistan notified rules to allow companies to securitise receivables. The draft rules were framed in June this year.
• Bad loans securitisation continues in Italy 
  Added on 22nd Dec. 1999 
  Markets World-over seem to have gone for X-mas-cum-new-millennium holiday, but Italian banks are busy cleaning up their balance sheets of bad loans.
• Price Waterhouse tells Indian govt to create securitisation-friendly set up 
  Added on 21st Dec. 1999 
  International accounting firm Price Waterhouse Coopers has advised Indian government to create legal environment congenial to securitisation transactions.
• Hong Kong mortgage corporation plans mortgage securitisation 
  Added on 21st Dec. 1999 
  Hong Kong Mortgage Corporation plans to launch mortgage-backed securities worth HK $ 630 million (approx USD 90 million) and has ambitious plans for year 2000.
• Tobacco securitisation deal voted as "Deal of the Year" 
  Added on 18th Dec. 1999 
  The New York tobacco settlements securitisation has been voted as one of the hottest deals of 1999.
• GMAC's securitization volume 1999 reaches USD 22 billion 
  Added on 18th Dec. 1999 
  GMAC-RFC, a unit of General Motors, is the largest securitization originator in the world, and its volume for 1999 has reached USD 22 billion after a USD 2 billion issuance in 1999.
• Banca di Roma, Italy to securitize bad loans again 
  Added on 17th Dec. 1999 
  Banca di Roma, the Italian Bank which was among the first to jump on the securitisation bandwagon has proposed another securitisation of bad loans worth 3.730 trillion lire.
• US banking agencies concerned about securitization; issue joint guidelines 
  Added on 15th Dec. 1999 
  US bank regulators, viz., Federal Deposit Insurance Corporation, Board of Governors of Federal Reserve System, Office of Comptroller of Currency and Office of Thrift Supervision on Monday showed concern about securitisation by banks, and issued a joint press release and guidelines. The stance of the guidelines is primarily precautionery.
• Philippines housing finance body mulls securitization in phases 
  Added on 2 Dec. 1999 
  Philippines Home Development Mutual Fund (Pag-IBIG Fund) plans to securitize its P54-billion loan portfolio on a per-project basis.
• First securitization of all-Internet loans 
  Added on 2 Dec. 1999 
  Online auto loan provider PeopleFirst.com on 1st Dec announced the first-ever securitization of loans completed originated on the Internet.
• Indian housing finance entity to securitize early next year 
  Added on 30th Nov. 1999 
  HUDCO, a premier housing finance body in India, plans to securitize housing loans to the tune of Rs. 10 billion will be out in January 2000.
• India's development finance body preparing for mega securitization deal 
  Added on 29th Nov. 1999 
  Industrial Development Bank of India, a Government-controlled financial institution in India, is readying to go for a mega securitization deal worth Rs. 50 billion of loans with GE Capital.
• Italy makes history by securitising government revenues 
  Added on 29th Nov. 1999 
  Securitisation of social security receipts by Italian government totaling USD 4.8 billion was thrown to subscription on 25th Nov. Financial Times regards the deal as "breaking new ground in financial engineering".
• ABS market in Japan doubles, as assets range from cars to kimonos 
  Added on 29th Nov. 1999 
  Japan, a late entrant in securitization field, is showing spectacular growth in volumes with a variety of asset classes.
• Thai housing finance body buys mortgages, to securitize next year 
  Added on 29th Nov., 1999 
  Secondary Mortgage Corporation bought baht 400 million housing loans and proposed to securitise second quarter of 2000.
• Armed with Internet and securitization, company promises to eliminate receivables 
  Added on 24th Nov., 1999 
  A start-up venture called eTime Capital promises to use online tracking of receivables and securitization to allow businesses to completely eliminate receivables.
• Yet another bank goes bust on accounting lapse for securitization 
  Added on 24th Nov., 1999 
  A small bank in California called Pacific Thrift and Loan failed on charges of inflating the value of its residual interest in securitised loans.
• Countrywide securitizes servicing fees 
  Added on 24th Nov., 1999 
  You may call it the second round securitization – Countrywide has securitized excess servicing fees from the mortgages already sold by it.
• KPMG analysis sees scope for reverse mortgage securitization in USA 
  Added on 23rd Nov., 1999 
  A recent analysis by accounting and consulting firm KPMG shows potential in reverse mortgage securitization in the USA.
• In securitization arena, it is hockey bonds now 
  Added on 23rd Nov., 1999 
  The ever expanding asset classes in securitization takes us to the hockey field where New York Islanders proposed to raise as much as USD 200 million by sale of hockey bonds.
• Tobacco bonds sold out like hot cakes 
  Added on 22nd Nov., 1999 
  The recent sale of tobacco bonds on Nov. 1 was an instant success; however, an article in Business Week raises concerns.
• Korean banks planning ABS issues 
  Added on 19th Nov., 1999 
  Several banks in Korea have firmed plans for securitisation issues.
• Japan to have REITs 
  Added on 18th Nov., 1999 
  Tokyo Stock Exchange is soon going to allow trading in real estate investment trusts.
• Fitch IBCA comments on securitisation for finance companies
  Added on 16th Nov., 1999 
  Fitch IBCA recently [15th Nov., 1999] put up this report: the report discusses the benefits and threats of securitisation for finance companies.
• Innovative securitisation deal by Italian bank strips credit and risk 
  Added on 16th Nov., 1999 
  If securitisation is all about unpacking and packing, an Italian bank has hit upon the most obvious idea: it has retained the credit in loans on its balance sheet and securitised risk – shall we say it is an extension of the cat bonds technology or credit derivatives?
• Pakistan SEC approves securitisation rules 
  Added on 14th Nov., 1999 
  Rules regarding securitisation SPVs have been approved in Pakistan by the SEC Pakistan on 13th Nov., 1999.
• NAIC proceeding on model cat bonds law 
  Added on 13th Nov., 1999 
  National Association of Insurance Commissioners in USA in a recent meeting considered drafts of model law for insurance securitisation.
• Italian government securitisation to be one of the largest ever deal 
  Added on 13th Nov., 1999 
  The securitisation of contributions to Italian state fund by companies is on its way to finalisation as key agencies have been appointed. The deal looks like being one of the largest ever.
• Morgan Stanley to securitise NPAs of Japanese banks 
  Added on 11th Nov., 1999 
  The US investment banker Morgan Stanley in reportedly working on the first-ever securitisation of non-performing loans of Japanese banks.
• Fashion king Blass sells brand equity: sale funded by securitisation 
  Added on 10th Nov., 1999 
  World-renowned couturier and designer Bill Blass sold his brand equity and the sale was funded by issue of asset-backed securities.
• Alan Greenspan speaks on mortgage financing in USA 
  Added on 10th Nov., 1999 
  Fed Chairman Alan Greenspan recently reviewed mortgage financing activity in USA – this report gives a summary of his speech and link to the FRB site for full text of the speech.
• Major mortgage loan securitisation in France 
  Added on 10th Nov., 1999 
  French bank Paribas has launched a major housing loan securitisation for 35000 property loans.
• Indian state reduces stamp duty on securitisation 
  Added on 10th Nov., 1999 
  West Bengal, an Eastern Indian state, has reduced stamp duty on securitisation to 0.1% from 5% as it existed.
• Securitisation to reopen lending window in Philippines 
  Added on 9th Nov., 1999 
  A recent conference on securitisation in Philippines indicated optimism on the potential of securitisation in reopening the lending window in housing finance.
• Nursing home securitisation in Australia 
  Added on 9th Nov., 1999 
  In a recent transaction, cashflows from several nursing homes all over New South Wales were used to collateralise bonds issued by an Australian company.
• Securitisation picks up in Korea 
  Added on 9th Nov., 1999 
  A Duff and Phelps report regards 1999 as the year of securitisation in Korea.
•  Tobacco lawyers preparing for securitisation of fees 
  Added on 9th Nov., 1999 
  After the States, it is now the attorneys, who are actively considering securitising their fees out of the US tobacco settlement suits.

