Reuters IFR: Kroll ascends to No. 3 in CMBS ratings business

Jul 19 10:36am By Adam Tempkin

 

NEW YORK, July 19 (IFR) -   Just one year after rating its first commercial mortgage-backed securities deal, newcomer Kroll Bond Ratings has grabbed the No. 3 market-share spot in year-to-date CMBS ratings, eclipsing some of its more experienced competitors, including Big 3 agency Standard & Poor's, according to IFR Markets deal data.
    The rating agency, started by storied corporate-investigations pioneer Jules Kroll only two years ago, rated about $10.6 billion worth of CMBS year-to-date via 11 offerings, including private-label deals issued by bank lenders as well as transactions backed by loans on multifamily properties underwritten by Freddie Mac, according to IFR Markets.
    This places the newcomer at the No. 3 market-share ranking following Fitch, which rated about $17.5 billion, and Moody's, which rated the largest amount of CMBS so far this year -- nearly $18 billion.
    Kroll also narrowly beat out two other more-tenured competitors who have been rating CMBS for years: Toronto-based DBRS, which captured the No. 4 spot for year-to-date market share, and Morningstar, which came in No. 5, according to the IFR Markets deal database.
    Kroll's ascendance was no doubt helped by the fact that Standard & Poor's, once a leader in CMBS ratings, found itself all but locked out of the market to rate CMBS offerings after a slip-up one year ago on a $1.5 billion deal cost it much of its market share.
    The episode, which involved discrepancies that S&P found in its ratings for a July 2011 deal, led to bonds being pulled from the market post-sale, and eroded S&P's credibility. The debacle also took S&P's share of the CMBS ratings market along with it, allowing relative upstarts like Kroll to steal away part of the sector's business. S&P has recently overhauled its ratings criteria in an attempt to regain a foothold in the market.
    But Jules Kroll, who points out that his agency rated its first CMBS transaction prior to the S&P incident -- and has now rated a total of 19 deals -- says that it is instead a focus on deep due diligence, insightful analysis, and very selective hiring of seasoned professionals that has allowed his firm to quickly gain investors' trust and attract issuers' pocketbooks.
    "Given my legacy, the tone we try to set is that due diligence counts," said Mr. Kroll, whom many credit with inventing the modern corporate investigations industry. "The incumbent rating agencies make a point that it's not their responsibility to do due diligence, that they're only reviewing what's presented to them. But the tone we try to set is that the ultimate goal is to give investors as much as we can give them to make their own judgments."
    Kroll Bond Ratings has already expanded into municipal-bond ratings and asset-backed securities, and plans to issue its first corporate rating in the Fall, continuing down that path with an emphasis on grading financial institutions. However -- sticking to its strengths -- it will not attempt to rate the debt of sovereign nations.
    "Our views, our approach, our embracing of due diligence over time with surveillance and detailed write-ups, are of people who are trying to restore trust," Mr. Kroll told IFR.

GAINING TRACTION

    It's not an accident that the agency has excelled in CMBS. After initially spending money and time in 2009 developing non-agency residential mortgage-backed securities (RMBS) ratings models, Mr. Kroll finally realized that the sector was not returning anytime soon, and instead turned his attention to the nascent post-crisis renaissance in commercial mortgage bonds, another battered asset class.
    He sought out some of the most seasoned and well-known analysts in the industry to head up his new structured finance ratings business.
    "We offer more than a rating; what we view as a product is the insight into the analysis," said Kim Diamond, who joined Kroll in December 2010 to head up the firm's structured finance business.
    Diamond was a 21-year veteran of S&P who headed up the CMBS new-issue ratings group for years and eventually headed the entire mortgage-bond ratings unit during the tumultuous time after the crisis hit in 2008.
    Frustrated by some decisions that S&P upper management made in the aftermath of the crisis, Diamond left the firm in 2010.
    Diamond herself commanded the overwhelming respect of the CMBS investor and issuer community, making her a perfect choice to head up Kroll's new structured finance unit. "She was well known, seasoned, and emerged from the crisis with an unscathed reputation," Mr. Kroll said.
    Shortly thereafter, Diamond recruited another respected CMBS colleague from S&P, Eric Thompson, to head up Kroll's structured-finance surveillance efforts.
    "We were known entities to the industry, just resident in a different place. So there was a predictability of outcome" to what investors were getting, Diamond said.
    While many of the Kroll analysts have rating agency backgrounds, Diamond says that the firm has made a point to also recruit professionals from the buy-side, sell-side, bond-structuring professions, research, and appraisal and workout backgrounds.
    "Rather than taking the standard academic or didactic approach that many agencies take -- which tends to be very disconnected from the real world -- we brought in perspectives of those that had taken part in different parts of the business. That makes our perspective much more holistic at the end of the day," she said.

