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October 2, 2009

 Past Issues

Cover Story

What is the New Triple-A?

As the credit rating agencies (CRAs) begin to rebuild their brand, market experts are questioning whether the changes these firms are implementing are tackling the key problems that have caused rating inaccuracies. The failure of the CRAs and of the ratings they assigned has been blamed for the difficulties plaguing the economy today. This failure has created a buyer's market that has no confidence in either the credibility of the CRAs or the reliability of the U.S. economy.

Column

Regulatory Reform and the Fed

Early last summer, the Obama administration proposed a sweeping revision of U.S. financial regulation. Among its notable features are the elevation of the Federal Reserve to the role of primary financial regulator and the creation of a Financial Services Oversight Council to monitor so-called systemic risks, i.e., those exposures that risk a cascading series of failures based on the collapse of one entity. A number of observers (including former Fed Chairman Paul Volker) have focused on the notion that the proposal will create moral hazard by codifying certain institutions as 'too big to fail,' concerns that were not assuaged by Treasury Secretary Tim Geithner's recent Congressional testimony. However, my concern is that the proposals ultimately will be ineffective in managing risks to the financial system. If this turns out to be the case, the resulting complacency will create an environment ripe for new problems.A poorly conceived and structured regulatory regime risks giving market participants unjustified confidence that systemic exposures are under control, even as the financial system's risks could actually be growing. (This brings to mind the Long Term Capital Management crisis in 1998, in which a fairly obscure firm had positions large enough to threaten the viability of the financial system.) The events of the past few years show how dangerous complacency on the part of managers and regulators can be.

ABS

Economy Pressuring U.S. Middle-Market CLO Performance

The well-documented struggles of the U.S. economy continue to pose increased difficulties for borrowers underlying U.S. middle market CLOs. Whereas early middle market CLOs benefited from solid performance of underlying middle market loans, the economic downturn has affected the viability of middle market companies resulting in a significant increase in defaults, which has contributed to negative rating pressures on middle market CLOs. Evidence of this performance reversal was a recent string of downgrades and Negative Rating Outlooks by Fitch in its 2008/2009 rating review cycle of middle market CLOs. Of the 117 Fitch-rated U.S. middle market CLO tranches, 31 tranches were downgraded, 79 tranches were affirmed, and no tranches were upgraded.

PPIP's Tardiness May ReflectInvestor Queasiness About Returns

A massive leap in the values of 'toxic' MBS since March - albeit from record lows - may lessen the urgency prompting the U.S. Department of the Treasury's Public-Private Investment Program (PPIP). However, it may also dampen investors' returns and increase their risk. The Treasury chose nine fund managers to partner with July 8 and gave each of them 12 weeks - ending last week - to raise at least $500 million in capital. The government would then match their capital and provide financing to double their firepower to invest in the securities.

The Art of Tweaking Triple-A

Credit rating agencies (CRAs) are still scrutinized and blamed for their failure to capture the true risk in rated ABS transactions. Just last week, past and present employees of Moody's Investors Service were required to testify to the House of Representatives' Committee on Oversight and Government Reform as it probes credit rating agencies.

IMN to Keep TALF/PPIP Focus at ABS East

In keeping with the Term ABS Loan Facility's (TALF) and thePublic-Private Investment Program's (PPIP) prominent roles in the current securitization market, the Information Management Network (IMN) has aptly made these programs the focus of its upcoming 15th AnnualABS Eastgathering. The conference, which features prominent government officials, is set for Oct. 25-27 at Fontainebleau Resort in Miami Beach, Florida.

Accounting Rules Call into Question Future of ABS

The American Securitization Forum (ASF) last weeksubmitted a letter to federal banking regulators. The letter requested a six-month moratorium on any regulatory capital rule changes related to the implementation of accounting standards FAS No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140, and FAS No. 167,Amendments to FASB Interpretation No. 46, and the proposed elimination of the option for ABCP conduit sponsors to disregard consolidation of conduits for risk-based capital purposes.

MBS

Federal Reserve Monetization of Debt a CRE Concern

Although the economic fallout from the 'great recession' would have been much higher without the steadying hand of government, its activity also has other consequences, including a potential downside for the commercial real estate sector. At the Sept. 24 International Council of Shopping Centers' capital marketplace conference in New York, two speakers voiced concern about the potential for inflationary pressure down the road from Federal Reserve activity in buying up Treasury bonds. This year, the U.S. Central Bank has committed to purchasing up to $300 billion in Treasury securities.

IRS REMIC Update a Double-Edged Sword

The Internal Revenue Service's update on REMIC rules that will now allow for more commercial loan modifications is welcomed by the industry. However, the 80% property valuation test required at the time of the modification could bring punitive consequences. The first ruling is the final implementation of Notice 2007-17, which allows additional types of modifications to occur in connection with commercial mortgage loans held by REMICs. The first notice discussing these changes was issued in March, with industry requests for amendments to the REMIC rules coming for years before that.

Global

Asset-Backed Sukuks: Some Drama, but No Action

A sense of relief is percolating through the market of Shariah-compliant bonds, known as sukuks. Standard & Poor's records show that issuance in the first seven months of the year came in at slightly more than $9.3 billion, compared with $11.1 billion during the same timeframe last year, a drop of 16%. But the market was far grimmer about the sector's prospects only earlier this summer. And it seems that something akin to optimism is seeping through.

Lack of Interest in Buyback Offers Signals Improving Euro Market

The increased numbers of European banks and other originators making tender offers to buy back their structured finance issues primarily reflect originators taking advantage of opportunities to optimize their funding profiles and capital structure. Tender offers often appear to be motivated by originators taking opportunistic advantage of the apparent differential between current distressed secondary market prices - which are usually lower than the tender offer price - and the implied value that originators see, indicated by the expected credit performance of the related securities. The tender offer allows a degree of deleverage for the originator and the potential ability to book a profit.

Mexico's New Dream Equity Product Has ABS Accent

A new financing vehicle is poised to take off in Mexico, and it has structured finance players scrambling to make deals. What's interesting is that, at its core, it's an equity product. Boosters of capital development certificates (CCDs), as they are known, see them as an unprecedented opportunity to invest in infrastructure and other sectors of the economy sorely lacking in capital. ABS devotees are involved in part because Mexican banks and the local offices of international banks typically have teams that are too small to divvy up work on a corporate debt/structured debt basis. Indeed, often the equity and DCM people are on the same team.

Cross-Border Securitization of Canadian Receivables

Notwithstanding the anaemic state of securitization generally, cross-border securitization of Canadian receivables has remained fairly steady, and in some sectors has actually picked up. This is due in part to Canadian domestic securitization having only slightly recovered from its near-death state, and in part to Canada eliminating virtually all withholding tax on arm's-length interest payments, and thereby providing new access to U.S. and other foreign investors for Canadian loan, lease and consumer receivables.

ABS Totals

ABS Totals

View the year-to-date ABS issuance totals for ABS, MBS and CMBS.

ABS Manager Rankings

ABS Manager Rankings

View the year-to-date manager rankings for the different ABS sectors, including real estate, credit cards and autos.

Mortgage Refi Data

Mortgage Refi Data

See results from the Mortgage Banker's Associations Refinance and Purchase Indexes as well as the weekly mortgage rates surveyed by Freddie Mac.