 

NEC Japan to securitize office building

NEC Japan has decided to securitise its head office in Tokyo for Yen 90 billion. The building will be sold to Sumitomo Trust and Banking Corp which in turn will finance itself by issue of securities, backed by the ownership of the building. The building will, in turn, be leased to NEC to allow Sumitomo to service the investors.

The transaction will allow the ailing electronics giant to book a profit of Yen 60 billion on account of sale of the building. The transaction is likely to take place with the current fiscal year of NEC ending in March.

 

Three cheers for securitization industry 
French company proposes securitization of champagne bottles

The constantly expanding asset-classes in securitization transactions must have really got a "kick" as a French company proposed securitization of champagne bottles. Marne et Champgne, the originator, is the second largest champagne producer in France and the transaction seeks to raise euros 396 million through a bond issue that will be backed by 60 million bottles of champagne at various stages of production. The roadshows for the offer began on 17th Jan.

The bond issue is being led by Nomura Securities. It may be noted that Nomura has been responsible for similar innovative asset classes in Europe as pub revenues, TV channel (Formula One) income, etc.

Three types of bond will be issued, all with investment-grade rating. Two of them, accounting for 85 per cent of the total, are rated single-A, with the third triple-B. The proceeds will be used to replace bank funding being used by the company.

This innovative transaction was covered by Wall Street Journal in the following words: "This reflects a new trend in securitized debt, with deals on passenger train companies, Formula One racing teams and future sales of beer. Offerings from so many different sources are spreading across the Atlantic to the US, where companies are also discovering that future shareholder value is best assured by capitalization through the assumption of debt. In the future, corporate financiers might be able to look forward to securitized debt as a means of restructuring and raising finance for acquisitions."

Vinod Kothari comments: The transaction has a few unique features which are noteworthy. First of all, it represents a securitization of physical assets, rather than financial assets. The operating asset of the company, glass bottles though physically with the company still, have been offered as a collateral. In a sense, this amounts to securitization of working capital. If this form of financing is acceptable to investors, it gives a new dimension altogether to the trend towards disintermediation – more companies may substitute bank funding by such securities.

Do you have any comments to offer on this path-breaking transaction? If so, please do write to me and we would gladly publicise your views on this site.

Securitization activity heats up in Canada

The Canadian securitisation market is expected to have lot of activity in 2000. According to data from Dominion Bond Rating Service, the outstanding ABS amount as at end-1999 was C$67 billion, including asset-backed commercial paper. This compares with C$49 billion was outstanding at the end of 1998, C$27 billion in 1997, and C$13 billion in 1996.

The outlook for Canada's asset-backed securities in 2000 is very positive. The first issue to hit the market in 2000 was a C$1-billion deal from Canada Trust named Genesis Trust, seeking to securitise personal line of credits. The deal received a AAA rating. The issue has apparently received strong investor support.

Links: Please do see our Canada country page for more information on Canadian securitisation market.

Chinese bank to securitise

A Chinese bank, Chinese Construction Bank, appears to have lined up with an Australian Bank Macquarie for the former's proposal to securitise loans.

There have been very few securitisation transactions in China – notable was a shipping company's assignment of future flows.

Links Do visit our country profile on China for a detailed account of the legal system in China and why is it difficult to securitise there. Click here to visit.

Philippines economic body moots securitization

Though securitization is yet to catch up in Philippines in a big way, it is on the top of the agenda items of the government. The recently-constituted Economic Coordinating Council has recommended several measures to smart up the housing sector in Philippines. Among these measures is included a suggestion to promote securitisation by the Home Insurance and Guaranty Corp.

In another unrelated development, the State-owned Development Bank of Philippines indicated its resolve to play a larger role in securitisation of mortgage-receivables.

Links – For another news item on securitization in Philippines housing sector, click here.

Hanover Re continues securitisation of non-catastrophe transactions

Securitisation as a tool for alternative risk transfer was mostly limited to catastrophe transactions. However, Hanover Re has been active in non-catastrophe securitisations.

Towards end-December 1999, Hannover Re completed a third securitisation of life and health reinsurance business worth EUR50m ($51m). The deal transfers the acquisition costs of life, health and personal accident reinsurance and was designed for insurers in Asia's emerging markets. Hannover Re has now refinanced EUR230m of life and health acquisition costs in the capital markets.

Links: Our insurance securitization page – click here to access – contains lot of materials on insurance securitisation in both the catastrophe and non-catastrophe segments. There are a number of articles also on this website as well as others.

Europe is gung-ho on securitization prospects in year 2000

Participants at a recent seminar about European securitization appeared greatly enthused about the prospects for year 2000. It was also an occasion to take stock of developments in various parts of Europe.

Several interesting and innovative deals appear to be knocking the door. Paribas Bank is putting together a deal for securitization of rentals receivables from students who stay in the campus of UK's Keele University. Morgan Stanley is expected to securitize a sale and leaseback transaction by a UK retail group. The retailing giant Marks and Spencer has also appointed Morgan Stanley to securitize retail stores.

Securitization of non-performing loans is also likely to hit Europe. Morgan Stanley has bought some 4,000 loans originated by Banca Nazionale del Lavoro, and is likely to securitise them later this year.

In other European markets too, activity is expected to pick up. For example, in Ireland, First Active is expected to launch Celtic 5 in February, selling Eu300m of Irish MBS through Paribas.

In Netherlands, MBS issuer will emerge at the end of the first quarter or early in the second, in the shape of Achmea Hypotheekbank, a unit of the mutual insurance and banking company Achmea Holding. ABN Amro and CIBC World Markets will be joint bookrunners on the Eu500m issue, for which ABN provided funding over the year end.

Links: For a general overview of securitization activity in Europe, see our profile for Europe – click here to visit.

1999 volumes surge in Australia
Year 2000 to be brighter, says Moody's

Year 1999 was a busy year for Australian securitization. A report recently published by the credit rating agency Moody's says that volumes surged in both the asset-backed market as well as mortgage-backed market.

1999 volumes of Australian structured finance securities surged by almost 66 per cent to $A17.2 billion ($US11.28 billion), from around $A10 billion ($US6.56 billion) the previous year, says the report. If one were to look at the asset-backed market alone, the growth was even higher at some 121%. The prime asset-classes in 1999 were auto loans and equipment leases.

Year 2000 promises to be a brighter year, according to Moody's. The factors responsible would be growing need of banks to manage their liquidity as well as their balance sheets, and increased investor appetite for subordinate and below-investment grade securities.

Links: Do visit our Australia country profile for detailed information on securitisation activity in Australia – click here to visit.

 

Turkish leasing company assigns rentals

Garanti Leasing, an entity of the Garanti Bank Turkey assigned future rentals in favour of IFC Washington and Rabobank to raise USD 51 million. The financing will be accounted for on the balance sheet as a loan.

Within the leasing sector in Turkey, this would be the first case of securitisation. However, Garanti Bank itself has been engaged in some securitisation deals earlier.

Links: For a country profile on the securitisation market in Turkey, go for Turkey on our Index page.

Malaysia's CAGMAS bonds rated AAA

The Malaysian securitisation agency CAGMAS' bonds issued in December 1999 have been rated AAA. The Rating Agency Malaysia has assigned the highest rating to these bonds based on the underlying asset quality, etc.

The bonds have a 3-year tenure and carry a fixed rate of interest. The proceeds of the bonds will be used by CAGMAS to buy mortgages from Malaysian housing finance entities.

Links: For a profile of securitisation market in Malaysia, click on the country profile on our index page. We have been carrying news about Malaysian securitisation market off and on, including that on Cagmas.

1999 ABS issuance in USA declines

The volume of asset-backed securities in the USA in 1999 was lesser as compared to the previous year, basically due to the decline in the last quarter owing to Y2K worries.

A Thomson Financial Services Data release said the total issuance in 1999 including private placements as well as public offers was $260.2 billion compared with $271.1 billion in 1998. The drop was basically because of the 4th quarter dip.