OVERCOMING A STIGMA

    Still, it was an uphill battle to gain the trust of investors or convince underwriters and banks to choose the upstart to rate new issues.
    "It was not written in the Bible that anybody had to put a Kroll rating on anything," said Mr. Kroll.
    One stigma that was hard to overcome: Kroll used the same pay structure as Moody's, S&P, and Fitch, the harshly criticized "issuer-pays" model. The conflicts of interest arising from this model -- the notion that the agencies were serving the wrong master in the run-up to the crisis and therefore were swayed to stamp toxic securities with Triple A ratings -- have been sharply lambasted by Congress, investors, and pundits.
    "It's become a bit of a shibboleth that that 'issuer-pay' doesn't work," Mr. Kroll said. "Well, what's the alternative? The investors don't want to pay."
    To get his start in the bond-ratings business, Mr. Kroll acquired an SEC-registered boutique credit rating agency in 2010, Lace Financial, that used an investor-pays model, but soon discovered that the pay structure was not viable.
    "It quickly became clear that investors didn't want to pay," he said. Mr. Kroll says his firm recognizes the inherent conflict that's involved with 'issuer-pays', so there is a tendency to be more conservative on some ratings, and "that has cost us some business."
    But company executives also point out that the investor-pays model has its own conflicts, including the fact that large, influential asset managers have their own vested interests: for instance, they don't like volatility or downgrades, they like access to analysts, and there could be the perception that they're receiving more information than smaller shops.
    "The reason that the issuer-pays model got a bad name is because it was combined with opaque criteria," said James Nadler, president and chief operating officer at Kroll, as well as a former executive vice president at Fitch. Pre-crisis, the rating agencies had unclear criteria, and therefore could rate securities however they wanted, saying that an issuer's rationale for a Triple A "generally fit" within the methodology, Nadler said.
"When the 'issuer-pay' model is combined with transparent criteria, and transparent analysis, there are fewer conflicts," he added.

EXPANDING THE BUSINESS

    Mr. Kroll feels that the quality of his firm's analysis is what distinguishes it from the Big 3 rating agencies, and that there is still opportunistic room for a boutique shop in the ratings business, especially after the pummeling that the large raters took over the last few years in the court of public opinion.
    "The level of criticism and condemnation that these folks have taken now for several years is non-stop," he told IFR. "If I was running one of these places, the first thing I would do is apologize. And offer an explanation."
    That may be hard to do for S&P, Moody's, and Fitch, however, Mr. Kroll said, as they are constrained by lawyers protecting them from litigation, regulators, and the Dept. of Justice.
    But the tattered reputation of the other agencies means that Mr. Kroll sees selective near-term opportunities in other areas where his ratings company can prove its analytical worth. The agency hopes to replicate the success it has found in CMBS this past year in other sectors, and has already rated a subprime auto ABS transaction, with two more in the queue, and is in the process of rating its first container-lease deal.
    Moreover, the bigger picture for Kroll Bond Ratings expands beyond just grading transactions and companies: Mr. Kroll intends to acquire an information provider/data company and combine it with the agency over the next year.
    "It is not our intent to only be a ratings business," he said.
    In order to make such an acquisition, however, and for it to be profitable, he has to make sure that there is a sturdy platform to build on.
    "I'm not doing this as a religious experience," Kroll said. "I'm doing this to achieve an economic return, and I think the marketplace will ultimately reward us economically if the product is viewed as independent and of high quality."
    "The minute it's not viewed as independent and high quality, we're toast."

adam.tempkin@thomsonreuters.com

Reuters IFR: New student-loan concept includes securitization plan

NEW YORK, April 5 (IFR) -- A San Francisco-based start-up lender named Social Finance (SoFi) is pitching a new concept in US student loans -- alumni-backed investments -- and is planning to securitize the product to reignite the student-loan asset-backed securities (ABS) market and help repair what it calls an "unsustainable" student-debt crisis in the US.

SoFi has already tested the waters with a $2 million pilot program at Stanford University Graduate School of Business, in which 40 of the school's alumni invested in the mezzanine tranche of a loan pool raised for student consolidation loans, which are used to refinance existing debt where loan amounts range from $5,000 to $200,000.

The company is now looking to expand the consolidation-loan program to 40 mostly top-tier universities, with a target of $150 million in originations for 2012, and hopes to scale up to $1 billion by 2014. A separate program for new or matriculating students is also being rolled out. Interest rates are competitive to, or even slightly lower than, government-based loans.

"We are using the capital markets as an effective medium to perpetuate a market-based solution to a social problem," said Mike Cagney, SoFi CEO and chairman. "By offering alumni the opportunity to invest in students from their schools, we are restoring the historical norms of community-based lending."

"Students get a lower interest rate and alumni get a way to support their university while earning a financial return. Both sides are vested in one another’s success."

Feasible, but unproven

The current US student loan market is broken, said Cagney, a former head of proprietary trading at Wells Fargo. With education costs on the rise and $1 trillion in outstanding loans -- student debt is now the second largest consumer segment behind mortgages -- more students are graduating with debt than without, and borrowers face high interest rates and a challenging job market.

 The "social" piece of the puzzle is what’s missing, SoFi believes. Cagney claims that a school-specific alumni-based investment vehicle provides mutually beneficial interactions that would make students less likely to default. Moreover, alumni will be empowered to offer advice, mentorship, and career support to students, although it’s not yet clear exactly how that connection will take place, or whether an alumnus will know the exact identity of a borrower.

"You are planting the seeds for lifetime engagement," says Cagney.