Among investment bankers, Credit Suisse First Boston led the 1999 full year totals with $37.7 billion, while Salomon Smith Barney took second position with marginally over $35 billion. Lehman Brothers took third place for the full year leading $34.6 billion.

Electricity receivables securitised in India

The market does not wait for the regulator. Even as the RBI has suggested wide-ranging legislative reforms to enable securitisation transactions, the market continues to move ahead.

India's first transaction of electricity receivables was announced on 29th December. Newspaper reports [Economic Times 30th Dec.] quoted SBI Caps managing director as stating that a deal for sale of electricity receivables worth Rs 1.94 billion [USD 45 million approx] has been concluded between Karnataka Electricity Board as the originator and Housing and Urban Development Finance Corporation as the buyer. SBI Caps was the structuring and advising agent to the deal.

The deal represents transfer of overdue power receivables of the originator from various government companies. Credit enhancement was provided in form of a guarantee from the State government. The bonds have a 10 year tenure redeemable in 10 equal instalments.

European Securitisation Forum officials appointed

Appointment of officials for the European Securitisation Forum for year 2000 was finalised by the Bond Markets Association recently.

Ms. Tamara L Adler, managing director of the European Securitisation Group at Deutsche Bank, London, has been appointed chairman of the Forum. Joerg Dresen, head of the Fixed-Income Division of AXA Colonia Asset Management GmbH in Koelh, Germany, was appointed vice-chairman.

The European Securitisation Forum is a body of the Bond Markets Association. Website of Forum is located at http://www.europeansecuritisation.com/

Vinod Kothari comments: Would it not be a good idea to have a similar forum for Asia? Any takers?

 

NewState to issue RMBS in Korea

No sooner than the law permitting mortgage-backed securitisation was passed, NewState Capital Co, the Korean subsidiary of NewState Holdings, has announced plans to securitise residential mortgage loans worth USD 50 million. The issue would be timed in the first quarter 2000 in which NewState will retain servicing rights.

Headquartered in Seoul, NewState has been in home mortgage business since 1994.

The issue will be underwritten by Daewoo Securities. Daewoo is the third largest investment bank in Korea.

 

Korea passes mortgage securitisation law

The government of Korea recently enacted the Mortgage-Backed Securities Act on December 16, 1999. The Act permits the sale of mortgage loans to third parties without the consent of the borrower.

It may be noted that earlier this year, Korea has enacted a law for general securitisation of assets. The text of the law appears under the Securitisation laws section of our website.

Links: For a profile of securitisation market in Korea, go to country profile on the Index page.

For yet another news item relating to Korean banks securitising receivables, click here.

Working group of RBI in India suggests securitisation-friendly environment

An in-house working group appointed by India's central bank Reserve Bank of India (RBI) submitted its report to the Governor on 29th December. The group has suggested legislative changes to promote securitisation in the country.

The working group has appreciated need to launch securitisation product in India and has spotted immediate potential for securitisation with several financial intermediaries. The group has made several recommendations for legislative changes to support securitisation. Classified into short-term, medium-term and long-term changes, these suggestions relate to a cohesive definition in the Transfer of Property Act, tax law changes, stamp duty relaxation etc.

According to the working group, securitisation SPV structure may be left to the choice of the originator and may be a company, trust, association of persons, but the group recommends a mutual fund structure. The SPV should be registered with the Securities regulator, according to the group.

Here are Vinod Kothari's detailed comments on the working group report.

 

Catastrophe bonds in 1999 tabulation

Data about the 1999 issues of catastrophe bonds was recently published in Reinsurance:

INSURANCE-LINKED SECURITISATIONS – 1999

 

INSURED OR CEDANT		COMPLETED AND PERILS		DEAL STRUCTURE		LIMIT ($m)		TYPE
Horace Mann	Jan  capital		CatEPut		100		Contingent
Constitution Re	Jan		Cat XL		10		Risk transfer
St Paul Re/Mosaic Re II	Feb		Cat XL		45		Risk transfer
Kemper Insurance/Domestic Inc.	Mar  – New Madrid quake		Cat XL		100		Risk transfer
Gerling Credit/SECTRS-1	Apr		Trade credit		494		Risk transfer
Sorema/Halyard Re	Apr		Aggregate XL-Europe & Japan		17		Risk transfer
Oriental Land/Concentric Re	May		Cat XL- Tokyo earthquake		100		Risk transfer
Oriental Land/CircleMaihama	May		Cat XL – Tokyo earthquake		100 Contingent capital
Gerling Global Re	June		Cat XL – US cat		80		Risk transfer
USAA/Residential Re 3	June		Cat XL – US hurricane		200		Risk transfer
Undisclosed insurer	Sept		PCS index – New Madrid		50		Risk transfer
Koch Energy/Kelvin Ltd	Oct		US weatherderivative contracts		50		Risk transfer
Hannover Re	Oct		Life & healthacquisition costs		50		Risk transfer
American Re/Gold Eagle Capital	Nov		Cat XL – modelled losses		182		Risk transfer
Gerling Global Re/ Namazu Re	Nov		Cat XL – Japaneseearthquake		100		Risk transfer

 

Yet another bank dogged by securitisation accounting losses

Community West Bancshares in Goleta, California, USA was forced to write off USD 8 million of the USD 20 million worth securitisation residuary interests that stayed on its books after the loans it securitised during 1998 and 1999. Consequently, the bank will be reporting a loss of USD 3.8 million for the year.

This may be the n-th instance of arbitrary values in securitisation accounting. Residuary interests are the interests that a securitisation originator retains in assets that it sells: for example, residuary income in the SPV after paying off all external creditors. The FASB 125 requires such interests to be valued and reported on books. There have been several instances where arbitrary or inflated values were assigned to such interests. There have been quite a few cases of banks failing such as First National Bank of Keystone [ see for news on this site].

The bank plans to quit securitisation business.

Links and discussion on Accounting for securitisation : We have been actively pursuing issues relating to accounting for securitisation which we feel is very crucial to securitisation business. Recently, we published Martin Rosenblatt's views on the matter. Shortly we are going to publish more views. If you have any contribution to make, please do write to me.

 

Housing finance body in India finalises first mortgage-backed securitisation

National Housing Bank (NHB), apex housing finance body in India, has finalised plans for the country's first mortgage-backed securitisation program. This is in fact a pilot project, to draw up a template for such transactions in future. Newspaper reports [Economic Times 28th Dec] quoted NHB's Chairman as stating that there will be more MBS issues in time to come consisting of mortgages originated by several other housing finance companies.

The pilot will consist of mortgages originated by HDFC, one of India's premier housing finance entities. The issue will be arranged by SBI Caps and ICICI Securities.

Vinod Kothari comments: Does this issue mean NHB in future will re-invent itself into a Fannie-mae-kind of avatar? Looks unlikely, as in the present transaction, the role of NHB is more of a facilitator rather than guarantor.

Links: On the news page, we have carried several news items relating to NHB's proposed securitisation transaction as also other securitisation events in India. Readers will find country profile on India to be of great interest – go to the home page and look for India's country profile.

Home loan finance company in South Africa proposes securitisation

Securitisation is set to take off in South Africa next year. SA Home Loans, a non-bank lender that commenced operations in February this year is expected to launch its first securitisation transaction in February 2000.

The R300m deal will comprise some R277.5m of senior notes rated triple-A by Duff & Phelps and Fitch IBCA, R15m of unrated 'B' notes and a R7.5m retained first loss tranche.

Links – See country profile for South Africa on our Index page. The page also gives links to several South African securitisation issuers.

ABN Amro launches Europe's largest consumer loan securitisation

On 10th December, ABN Amro launched Europe's largest consumer loans securitisation: an EU1.376 billion issue representing securitisation of Dutch consumer loans. The collateral is a portfolio of revolving-type consumer loans granted by the Bank. The transaction will revolve for 3 years before it starts amortisation.

Oilfield development in Brazil funded by securitization

ABN Amro bank recently launched USD 200 million notes backed by oil income to part finance the development of an oilfield in the Rio de Janeiro region in Brazil. The issuer is a consortium of a project company called Companhia Petrolífera Marlim and Petrobas.

Links: See the country profile on Brazil – click on the Index page and go to Brazil.

First securitisation of life policy loans in Italy

Alleanza Assicurazioni, Italy's largest life assurance company, recently securitized the loans it granted under its life assurance policies. The transaction was offered on 10th December. Worth Eu278.3m, the deal was managed by Salomon Smith Barney.

The transaction is considered fully secure, as the loans are backed by the surrender value of the policies.

San Giorgio SpA, an Italian SPV, would be acting as a conduit for the transaction. The transaction would enable the assurance company to treat the cash raised by sale as a reserve, and would bolster its capital.

Pakistan issues securitisation rules

Final rules to allow securitisation transactions to happen in Pakistan were notified by the Securities Exchange Commission, Pakistan on 22 Dec, 1999.

The thrust of the new rules is to regulate the structure, functioning and taxation of SPVs. SPVs will be public limited companies, and they will be exempt from payment of income-tax. The securities issued by the SPV will be regarded as term finance certificate, or simply put, as debt securities.

The market has taken the new rules with optimism and it is expected that the country's debt market will get a new lease of life with the new rules. Potential issuers of securitised instruments in Pakistan include leasing companies, financiers, credit card issuers etc.

The draft rules were framed by the SEC in June this year.

For a full text of the new Securitization rules in Pakistan, click here.

For a profile of the securitization market in Pakistan, go the country profile on the Index page.

Italian banks continue to securitize bad loans

Markets World-over seem to have gone for X-mas-cum-new-millennium holiday, but Italian banks are busy cleaning up their balance sheets of bad loans.

In a recent transaction (Il Sole 24 Ore, 21 Dec., 1999), Banca Nazionale del Lavoro (BNL), finalised the securitisation of credits worth L3,500bn. It has chosen JP Morgan & Co Inc of the US to carry out the operation. It will involve the transfer of loans on a non-recourse basis. The bank continues to have negative net worth but this transaction will see it lesser deep in red.

Links – We have carried news items about securitization in Italy several times on this page. Also see the country profile for Italy on the Index page, which also has a write-up on the technique for securitisation of bad loans.

Pricewaterhouse advises India to create securitisation-friendly environment

In a recent report, Pricewaterhouse Coopers (PwC) advised the Indian government to create a legal environment congenial to securitisation transactions. The report related to infrastructure finance.

Stating that the creation of an appropriate legal framework for securitisation transactions was long overdue, PWC pointed out that the impediments in this were widely appreciated and it was necessary to undertake parallel reforms that address these issues.

These issues include the tax status of a special purpose vehicle (SPV) structured as a trust, allowing contractual savings institutions to invest in special purpose vehicles and developing appropriate accounting standards for securitisation transactions, the international consultancy firm said.

Vinod Kothari comments: More important than the legal changes suggested by PwC, which are anyway not any major stumbling block, is a clarity from the Reserve Bank of India, that banks can invest in securitisation transactions and the manner of computing capital adequacy requirements for banks that have securitised.

Hong Kong mortgage co. to securitise mortgages

Hong Kong Mortgage Corporation (HKMC) has plans to securitise HK $ 630 million worth of mortgage-backed securities which will be sold by American Express bank.

HKMC is a Fannie Mae-type body created by the government to activate secondary mortgage markets in Hong Kong.

HKMC has ambitious plans for year 2000 as it plans to come out with KH $ 2-3 billion worth of mortgage-backed securities.

Links: See also our country profile for Hong Kong on the Index page.

Tobacco bonds deal rated as "deal of the year"

Investment Dealers' Digest, a weekly publication in the USA, has selected the tobacco bonds issue as one of the hottest deals of 1999. Eighteen such deals were announced last week by the publication.

The awards are selected from issuance in various sectors such as healthcare, energy, emerging markets, real estate, etc.

The tobacco bonds deal has been selected in the Structured finance category, and the award goes to Salomon Smith Barney, investment bankers to the transaction. Details of the tobacco bonds issued by New York have appeared several times on this page – click here.

GMAC RFC's 1999 volume reaches USD 22 billion

GMAC – Residential Funding Corp., a unit of General Motors, is the largest securitisation originator in the World. It securitised loans worth USD 2.1 billion in November, taking its 1999 volume to USD 22 billion. Large part of loans securitised by the company consist of home equity or subprime loans.

Banca di Roma proposes securitisation of bad loans

Banca di Roma SpA, the Italian bank, has approved a securitization programme for its bad loans portfolio of worth a gross amount of 3.730 trln lire with a net book value of 3.100 trln.

When the securitisation law was passed in Italy earlier this year, Banca di Roma was among the first to launch a securitisation program. Click here for this piece of the news in July this year.

More links: Follow the Italy country page – see country profiles on the Index page.

 

US bank regulatory agencies issue precautionary guidelines on securitisation

Caveat bankers, say the agencies

This development may well be read as a precursor to tighter controls on securitisation activity of US banks. US banks have been going very optimistic on securitisation but recent failures of some banks attributable one way or the other to their securitisation business have created ripples in the market place, forcing the regulators to take this action.

On Monday, 13th December, the 4 bank regulatory agencies in the USA, viz., Federal Deposit Insurance Corporation, Board of Governors of Federal Reserve System, Office of Comptroller of Currency and Office of Thrift Supervision issued joint press release and guidelines on securitisation. The stance of the guidelines is mainly precautionary. For example, the Guidelines open with the following remark: " Recent examinations have disclosed significant weaknesses in the asset securitization practices of some insured depository institutions. These weaknesses raise concerns about the general level of understanding and controls among institutions that engage in such activities."

The problems pointed out by the agencies are primarily accounting-related problems. The agencies have pointed out the 4 major problems as under: (1) the failure to recognize and hold sufficient capital against explicit and implicit recourse obligations that frequently accompany securitizations, (2) the excessive or inadequately supported valuation of "retained interests," (3) the liquidity risk associated with over reliance on asset securitization as a funding source, and (4) the absence of adequate independent risk management and audit functions.

Full text of the Interagency Guidance has been placed on this site – click here to read (the file will open with Adobe Acrobat reader).

Vinod Kothari comments: We have been expressing concern about the accounting practices on securitisation for sometime on this website. We are also trying to elicit opinions of other experts in the matter, and have constituted a virtual roundtable to discuss this issue. Should you have a contribution to make, do write to me.

 

Philippines housing finance fund mulls securitization in phases

Philippines housing finance body Home Development Mutual Fund (Pag-IBIG Fund) plans to securitize its P54-billion loan portfolio on a per-project basis. Report in BusinessWorld said, quoting the CEO of the Fund that previous attempts at securitizing failed as the Fund tried taking the entire portfolio at a time. The Fund has about 240000 loans on its books.

Securitization of mortgage loans has become a hotly debated issue in Philippines. Critics lament the inability of the administration to handle housing finance, which they claim should have been a private sector domain. Another unrelated article in BusinessWorld of 1st Dec claims that "If recent developments are any indication, the Estrada administration may be tacitly admitting its mistake in reverting to the failed government interventionist scheme in financing the housing program".

Links: We have carried news about securitization activity in Philippines off and on. Besides, see the country profile on the Index page.

All-Internet loans securitized

Prudential Securities and Internet-based auto loan provider PeopleFirst.com announced on 1st Dec. securitization of auto loans originated entirely on the Internet. The offering of USD 116 million is backed by auto loans originated on the website on PeopleFirst, and marks the first securitization of loans entirely generated on the Net.

The transaction is credit-enhanced by an insurance provided by Financial Security Assurance and is rated AAA by S&P and Moody's. The weighted average coupon is 6.58%.

Do you know anything more on this transaction? Can you make any comments on the unique aspects in the rating of transactions originated on the Net? Your comments will be appreciated and published on this site – click here to write.