Alumni investors buy into the loan pool with a so-called certificate of participation -- basically, an asset-backed security -- and earn nominal returns of 5% to 8%, depending on the level of risk they take in their investment. Alumni can invest directly or through their individual retirement accounts, meaning that investing does not affect alumni donations to the school.

The proposed ABS will have a senior/subordinate structure where the alumni investors mainly have a stake in the mezzanine notes. The senior tranche goes to institutional investors – many regional banks are interested, Cagney said – and SoFi takes the equity piece, which is the riskiest. The lender retains 50% of residual cashflows for a reserve account.

The social aspect "creates positive selection among borrowers and increases the credit quality of the pool", Cagney added. In fact, he claims the senior notes would have roughly the same coupon and comparable subordination, or credit protection, as a traditional private student-loan ABS, except the SoFi alumni-backed product would have better underlying credit quality.

 There is one problem, though. Rating agencies will not rate the product, due to its lack of a track record. "We hope to get it shadow-rated by a bank. We think it has Triple A capitalization," Cagney noted.

More thought required

But some student loan ABS experts are skeptical. "While in theory this may be a viable product, there are serious legal implications that need to be thought about, investigated, and complied with," said Steve Levitan, a securitization partner at Bingham McCutchen.

Firstly, complying with the new set of regulations laid out by the Consumer Financial Protection Bureau will be an uphill battle, Levitan said, and cherry-picking the better students from mostly top universities with a postgraduate refinancing loan offering will cause certain classic lenders such as Sallie Mae to respond aggressively with similar products.

"Somebody has a loan to these people already; no company likes to have their best loans taken away from them," Levitan said.

Moreover, while community-based loans are a unique concept, it's not yet clear whether the connection to alumni is enough to guarantee borrowers will stay current on their loans, says Scott Weingold, the co-founder and head of College Planning Network, LLC, a college admissions and financial aid servicing and advisory center.

"At the end of the day, the question is, does the alumni tie-in really make a student less likely to default than if the loan was written somewhere else?" Weingold said. "That's unproven. Ultimately, it all comes down to whether a borrower has the money to pay the loan back."

And lastly, the market needs more details on how the "social connection" works. For instance, if an alumnus ends up calling a student to put moral pressure on him to pay his debts, that makes the alumnus a debt collector. "And there are legal ramifications to that,” Levitan said. "You need a license to do that."

Adam Tempkin

Reuters IFR: Prudential subprime-linked bond: neither fish nor fowl

NEW YORK, March 30 (IFR) - Investors were scratching their heads this past Tuesday over how to classify a unique $1 billion bond issue from US insurance giant Prudential Financial that was somewhere between a so-called "covered bond" offering and residential mortgage-backed security (RMBS), but didn’t fit completely into either category.

While the categorization of Prudential Covered Trust 2012-1 and the issuer’s motivation behind it were up for speculation even after pricing, market participants did generally agree that the Single A rated issue (Standard & Poor's) might be the first bond of its kind, as it is linked to the corporate credit risk of an insurance company but involves legacy RMBS assets.

Investors' circumspect attitude toward the bond led to a soft initial pricing -- it printed 100bp wider than a typical Prudential coroporate bond -- but on Friday the issue tightened nearly 40bp in the secondary market.
"I guess accounts got a little more comfortable with it!" said one market source.

The unusual deal was tied to the cashflows from a portfolio of 470 subprime RMBS and Re-Remics that a subsidiary of Prudential wanted to get off its balance sheet for the 3.5-year tenure of the bond. Yet the principal and interest were fully guaranteed by the parent company, just like the monoline “wraps” of yesteryear. That’s why S&P simply slapped Pru's Single A rating on the mysterious offering.

But some investors didn’t know what to make of it. Marketed by name as a “covered trust” (a misnomer, sources say), appearing to the naked eye as a simple secured corporate bond, and backed by cashflows of distressed sub-prime RMBS, the issue was an enigma.

“This bond is in no-man’s land,” said Mike Kagawa, a senior ABS portfolio manager at Payden & Rygel. “As an ABS investor, I didn’t even look at it. And given that it priced 100bp wide of Prudential’s corporate bonds with a structure attached to subprime, I’d say that most corporate investors were wary of it as well.”

The offering contains features of both covered bonds and RMBS, but is not truly either. The assets of a covered bond, a structure that is popular in Europe, remain on the balance sheet of the issuer throughout the tenure of the issue. MBS issues, for the most part, are off balance sheet, given the sale of the assets to a special purpose vehicle (SPV), or trust.

As with a covered bond, the notes of this week's offering were guaranteed by the parent company and offer semi-annual payments. But unlike most covereds, it pays out sequentially as well as with a fixed bullet of principal, and the payments are contingent on the underlying cashflows from the RMBS.

Underwriters Deutsche Bank (structuring lead), Barclays, and Wells Fargo were particularly tight-lipped about the issue. All the dealers, as well as Prudential, declined to comment.

Tax benefit?

The deal was a Rule 144a issue with no registration rights, and was handled by the leads’ high-grade bond desks, which surprised some in the market who had thought it was more of a structured issue.

Originally expected to price 75bp behind Prudential’s corporate bonds, the issue was talked at Treasuries plus 225bp. But it ultimately priced at Treasuries plus 250bp, a full 100bp wider than a standard three-year senior unsecured corporate bond issue from Prudential (typically Treasuries plus 145bp–150bp).

Surprisingly, the bond tightened to Treasuries plus 210bp–215bp in secondary market trading on Friday.

Still, the company’s initial lacklustre execution left market participants puzzled as to why Prudential would pay such a hefty premium to issue a bond like this as opposed to a straight bond offering or a direct trade of the underlying assets into the secondary market.

“It’s purely for tax reasons. It’s not capital arbitrage and it’s not asset liability management, according to the dealers,” explained one investor.

By selling the RMBS assets at market price and “locking in the loss”, the insurance company gains a significant tax benefit, another source suggested.

The source suggested that the tax relief is linked to Prudential's 2010 sale of its minority stake in Wachovia Securities Financial Holdings to Wells Fargo for $4.5 billion in cash.

But some market participants offered other explanations for the wide pricing: the deal was 144a versus Prudential’s public debt; it was amortizing, which high-grade investors charge for; and it was issued out of a trust.

It was also only rated by S&P, and several sources said that the issuer went with the sole rating because other agencies would have taken much longer to rate the trade.

Still others thought the most important factor in pricing was the offering’s illiquid nature. “I think accounts wanted a very steep concession for illiquidity,” an investor said.

Rating risks

S&P analysts said that this was the first deal of its kind, and that there were likely to be similar trades over the next few years. It was rated by the agency’s insurance team, which said it was only concerned about the corporate rating of Prudential, which is providing the guarantee.

Despite the fact that the bond was marketed with the name "covered trust", insurance-company ratings analyst do not have a background in covered bonds, according to S&P analysts.

The team was not worried about – nor does it know – the market value of the RMBS assets used as collateral. The notional balance of the RMBS is roughly three times the size of the note issuance, but it’s not clear what the current market value of the distressed RMBS is. However, the analysts said it was not germane to the ratings analysis.

Investors get scheduled principal and interest every six months. At the end of 3.5 years, they receive a final payment to redeem the notes in full. If there is a shortfall when the assets are liquidated, Prudential guarantees payments to investors.

But what happens if Prudential goes under? Analysts say that investors have a security interest in the assets of the trust, so they can make a claim to the assets. But since Prudential is an insurance company in New Jersey, it is governed by the state insurance regulator, and regulators have leeway to halt asset flows to investors if Prudential is dissolved. This is one, albeit remote, risk to investors that is unaccounted for in the rating, an S&P analyst said.

Adam Tempkin and Andrea Johnson

Reuters IFR: Investors unfazed by S&P CDO threat, but European banks may feel differently

NEW YORK, March 23 (IFR) -
  
      Standard & Poor's on Monday placed almost the entire universe of its rated US structured-finance collateralized debt obligations on CreditWatch Negative -- $63 billion worth -- as a result of a significant criteria tweak that it had begun to hint at several months ago. The move is likely to mean steep downgrades to an already distressed sector.

     Yet the response from many in the market was: "Who cares?"

     Even as risk appetite grows and trading picks up in the secondary market for products such as CDOs of asset-backed securities (ABS CDOs) and commercial real estate (CRE) CDOs --  and their values appreciate significantly -- investors are paying less attention than ever to the securities’ credit ratings, which are becoming increasingly uncorrelated to valuations, analysts say.

     "From a pure trading vantage point, ratings are not important any more," said David Yan, global head of CDO strategy at Credit Suisse. "People nowadays care more about how much subordination is in an underlying bond, or what the recovery and loss levels are on the bonds underpinning the CDOs. People are ignoring the ratings." 

     Subordination refers to the credit cushion protecting investors in the senior portions of the CDO from losses. The losses are first absorbed by the lower-ranked, or subordinate, pieces of the security. 

     "The ratings are irrelevant," added Darrell Wheeler, head of CMBS strategy at Amherst Securities and an expert on CRE CDOs. "Most of these CDOs don't trade that often and are already written down."

     S&P placed 517 bonds from 224 structured-finance CDOs on negative watch, in addition to many so called Re-Remics backed by commercial real estate. Re-Remics -- or re-securitizations of real estate mortgage investment conduits -- are structures used by dealers since the crisis to create new, investment grade securities out of severely downgraded mortgage bonds. 

     The disconnect between rating level and market value for these instruments is growing. For example, one slice of a CRE CDO called Hartford Mezzanine Investors I 2007-1 (HMEZZ 2007-1), rated only BBB/BBB+/Aa1 by Fitch/S&P/Moody's, was seen trading in the mid-90-cents on the dollar range last week, according to Richard Hill, a CMBS strategist at RBS.

      "There are numerous examples of senior, first-pay CRE CDOs trading in the mid-to-high 80s and 90s, with investors assuming full return on principal. And these are certainly not Triple A rated CDOs. Ratings have become a secondary consideration in the analysis," Hill said.

     As risky assets continue to perform well in the current environment, ratings have less meaning. Even other so-called "spread" products outside of S&P's recent ratings warning -- such as collateralized loan obligations (CLOs) -- have been valued higher in the secondary market than what their current credit ratings would suggest.