Housing finance body in India to securitize early next year

A report in The Economic Times of 30th November says that HUDCO, a premier housing finance body in India will securitize housing loans to the tune of Rs. 10 billion early next year. The deal was in the news for a long time and HUDCO was reportedly shortlisting agencies for the premier housing loans securitization program in India.

The report quoted the CEO of the company as saying that the transaction will be offered in two tranches of Rs 5 billion each.

India's premier financing body readying for mega securitization deal with GE Capital

A report in Financial Express on November 25 said Industrial Development Bank of India (IDBI) was on the verge of stitching together a mega securitization deal with GE Capital where the former will sell off loans worth Rs. 50 billion by way of securitization. This will be the first securitization by any public sector bank or financial institution in India, nay, the first securitization of corporate loans.

IDBI is a premier financial institution in India, created for development finance by the Government. Most of IDBI's loans will be in the nature of corporate project finance.

Vinod Kothari comments: The report does not clarify whether GE Capital is structuring the deal or is buying up the loans itself. If the latter be true, it would be ironical for India's financial sector where domestic banks themselves are flush with funds and the only reason why they would not buy up IDBI's securitised loans would be that the Reserve Bank of India has not clarified whether banks can invest in such deals. GE Capital, on the other hand, might itself borrow from these very banks to invest in the transaction.

Italian government launches unpaid tax bond

Securitisation of government social security dues totals USD 4.8 billion

Deal rated higher than Italy's sovereign rating

Italy made a history in the world of securitization by being the first in the World to securitize government revenues by taxation. A report in Financial Times London said this was a deal that "broke new ground in financial engineering".

We have talked about this deal several times on this site. See the news reports – here, and for further news reports, see links with the news item above.

This deal was offered to capital markets on 24th November by selling USD 4.8 billion worth of bonds. The bonds were over-collateralised (see our securitisation glossary on the Index page) to the extent of 10 times, and thereby, the bonds obtained AAA rating, which is higher than the sovereign rating of Italy.

Financial Times also says that the deal will be watched closely by other European governments as they might be planning similar issues.

According Paribas, lead manager of the issue, the issue was sold mainly to European and Asian banks.

Japan ABS market doubles as assets range from car loans to kimono bonds

Japan was a late entrant to securitization business, but recently, there has been a remarkable spurt in volume.

A report in Financial Times of 25th Nov., quoting practitioners in Japan says that the outstanding issuance in Japan this year has doubled in relation to the previous year to Y 2000 billion, and is likely to double again next year. Domestic investors are taking keen interest in securitisation issues.

Reflecting the variety of asset classes, recently a consumer finance company called Quoq issued bonds backed by kimono loans. Kimono is a traditional Japanese dress mostly populra among women of 40 and above. A kimono costs a fortune, anywhere between Y 200000 to 2 million. Small banks and finance companies grant loans to buy kimonos.

The other asset classes in Japan are 22% in car loans, 32% in leases, about 9% in shopping loans which includes kimono loans as well.

Relevant links: News reports about Japanese market have been often flashed on the news pages – see this and the other news page.

For a country profile of Japan, see the Japan page – follow the link on the Index page.

There is a fairly detailed article on Japanese securitisation – see the securitisation articles page.

Thailand body buys receivables; to securitize second quarter 2000

Secondary Mortgage Corporation, a Fannie-May-type body set up in Thailand, has started acquiring mortgage loans but would wait till the second quarter next year before it securitises them into the market. A report in The Nation said that the Corporation agreed with Government Housing Bank to buy Baht 400 million loans on 24th Nov.

Securitisation of housing loans in Thailand is a part of the Government's August-package to revive the economy which suffered heavily during the Asian currency crisis but is showing sure signs of revival. The revival of the economy would help the Corporation in being able to offload the mortgages to investors.

Relevant Links: We have covered news about securitisation in Thailand on various occasions – search this and the previous news pages.

The general securitisation environment in Thailand is covered on country profile – check the Index page for a country profile of Thailand.

 Company to use Internet and securitization to eliminate receivables

If this promise sees the light, companies may soon look forward to the day when their balance sheets will be lighter by trillions locked in receivables mainly due to the time the process of receivable posting, tracking, and settlement takes. eTime capital would make use of the Net and securitization of asset-backed receivables to provide companies cash against receivables instantly.

A company release explains the concept as thus: eTime Capital is using the Internet to revolutionize the financial supply chain for trade receivables. eTime Capital uses the Internet to integrate information across the seller, buyer, transportation service provider and financial institution comprising the web of trading parties into a single real-time system. By integrating real-time information with Internet-speed financial services, eTime Capital promises to create a new industry category that will virtually eliminate accounts receivable. Additionally, through its securitization of asset-backed trade receivables, eTime Capital will allow all companies to directly access the capital markets, regardless of their credit rating.

The inspiration for this venture comes from the realisation that "there has been tremendous innovation in the physical supply chain in recent years, yet the financial supply chain is fundamentally unchanged since the rise of modern banking-over 700 years ago".

Yet another bank goes bust on securitisation accounting lapse

A small bank in California went bust on Friday last week. Named Pacific Loan and Thrift, it was a small bank with just USD 118 million in assets. But its failure is expected to cost bank insurance fund some USD 50 million, says a report in American Banker of 23rd November.

The 11-year-old bank originated first and second residential mortgages to subprime borrowers over the Internet and via its 20 loan-production offices in 13 states. It then securitized and sold these loans on the secondary market. By the end of 1998, the institution had 541 full-time-equivalent employees, though the total shrank by more than half this year under pressure from regulators. Virtually all the bank's deposits were in certificates of deposit marketed via telephone.

The reason for the collapse is that a majority of the bank's USD 48 million in Interest only residuals out of loans securitised by the bank are worthless, says the report quoting FDIC officials.

Updation dated 25th Nov., 1999: A further report in American Banker of 24th Nov. says that the assets of the bank included clean-up calls on securitised loans which had been valued at ambitious figure by the bank but which would sell for a pittance. The FDIC it seems had already objected to the valuation and issued a cease and desist order, but an accounting firm ultimately frustrated the FDIC by accepting the bank's valuation based on assumptions about interest rates, etc.

Expressing concern about the method of valuation of retained interest in securitization, an interagency group of bank and thrift regulators wants to change the rules for valuing residuals. Members already agree that financial institutions should be limited in the amount of residuals they may count as capital.

Vinod Kothari comments: We have earlier reported on the failure of First National Bank of Keystone – click here to view.

Accounting for securitisation transactions by banks is apparently fraught with many problems. An article in Business Week in Oct. 1998 put it beautifully: " Securitizations are all about guesswork. First, companies guess how much revenue they can expect at a particular time. Then they guess how much of that money they will need to back their bonds safely. Finally, they guess how much cash will be left over–and book that as profit."

There are some serious issues about FASB 125 that we would like to discuss. We want to constitute a roundtable on this issue. If you have intimate understanding of accounting principles and practices, you are welcome to join the roundtable – by e-mailing me.

Countrywide securitises excess servicing fees on securitised mortgages

You may well call it the second round of securitization, or securitisation of securitised flows – Countrywide of USA has securitized the servicing fees on mortgages already sold to the agencies.

Excess service fees are the originators' residuary interest, normally his spread, in mortgages securitised by the originator but still being serviced by him. It is usual in securitisation transactions to break the servicing fees into normal fees and excess fees, with the latter representing originator profits.

Countrywide would have already raised upfront cash on mortgages at the time of their original sale to the agencies, viz., Fannie Mae or Freddie Mac. Securitisation of service charges would now mean even the profit on such securitised mortgages is being securitised.

A news report in American Banker 23rd Nov on this item said that in a market where new origination was at an ebb, Countrywide had little other choice.

Reverse mortgages securitization holds potential, says KPMG

A recent analysis by KPMG sees a potential in reverse mortgage securitization in US mortgage markets. A reflection of this trend may also be found in the remarks of Fed Chairman Alan Greenspan in a recent speech – see report on this site.