     Credit Suisse's Yan gave an example of two slices from two different CLOs -- one rated Double B and one rated Triple C -- that have recently been trading at the same price. Despite the disparate ratings, the bonds' underlying subordination levels are the same. "Ratings don't necessarily reflect all the factors that investors need to look at," Yan said.

Different for banks

     While investors interested in trading these securities are clearly no longer making decisions based on ratings, banks holding them on balance sheet may be in a different position. They face harsh regulatory capital charges if S&P pulls the trigger and downgrades the CDOs from investment-grade to junk.

     Luckily, roughly two thirds of the CDOs that S&P flagged are already non-investment-grade. But many European banks still hold high-grade CDOs, and such a move by the rating agency could force the banks to liquidate their distressed US assets ahead of the Basel III regulatory framework, sending a shock of supply into a fragile secondary market. The new capital adequacy rules will be gradually phased in starting in 2013.

     "A substantial downgrade could motivate some of the European banks to expedite the process of selling off these assets," said Vishwanath Tirupattur, the head of securitized-product strategy at Morgan Stanley. "In this regard, ratings are important because they could trigger a sale that would destabilize the market."

     The most pain will probably be felt by banks still holding CDOs at the Triple B, Double B, or Single A level.

     "Regulatory capital charges increase significantly when the bonds are downgraded from Triple B to Double B," said Ratul Roy, head of structured credit strategy at Citigroup. "At Single B, the banks have to set aside dollar-for-dollar regulatory capital."

     The degree of European bank liquidation of US SF assets has been difficult to gauge so far.

     While there is surely significant exposure, securitization specialists say that the banks are fairly astute product managers and may have already found an exit for the assets.

     "It's quite likely that they have managed by now to either trade up in quality, Re-Remic their positions, or exit entirely," said Chris Sullivan, the chief investment officer at the United Nations Federal Credit Union.
    
  "But the raters are no longer a driver of market activity, or even valuation," Sullivan said.

By Adam Tempkin   adam.tempkin@thomsonreuters.com 

Reuters IFR: As crisis fades, risk returns to asset-backed debt: Moody's

March 15 (IFR) -    As the credit crisis recedes and underwriting standards begin to loosen, bonds backed by consumer debt such as auto loans, credit card payments, and student loans are becoming increasingly risky, Moody's said on Thursday. 

  

Relaxed underwriting standards, more complex structures, and new untested market participants are just three of the trends suggesting that risk is on the rise for some sectors of the asset-backed securities market, Moody's said in a report.  

Even in the residential mortgage sector, which has not seen a significant return of private-label securitization, riskier non-prime, non-traditional mortgage originations are appearing. 

With credit standards slipping in asset classes such as subprime auto loans, and risky crisis-era structural features showing up in transactions, credit rating agencies need to make sure they are keeping up with the deteriorating credit standards and rating the these bonds appropriately -- which means withholding their coveted Triple A rating if it is not deserved, or making sure there are other features that mitigate the risks, said Moody's. 

   

Some of Moody's competitors have recently given Triple A ratings to ABS transactions that, in its view, did not deserve the top grades, particularly in the subprime auto space.  

 "We want to make sure that the credit protections that investors have keep pace with the evolution of the [securitization] market," said Claire Robinson, the head of new-issue structured finance ratings at Moody's and author of the report.  

   "There's a natural evolution in the credit cycle, and after the huge credit crunch came about as part of the crisis, we are now seeing the beginnings of credit loosening, which is normal. But as underwriting loosens, we need to make sure we're keeping an eye on investor protections in these deals.  

   "Non-traditional issuers and/or collateral are successfully coming to market again, indicating that investors have more of an appetite for risk." 

    

   AAA NOT DESERVED ON SOME DEALS 

   The riskiness of securitizations is still low and has not approached the level it reached in the early to mid-2000s, Robinson said, much less the level it reached at the height of what is now generally considered the credit bubble in 2006 and 2007.   

   ABS reached its issuance peak in 2006 at $754 billion.  

   However, if the normal pattern of the credit cycle plays out, the easing of credit that took place in 2011 will persist into 2012 and beyond, she said.  

   Originators have begun to ease underwriting standards, which is a natural progression from the extremely tight credit conditions that followed the onset of the financial crisis. However, in sectors such as subprime auto-loan securitizations, where underwriting is returning to its pre-recession norm, losses on loan pools backing auto ABS are bound to increase.  

   Issuers can compensate for this risk with the proper level of so-called credit enhancement, or the buffer protecting investors in the most senior bonds. Sometimes structural enhancements help mitigate the risk as well.   

   However, Moody's would not have assigned Triple A ratings to certain recent transactions that it did not rate, including a subprime auto deal issued by Exeter Finance Corp, which received high investment-grade ratings from Standard & Poor's and DBRS. 

   Even those two rating agencies disagreed on the top slice of the transaction:  S&P assigned it a AA rating while DBRS awarded it a AAA.  The US$200m deal priced on February 23.    

   "Exeter is small and unrated, with limited experience and little asset performance history," Moody's said. "The resulting potential for volatility in asset performance makes high invest-grade ratings inappropriate."  

   Subprime auto securitization has been increasing recently. This week alone, asset-backed backed offerings from Santander Consumer USA and Consumer Portfolio Services (CPS) were increased in size due to investor demand and oversubscribed, meaning that the demand for the bond exceeded the amount of issuance available several time over.   

   Similarly, in the credit card sector, Moody's said that the senior classes of bonds sponsored by issuers such as Cabela's, World Financial Network, CompuCredit and 1st Financial do not merit Aaa Moody's rating because of the weaker credit profile of the sponsors and the risk that they may not service the debt appropriately.   

   Moody's also noted that the volume of mailings in 2011 soliciting credit card customers was about double the level of 2010, with an increased emphasis on offerings to individuals with less than pristine credit histories.   

   Although credit standards are still tighter now than they were before the recession, the newest credit card vintages have more lower-quality accounts than do vintages originated in late 2009 and early 2010.  

   Moody's also raised a red flag about the entrance of private equity funds, hedge funds, and investment banks into the subprime auto and mortgage businesses.  

   "A sign that asset credit quality will continue to loosen in the subprime auto and mortgage sectors is the influx of non-traditional private capital into mostly subprime consumer lenders that will tap the securitization market," Robinson wrote.  

   For example, Moody's says that Pimco is considering buying a stake in subprime auto lender CPS, while Blackstone <BX.N> is interested in Exeter Finance and Perella Weinberg has set its sights on CarFinance Capital/Flagship Credit.  

   In the mortgage market, Fortress purchased subprime lender American General (now, Springleaf) from AIG in late 2010, and Shellpoint Partners acquired New Penn Financial. BlackRock recently announced that it had more than doubled its investment in PennyMac, a mortgage REIT.  

   "The entrance of players ... with higher risk profiles is a sign that competition for asset origination will increase," Robinson said.  

   Moody's also noted that certain risky structural features, such as "prefunding accounts", or cash reserve funds for the purchase of assets after a transaction's close, have begun returning to ABS deals for the first time since the onset of the crisis. The risk there is that the assets purchases after the transactions closes may be of lower quality than what investors were expecting.  

   Additionally, small originators and issuers with low credit quality have been getting back into the game, and their ability to honor representations and warranties may be limited.  

   Moody's warning comes during the busiest week of ABS issuance so far this year.  

   More than US$7.5bn in asset-backed volume across 11 deals is expected to price by Friday. 

   The surge of issuance brings year-to-date volume to more than US$45bn, putting it significantly ahead of 2011 issuance at the same point last year, which was roughly US$30bn. The encouraging level of issuance also puts ABS volume on a trajectory to eclipse last year's US$125bn full-year total.  

   At least four deals this week were upsized due to investor demand and oversubscribed.  

   Moreover, there were very large bid lists and increased trading in the secondary markets, as the buyside started rolling off seasoned paper in order to be able to allocate the money to the swath of deals in the primary. More than US$1.5bn traded in the non-mortgage ABS secondary so far this week, while a typical week usually sees US$500m trading.  

   Investors have money to put to work, dealers say, and the positive momentum in broader economic activity -- both consumer and commercial -- may have encouraged issuers to opportunistically tap the market.  

   On the other hand, the sheer range of asset classes represented this week -- auto lease, subprime auto, timeshare receivables, structured settlement, equipment, UK credit card, UK RMBS with US dollar tranches -- suggests that the trend may go beyond just opportunistic issuance, and that the ABS market may actually be poised for strong year-over-year growth for the first time since the crisis.   

Adam Tempkin

adam.tempkin@thomsonreuters.com 

     

REUTERS IFR: "Esoteric" bonds tempt yield-starved investors

NEW YORK, March 8 (IFR) -  With interest rates and benchmarks tighter than ever, asset-backed securities investors are flocking to bonds backed by unusual collateral in a hunt for higher yields.

At least five so-called "esoteric" ABS transactions have either been sold to investors over the last three weeks or are in the pipeline, backed by untraditional debt such as cell tower site lease payments, franchise fees, timeshare receivables, drug-royalty cashflows, and structured settlement payments.

Even typically staid investors such as insurance companies have been willing to diversify away from "traditional" commoditized consumer ABS -- such as bonds backed by auto loans, student debt, and credit card payments -- into "off-the-run", or less typical, collateral that may be harder to understand, but much higher-yielding.

While the trend has been developing for more than a year, in a more recent twist, these insurance companies have been willing to buy more subordinate debt of these esoteric ABS, moving out of their natural comfort zone of Triple A slices.

And even beyond esoteric collateral, investors have been willing to move down the capital structure of traditional consumer ABS offerings, buying either lower-rated or unrated residual pieces of more plain-vanilla transactions in order to juice returns.

"As traditional money-market managers have entered into consumer ABS as a cash alternative, traditional ABS investors continue to search for yield in off-the-run and esoteric ABS," said Tony Lee, a structured finance analyst in the US fixed income group of Los Angeles-based investor TCW. "Demand for prime and subprime auto subordinate, timeshare-backed, shipping container, and aircraft lease-backed ABS all increased during February with supply for these bonds still hard to find" in both the primary and secondary markets.

With swaps benchmarks at historical lows, yields on recent auto loan-backed transactions with maturities of three years or less have been 1% or less, and continually decreasing. Investors are hungry for any product that will offer even a little more yield.