According to the KPMG report dated 19th Nov., the logic is quite simple. " Of the nearly $5 trillion in U.S. home equity today, about $1 trillion is owned by the elderly, a figure that will only increase as baby boomers retire (see story below). And some industry observers see a fundamental change in how retirees will treat that wealth tied to their homes, tapping the equity to supplement rather than leave it to inheritors. That trend could make the reverse mortgage market –and securitizations –explode. "

A reverse mortgage arises when a homeowner 62 years old and older borrows against the appraised value of his home, giving him a set amount each month. Homeowners don't have to make any payments until they die or leave their houses for an extended period of time due to illness. When one of these things occurs, the bank gets the principal and interest back on the loan, along with half the home's appreciated value.

Thus, a reverse mortgage serves as a source of earning for the old, to be repaid by the value of the house after their death.

Since 1990, about 52000 reverse mortgages have been written in the USA but the potential is still huge. The analysis says, quoting experts, that reverse mortgage generation could increase 10% to 15% a year as aging homeowners look for ways to supplement income. The potential market is unlimited: $4.8 trillion in U.S. residential mortgages were outstanding at the end of the first quarter, according to the Bond Market Association.

It is notable that Lehman Brothers was the first investment bank to securitize reverse mortgages in August this year.

In securitization arena, it is hockey bonds now!

About 2 years back, an article in Business Week said: Wall Street can securitize everything. Ever expanding array of asset classes being securitized proves this statement beyond doubt.

Though securitization of sports revenues is not new, this one is a sizeable transaction – New York Islanders proposes to raise USD 200 million by sale of bonds backed by fixed revenue streams the U.S. National Hockey League team gets from television cable contracts and advertisements at its home games. CAK Universal Credit Corp. of New York is said to be underwriting the deal for the New York metropolitan area team, which will be marketed as a private placement, probably in the first quarter of 2000.

Other instances of sports revenues securitization in the USA include the Staples Center in Los Angeles and the Pepsi Center of Denver which raised money through the sale of debt backed by expected revenues from license agreements for luxury suites and "other revenue producing arrangements." The Staples deal totaled $315 million and the Pepsi Center offering totaled $139.8 million. The bonds of both transactions had a life of about 20 years.

Links: For an earlier news item on a UK soccer club's securitisation, refer to this link: click here

 Tobacco bonds a sell out

Tobacco bonds issued recently by New York city sold like hot cake – though the name might sound like adding the smell of tobacco to the cake. A recent article in Business Week of 20th Nov. says that on the very first day of opening of the issue on Nov. 1, investors snapped USD 709 millions worth of securities. There was a huge demand and many investors were left empty-handed.

New York city was the first municipal government to securitise tobacco settlement dues. We have carried several news reports on this deal – click here and for further links, refer to the above-referred news item

The Business Week article also comments on the risks inherent in tobacco bonds. Observers doubt if tobacco companies would remain solvent to pay the settled amount in damages.

Korean banks planning ABS issues

Several banks in Korea have firmed up their plans for go for securitisation issues. A report in The KoreaHerald of 19th Nov. says that the Korea Exchange Bank going ahead with the issuance of 10-year asset-backed securities (ABS) worth 100 billion won. The issue will be backed by the bank's nonperforming loans made to companies under court receivership or bank management control. The issue will be credit enhanced by a deposit of 20 billion won with an SPV.

Meanwhile, Kookmin Bank and H&CB of Korea also plan to securitize their real estate holdings or assets below investment grade.

Links: This site has a special focus page on Korean market – see the Index page and look for the country profile of Korea.

As for bank securitisation, click here to go to the dedicated page on securitisation of bank loans.

Securitisation of non-performing assets has been discussed in the country profile page of Italy.

Japan to have REITs

Come January 2000, Japan will have real estate investment trusts (REITs) as Tokyo Stock Exchange proposes to allow trading in shares of trust funds investing in real estate. Trading in REITs is going to be allowed by the government shortly.

Real estate investment vehicles in corporate form are already being traded on the exchange. The trust form is popular in US markets and several other common law countries where trusts are preferred as they achieve a tax transparent status.

Fitch IBCA on securitisation for finance companies

Fitch IBCA on 15th Nov has put a report on impact of securitisation for finance companies. The report discusses the risks and rewards of securitisation for finance companies.

Fitch IBCA says that securitisation has proved to be a "double edged sword" for finance companies. With its several benefits, there are certain inherent risks for a finance company, particularly the moral imperative to save the transactions securitised by it which may not technically have any recourse obligation.

The foremost advantage of securitization is its use as a resilient mode of funding. Lower-rated companies have better access to securitised funds. However, "there are clear risks for any finance company that is over-reliant on securitization. The market has not been tested in a prolonged economic downturn and should not be viewed as impervious."

Excessive reliance on securitisation is not a wise option for most finance companies. According to the report, investment grade companies should keep options open to a broad array of funding sources and look at securitisation for a "contingency liquidity".

Accounting standards allow upfronting of gains on securitisation, resulting into higher profits for companies that have a consistent reliance on securitisation. In the process, there is a transfer of profits from future to present, which becomes a compulsion for companies resorting to this on a regular basis. In the process, the quality of earnings takes a backseat. If environment becomes unfavourable and securitisation activity declines, this would result into a sudden drop in profitability. [Newcourt Credit is an example.] As a result, many companies have become more conservative in securitisation accounting and have even resorted to changing securitisation structure so as to make it on-balance-sheet.

If regulatory capital relief and achieving reduction in funding costs is an objective, there might be a tendency to securitise high quality assets. "A tendency to securitize high-quality assets may lead to adverse selection, causing an overall decline in the on balance sheet portfolio. Loans that do not conform to standards set by securitization investors, perhaps due to missing documentation or early delinquencies, may be excluded. Issuers also may be tempted to "cherry pick" assets, keeping lower quality assets on the balance sheet to achieve lower securitization costs. A similar phenomenon occurs when issuers purchase underperforming loans out of pools to enhance the securitizations' performance."

Innovative securitisation deal by Italian bank

bank strips and retains credit, parcels the inherent risk

A report in CORRIERE DELLA SERA says that Italian merchant bank Banca Commerciale Italiana (COMIT), the Italian merchant bank, has just concluded a securitization of L8,000bn, the first of this kind in Italy (publication date 14 November 1999). The innovation lies in the fact that it is a synthetic operation, with only the risk being sold while the credits remain in the institution's assets.

Vinod Kothari comments: Credit derivatives are known to achieve transfer of risk: this transaction is a securitised derivative which results into creation of a marketable security representing risk in a portfolio of loans. In this sense, the transaction is application of the cat bonds technology to credit risks, and is an important milestone in development of securitisation. The risk securitisation technique has so far been limited to natural calamities such as catastrophes and weather: its application to credit where the risks are more systematic and definite is an achievement.

Do you have any views on this development? Or are you aware of any more such deals, either in the making or in the market? Please post them either on the securitisation forum [ click here ] or e-mail them to me.

Links: For detailed commentary (in Italian) on Italian securitisation law and markets, go to the articles section – click here. For country profile on Italy, click here. For text of Italian securitisation law, click here. Several news about securitisation in Italy have appeared on this page – browse the news pages.

Pakistan approves securitisation rules

The Securities and Exchange Commission Pakistan has approves rules on asset-backed securitisation. The draft rules were framed and put up for public comment in June this year. The draft rules were placed on our website along with our commentary thereon – see securitisation laws page and our commentary on the country profile for Pakistan.

A report in Business Recorder says that the rules on asset-backed securitisation, called Companies (Asset-backed Securitisation) Rules, 1999, were approved in a meeting on 13th November in Islamabad.

From the report published in Business Recorder, it seems that the broad structure of securitisation rules is the same as in the draft rules earlier posted.

NAIC working on model law for insurance securitisation

In an earlier report on this site, we had reported that the National Association of Insurance Commissioners in the USA was working on a model law on insurance securitisation.