While auto-related ABS still comprises more than 60% of yearly issuance, new esoteric volume is poised to increase this year. Of the roughly $31.6 billion in total ABS issued year-to-date, more than $5 billion, or nearly 16%, is comprised of so-called "off-the-run" collateral, according to IFR Markets data.

For the same period last year, only $900 million, or about 4% of the $22.4 billion total could be considered esoteric cashflows.

Of the approximately $125 billion in total ABS issued in 2011, about $15.5 billion, or 12.4%, consisted of debt backed by non-traditional cashflows, according to the Securities Industry and Financial Markets Association.

In terms of volume, non-traditional ABS reached its peak of US$66.1bn in 2005, according to SIFMA, but that year it only comprised 8% of the then-robust total ABS market of $754 billion, which included home-equity ABS issuance, a sector that was just beginning to ramp up amid the housing boom.

Given the much slower pace of current ABS issuance, however, esoteric deals are likely to comprise a larger percentage of the total market over the next few years, according to securitization experts.

"There is robust investor appetite for these deals, and they are now willing to move down the capital structure into subordinate tranches," said Jay Steiner, the co-head of the global credit solutions group at Deutsche Bank. "Even insurance companies are willing to take the time to get their arms around these transactions, which are typically much more complicated and have longer marketing periods than traditional consumer ABS."

CELL TOWERS, PIZZA AND DRUGS

A spate of off-the-run transactions have been pitched and successfully sold to investors over recent weeks, including a franchise-fee ABS refinancing from Domino's Pizza, a timeshare receivables transaction from Orange Lake Resorts, and a cell tower site lease offering from Global Tower Partners.

Due to investor demand, the Domino's deal was upsized at pricing this week to $1.575 billion from an original size of $1.475 billion. Several insurance-company investment managers were interested, and even called in to an issuer-led private conference call pitching the transaction to qualified investors on Feb. 29, including Debbie Adami of AIG Global Investment Corp., who asked a question to underwriters regarding the risk of prepayment on the deal.

Another off-the-run transaction – a so-called stranded-cost transition bond – priced on Wednesday from AEP Texas Central Company.

The $800 million offering consisted of three Triple A pieces and was issued to help the utility recover certain costs and regulatory assets. Usually, a specific charge imposed on the distribution of electricity to customers supports principal and interest payments on these types of bonds.

Meanwhile, a rare securitization backed by royalties flowing from pharmaceutical patents on established drugs is about to enter the asset-backed market next week. Credit Suisse and Wells Fargo have been mandated as joint bookrunners on DRI Capital's upcoming $195 million Drug Royalty LP1 transaction. Credit Suisse will act as structuring lead. 

The offering will be backed by the cashflows of 18 royalty streams on 14 patent-protected drugs. It is expected to be rated Baa2 (sf)/ BBB (sf) by Moody's/Standard & Poor's. 

DRI Capital purchases royalty streams on established pharmaceutical products developed to treat chronic, critical, and rare diseases. The partners in the company have been investing together for nearly ten years. 

Other "esoteric" deals are also in the hopper:  Next week, Barclays Capital (structuring lead) and Deutsche Bank will be joint-lead underwriters on a $226 million transaction backed by structured-settlement streams for J.G. Wentworth, the nation's largest buyer of illiquid financial assets and annuities.

A structured settlement securitization allows companies such as J.G. Wentworth to fund the purchase of monthly settlement payments from people who are willing to sell long-term payouts for a lump sum. Investors in these securitizations share in the risks and profits of such an arrangement.

Also next week, Sierra Wyndham will issue a $250 million offering backed by timeshare receivables. Deutsche Bank, Credit Suisse, and Royal Bank of Scotland are underwriting the transaction.

REVIVED OFFERINGS

Two of the recent offerings, the Domino's refinancing and the DRI Capital drug-royalty deal, were originally pitched to the market in the second half of 2011, but were each pulled at the time due to the macroeconomic global volatility caused by the European sovereign debt crisis.

Both offerings have now resurfaced in a much more upbeat, "risk on" environment, and investor interest in recent esoteric deals has been keen.

On February 23, a two-part $282 million cell tower transaction from GTP Cellular Sites attracted more than 25 investors across all tranches. The offering was backed by a portfolio of 1,177 ground-lease cashflows on various cell-tower sites.

GTP was able to achieve attractive leverage on the transaction -- about nine times cashflows down to a Triple B minus tranche -- and offered a blended yield of 5.03% to investors down to a Double B tranche. These tight spreads reflected a fairly attractive financing for the company.

The quest for higher yields has recently expanded beyond just esoteric collateral. Certain hedge funds have been buying deeply subordinated tranches on traditional consumer-asset deals as well, according to securitization specialists.

For instance, a recent $1.3 billion prime retail auto-loan ABS from Columbus, Ohio-based Huntington National Bank that priced on March 1 contained an "invisible" unrated residual tranche below the Triple B bond – the first such unrated tranche seen in the market since 2006.

Structured-credit hedge funds with an expertise in judging the direction of consumer behavior are able to leverage what they know in order to buy unrated auto ABS paper in order to get much higher yields, according to people familiar with the Huntington sale.