In a recent meeting of the commissioners [ Fall National Meeting in Atlanta, Georgia, on October 2 – 6, 1999] it is reported that quite a headway has been made in formulating the model. It is reported that in the above meeting, the industry interested parties offered a draft Special Purpose Vehicle (SPV) Model Act for those interested in using an onshore SPV structure for catastrophe securitizations. In the draft, the SPV would be defined as an entity not affiliated with the ceding insurer, acting as an intermediary between investors and ceding insurers. The SPV and would be authorized and operated under a simplified and specialized regulatory structure. The SPV would sell securities to investors and be contractually bound with the ceding insurer to pay amounts upon the occurrence of a triggering event. Regulators did not have an opportunity to review the draft prior to the meeting. and are expected to have several questions regarding the draft model which are expected to be discussed in Aan interim conference call will be held to address questions from the Working Group. Additionally, separate tax legislation which is critical to efficient implementation is being developed by the industry Iinterested Pparties and is expected to be available in December. Finally, the American Academy of Actuaries and other interested parties made presentations regarding index-based insurance derivatives in hedging property/casualty insurance transactions.

Italian INPS securitisation going ahead

Deal to be one of the largest in the World

Securitisation by Italian treasury and state pension fund, of the unpaid contributions by companies to the INPS, is proceeding ahead. Key agencies for the transaction have been appointed. Banca Intesa SpA unit Caboto, Merrill Lynch International and Cie Financiere de Paribas will be managers to the unique transaction of its kind world over.

Earlier this year, Italian government announced its plans to securitise these contributions and thereby fill up a part of its budget gap. News about the proposal was flashed on this website – click here.

The securities are likely to be issued by an SPV called Societa di Cartolarizzazione dei Crediti INPS SpA and are expected to have a AAA rating from the four main rating agencies.

The size of the transaction, presently not confirmed, is likely to be around euro 4.5 billion (approx 4.5 billion USD) which would make it one of the largest single deal in the ABS segment.

This website has one of the most comprehensive resources on Italian securitisation. For a country profile on Italy, see the country link on the Index page. For full text of Italian securitisation law, see our securitisation laws page – click here. Lucia Mazzocco has recently contributed an elaborate commentary on the Italian securitisation law – click our articles section here.

 Morgan Stanley to securitise Japanese banks' NPAs

Deal to be first for Japan

Morgan Stanley Dean Witter & Co plans to securitise non-performing loans of Japanese financial institutions for sale to domestic and overseas investors. The US investment bank will be the first to attempt to securitise bad loans in Japan. The deal is expected to offer more than 20 billion yen worth of bonds with real estate as collateral. The terms of the issue are likely to be finalised by mid-November.

On this site, we have earlier carried news about securitisation of non-performing assets in Italy. Click here to visit this news. More about the methodology of securitisation of non-performing assets is available in the country profile on Italy – click on the Index page and go to Italy page. On securitisation of bank loans in general, click here.

For country profile of securitisation in Japan, go to the Index page and see the country profile of Japan. Also, there is an article by Roy True in the articles section.

Links: For securitization of non-performing loans, refer to the special section – click here

Bill Blass sells brand equity: sale funded by ABS

World renowned couturier and designed Bill Blass announced on 8th November the sale of his $700 million design and licensing empire to Haresh T. Harani, Chairman of the company's largest licensee, The Resource Club, Ltd., and Michael Groveman, Blass' Chief Financial Officer.

The sale, for an undisclosed amount, was funded by the apparel industry's first investment grade asset-backed securities. The securities are backed by the company's license fees and trade marks.

Alan Greenspan reviews mortgage financing in USA

In a recent speech [2 Nov., 1999], Federal Reserve Chairman Alan Greenspan reviewed the development and trends in mortgage banking in USA.

US mortgage markets are one of the most developed markets in the World. To quote Greenspan: " Your predecessors, and perhaps even some of you, championed the then-novel lower downpayment, long-term, conventional, amortizing, residential mortgage instrument that has become today's basic foundation of housing finance".

Greenspan reasoned why mortgage banking in time to come will be constrained by the growth rate in purchase of new houses, and will have to depend more on hands changing.

To access full text of Greenspan's speech, click here.

 Major property loan securitisation in France

French bank Paribas has launched a securitisation operation on property loans for UCB, a subsidiary of BNP Paribas, with the creation of the MasterDomos mutual credit fund, which is to acquire some 35,000 property loans for around 1.525 billion euros. Around 51 per cent of the loans are mortgages and 49 per cent depository loans, says a report in Les Echos.

Securitisation in France is growing quite fast, particularly after the recent legislation. See for details of securitisation activity in France our country profile on the Index page.

More news on France was published recently – click here

Do you have more news or materials about securitisation market in France? Send me a mail – I would be obliged for your contribution.

West Bengal reduces stamp duty on securitisation

Stamp duty is still a major hurdle to securitisation transactions in India but states are gradually removing this hurdle. West Bengal, the sleepy Eastern Indian state, became the latest among the 5 which have already reduced stamp duty on securitisation transactions. West Bengal reduced duty from 5% to 0.1%, in accordance to a promise in the last Budget.

The other states are Maharashtra, Gujarat, Karnataka and Tamil Nadu.

A copy of the West Bengal notification dated 7th July was available only recently. The West Bengal notification is generic and does not have the discrepancies found in the Maharashtra and other notifications earlier.

For the genesis of the stamp duty problem in India, see our section on Indian securitisation – click on the Index page for country profile of India.

Securitisation to reopen lending window in Philippines

Securitisation is likely to re-open the lending window in Philippines. The window was shut down by mounting loan defaults resulting from the currency crisis in 1997. " Two years later, securitization comes as a key for the possible reopening of the window and offer housing finance to more consumers." These views were expressed by participants at a recent conference on securitisation in Philippines.

Securitisation in Philippines was initiated in 1994 by State-owned housing finance outfit Pag-IBIG Fund. The Fund issued mortgage-backed securities in P500 million 1994 and then in P 430 million in 1997.

Thrift banks in Philippines have also become active in securitisation. 

Nursing home revenues securitised in Australia

Moran Health Care group, Australia, proposes securitisation of revenues from old age care homes owned and operated by its group companies. It is issuing A$93.6 million fixed-rate senior annuity bonds due Oct. 12, 2027, rated double-'A'; and A$34.3 million fixed-rate subordinated annuity bonds due Oct. 12, 2027, rated triple-'B'-plus. The bonds are backed by revenues from 40 nursing homes (residential aged care facilities), and eight assisted living apartment complexes, located throughout New South Wales, Victoria, Queensland and Western Australia. The facilities are operated by Moran Health Care (Australia) Pty. Ltd. (MHCA, a subsidiary of Moran Health Care Group Pty. Ltd.), and managed by Omega (Australia) Pty. Ltd.

The transaction is the first securitisation of nursing home revenues in Australia.

Lawyers prepare for securitisation of fees in tobacco suits

Deal to be first securitisation of legal fees

Why wait for years if you can eat today? In our age of impatience, who is prepared to wait for years to receive legal fees? The attorneys who are to receive legal fees out of the tobacco suits against 4 major tobacco companies are actively parleying with investment bankers to securitise their fees. Morgan Stanley Dean Witter is working with more than a dozen law firms to securitize a portion of their combined legal fees stemming from the $246 billion settlement reached between big tobacco companies and 46 states. The deal would represent the first securitization of legal fees.

The legal-fee bounty appears ripe for securitization, as the states' lawyers are guaranteed at least $10 billion over the next 20 years-payable in annual sums of $500 million-according to the master settlement agreement signed last November.

This report is based on BondWeek, a publication of Institutional Investor.

Year of securitisation in Korea

A Duff and Phelps Credit Rating report recently described 1999 as the year of securitisation in Korea. Securitisation made a late start in Korea – the first transaction was written only in lat 1998.

The Government in September 1999 passed a law on securitisation. For full text of the securitisation law in Korea, refer to our securitisation laws page – click here. The laws incorporated guidelines for 'true sale' and the ability to set up a special-purpose vehicle (SPV). The procedures for perfecting interest against third parties were simplified through the registration with the Financial Supervisory Commission.

1999 has been an active year for securitisation business in Korea where 16 transactions have been completed by the close of the third quarter. Not all of them can be said to be true securitisations, but they do display characteristics of securitisation transactions, says DCR report.

"Securitization continues to develop as arrangers begin to incorporate traditional elements such as backup servicers and trustees. Due to the sophistication of these ABS transactions, many have had recourse back to the originator or some third party," DCR report says. 

[This page lists news and developments in

International securitisation markets –

please do visit this page regularly as it is

updated almost on a daily basis.]

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

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

• Pennsylvania utlity to securitize stranded costs
  Added on 28th April, 2000 
  A book by Stan Davis and Christopher Meyer talks about intellectual property securitization – a new concept whereby human knowledge and skill can be traded as securities.
• Grab your future wealth today
  Added on 28th April, 2000 
  A book by Stan Davis and Christopher Meyer talks about intellectual property securitization – a new concept whereby human knowledge and skill can be traded as securities.
• Latin America slow cultivating securitization
  Added on 27th April, 2000 
  Standard and Poor's recently reviewed the market and potential for securitization in Latin America.
• European market innovates and grows in Q1, 2000
  Added on 27th April, 2000 
  Standard and Poor's recently reviewed the growth and important developments in European securitization market.
• China initiates mortgage-backed securities
  Added on 26th April, 2000 
  The Chinese central bank for the first time approved the issue of mortgage-backed securities by permitting China Construction Bank to issue such securities.
• Banca di Roma in Italy's biggest non-performing loan securitization 
  Added on 20th April, 2000 
  Banca di Roma, which has become a key player in Italy's booming securitization market, recently announced the country's biggest securitization of non-performing loans.
• Securitization accounting: more accountants go more wrong 
  Added on 20th April, 2000 
  Accounting for retained securitization interests continues to come under regulatory assaults, and there are more instances of accountants writing off previously-recorded values on securitization gains.
• Poaching continues 
  Added on 20th April, 2000 
  Credit Suisse raided a team of securitization professionals off BNP Paribas and Merrill Lynch poached 7 off Deutsche Bank – the poaching games continue.
• Japanese government going ahead with securitization of land 
  Added on 20th April, 2000 
  The Japanese govt. has identified land that it wants to sell through securitization.
• Italian bankers contemplate exchange for securitization 
  Added on 14th April, 2000 
  Italian Bankers Association members are contemplating putting up a regular exchange for trading in securitized products as Italy heads for a boom year 2000.
• Predatory loan suits may put securitization parties to problems 
  Added on 13th April, 2000 
  A recent article in American Banker says that securitization trustees and assignees shiver at the threat of consumer interest claimants holding them responsible for predatory loan practices of loan originators.
• Insurance securitization: protected cell legislation may make structures easier 
  Added on 13th April, 2000 
  Insurance securitization community is optimistic about the use of protected cell companies, instead of usual SPVs to transform insurance policies into capital market products.
• Greece drafting securitization laws; mulls govt revenues securitization 
  Added on 8th April, 2000 
  Greece is reportedly following the Italian example and is reportedly working on a plan to securitize outstanding social security contributions. It is also drafting a law on securitization.
• Index-based insurance securitization: a new method of risk transfer 
  Added on 8th April, 2000 
  While cat bonds as devices of risk transfer by insurance companies have been around for some time, index-based insurance risk transfer is a new option, using a capital market device for trading in insurance risk.
• High quality Australian MBS still yield higher than US MBS 
  Added on 8th April, 2000 
  Australian MBS are considered very high quality due to the unique mortgage insurance system, but the offers still provide better spreads than US or UK counterparts.
• Indian regulator allows mutual funds to invest in securitized products 
  Added on 8th April, 2000 
  Securities Exchange Board of India allowed mutual funds to invest in mortgage-backed securities, thus paving the way of several RMBS issues that are apparently waiting in the wings to hit the market.
• Telecom future flows securitized in India 
  Added on 5th April, 2000 
  Global Tele Systems has raised Rs 1.3 billion by securitization of future flows from telecom set up.
• Pegasus aviation securitizes aircraft leases 
  Added on 5th April, 2000 
  Pegasus Aviation, the largest private commercial aircraft lessor, has raised USD 938 million by securitization of aircraft lease receivables.
• Credit Lyonnais helps Korean lease securitization 
  Added on 4th April, 2000 
  Credit Lyonnais has recently helped KDB Capital Corporation to raise USD 144 million by securitization of lease receivables.
• IFC buys stake in South African securitization vehicle 
  Added on 4th April, 2000 
  IFC Washington has agreed to buy 10% equity in South Africa's first home loan securitization company, SA Home Loans.
• Reverse mortgage securitization to get boost 
  Added on 4th April, 2000 
  Recent measures by US regulators might restore interest in reverse mortgages, a product that is believed to have a lot of untapped potential.
• CMBS losing its luster 
  Added on 3rd April, 2000 
  Commercial mortgage backed securities are gradually becoming less popular, says a report in Wall Street Journal.
• Italian telecom company plans securitization of telephone revenues 
  Added on 3rd April, 2000 
  Telecom Italia is planning a securitization of telephone revenues in a deal which will be the first of its kind in Europe.
• Mexican consumer finance company securitizes receivables 
  Added on 3rd April, 2000 
  Grupo Elektra, Mexica's largest consumer financier has announced securitization of consumer finance receivables, rated AAA(local).
• OPIC to get more aggressive in insuring securitization deals 
  Added on 3rd April, 2000 
  The US govt.'s agency OPIC intends to get more aggressive in insuring securitization transactions from emerging markets.
• Spanish bank to securitize mortgage receivables 
  Added on 3rd April, 2000 
  Spanish bank Banesto has proposed a mega securitization of mortgage receivables, the second by the bank.
• US regulators call for more disclosures on bank securitization 
  Added on 27th March, 2000 
  Petrobas proposes to raise USD 500 million by securitizing future sales of petroleum.
• Brazilian company securitises future sales 
  Added on 27th March, 2000 
  Petrobas proposes to raise USD 500 million by securitizing future sales of petroleum.

Pennsylvania electric company securitizes stranded costs

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

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

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

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

Grab your future wealth today, via securitization of intellectual capital

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

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

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

Latin America slowly cultivating securitization, says S&P

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

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

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

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

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

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

European securitization: innovation and growth mark Q1, 2000

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

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

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

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

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

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

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

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

China enters MBS age

Permits China Construction Bank to issue MBS

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

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

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

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

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

 

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

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

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

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

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

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

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

Securitization accounting: more accounts go more wrong

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

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

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

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

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

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

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

Links:

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

Poaching continues in European markets

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

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

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

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

Japanese government to sell land by securitization

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

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

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

Italian bankers contemplate securitization exchange

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

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

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

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

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

 Predatory loan practices may put securitization trustees to problems

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

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

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

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

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

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

Insurance securitization optimistic on use of protected cell companies

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

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

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

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

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

 Greece drafting securitization laws

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

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

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

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

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

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

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

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

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

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

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

Australian MBS trade at better spreads than US MBS

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

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

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

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

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

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

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

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

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

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

Telecom receivables securitization in India

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

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

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

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

Pegasus Aviation securitizes aircraft lease receivables

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

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

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

Korean leasing company securitizes receivables

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

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

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

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

IFC to buy equity in South African mortgage securitizer

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

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

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

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

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

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

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

 

Reverse mortgage securitization to get a boost

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

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

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

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

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

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

 

CMBS losing its lustre

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

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

Links For more on CMBS transactions, click here.

Telecom revenues securitization planned in Italy

First in Europe involving telephone revenues

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

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

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

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

Mexican consumer finance company to securitize receivables

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

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

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

 

OPIC to be more aggressive in insuring emerging market securitization deals

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

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

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

Spanish mortgage bank to securitize mortgages

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

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

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

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

US regulators call for more disclosures on bank securitizations

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

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

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

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

Brazilian company to securitize oil sales

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

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

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

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