"They know these sectors so well, they don't need a rating in order to buy it," said one dealer away from the transaction.

Adam Tempkin

REUTERS IFR: Bonds backed by drug-royalty cashflows make a return

Bonds backed by drug-royalty cashflows make a return

NEW YORK, March 5 (IFR) - A rare securitization backed by royalties flowing from pharmaceutical patents on established drugs is about to enter the asset-backed market, according to investors.

Credit Suisse (structuring lead) and Wells Fargo have been mandated as joint bookrunners on DRI Capital's upcoming US$195m Drug Royalty LP1 transaction.

The offering will be rated Baa2 (sf)/ BBB (sf) by Moody's/S&P.  It will be backed by the cashflows of 18 royalty streams on 14 patent-protected drugs.

DRI Capital purchases royalty streams on established pharmaceutical products developed to treat chronic, critical, and rare diseases. The partners in the company have been investing together for nearly ten years.

The largest percentage of discounted royalty value in the securitized portfolio comes from the product Enbrel (32% of portfolio), a rheumatoid arthritis and psoriasis medication from Pfizer.

The second highest concentration (13%) is from the drug Remicade, a rheumatoid arthritis and Crohn's disease drug from Johnson & Johnson and Merck.

About 76.7% of drug companies represented by the portfolio have long-term AA/AA- or Aa1/Aa2/Aa3 ratings.

The fund's portfolio is comprised of very seasoned drugs that have been in the marketplace for many years.

DRI Capital will be the servicer, and the expected weighted average life of the transaction is 2.70 years.  Overcollateralization is approximately 34% at closing.

The company issued a previous drug-royalty securitization in 2007.

In aggregate, despite broader market turmoil, the actual royalties received on the portfolio have performed 10% better than DRI's original forecasts.

There have only been a handful of drug-royalty ABS transactions based on diversified pools of pharmaceutical patent royalties in the last 10 years. Therefore, it is considered an "esoteric" asset class, distinguishing it from commoditized consumer ABS asset classes such offerings backed by auto-loan or student-loan payments.

The BioPharma Royalty Trust, the Royalty Pharma Trust, Paul Capital's Royalty Securitization Trust and the DRI Capital Inc. transactions are the best-known examples of this type of securitization, according to the law firm Dechert.

"With the worldwide pharmaceutical market generating approximately US$800bn annually, securitization of drug royalty payment rights remains a field ripe for exploration," wrote Malcolm Dorris, a partner at Dechert, in a research article from last year.

Adam Tempkin

adam.tempkin@thomsonreuters.com

Auto ABS deals price with record-low money-market spreads

NEW YORK, Feb 17 (IFR) -

This was a week of firsts as six issuers, most of which are well-established names, priced their first deals of 2012.

Five of these transactions were in the auto space. Auto deals are still the main drivers of the ABS sector, and this past week’s offerings bring year-to-date total US auto ABS issuance to approximately US$15.02bn.

Year-to-date total US ABS issuance (excluding CLOs) is roughly US$25.4bn.

The overwhelming investor demand for the money-market tranches of the prime-retail auto transactions continued to increase this week, with market players reporting that the commercial-paper pieces of the Honda and Nissan deals were between seven and nine times oversubscribed.

Nissan’s money-market tranche priced at a 22bp below interpolated Libor, which is definitely a record-tight print for money-market auto ABS debt – both pre- and post-crisis.  

However, these extremely low prints are mostly due to the fact that three-month Libor has widened out considerably – to about 50bp – which, even by subtracting 22bp, is still a more attractive yield than alternative money-market products, according to bankers.

As for the A3 and A4 tranches of these transactions, there is just a great deal of investor capital to deploy right now, the bankers said, and there is investor comfort in moving out on the maturity curve. The Honda A3 and A4 tranches each were four to five times oversubscribed, reflecting the increasing amount of last-cashflow interest compared to late last year.

Given that there was hardly any product in the second half of fourth quarter 2011 – and the volatility surrounding the European debt crisis – investors decided to hold onto their money and close their books. Now that things have cooled down with Europe, the “risk on” mentality means that investors currently have a lot of money to put to work.

Bank of America (structuring lead) and Barclays priced the first offering of the year from Honda this past week. The deal was the US$1.693bn prime retail-backed Honda Auto Receivables 2012-1 Owner Trust (HAROT).

The Triple A rated classes consisted of average lives of 1.10, 2.20 and 3.06-years, and were talked at EDSF plus 10bp area, interpolated Swaps plus 22bp area and Interpolated swaps plus 30bp to 32bp.

Investor demand drove final pricing spreads tighter to 8bp, 18bp and 28bp, respectively. A money-market tranche was also priced at 19bp less than interpolated Libor after guidance was seen at minus 16bp to 17bp. The transaction was also increased from US$1.25bn.

The prior Honda transaction was the US$1.483bn HAROT 2011-3 series, which priced in mid-October 2011. The Triple A rated tranches of that transaction consisted of similar average lives and were printed at EDSF plus 9bp, interpolated Swaps plus 20bp and interpolated Swaps plus 32bp. The money-market tranche was priced at eight basis points less than Interpolated Libor.

Fellow prime issuer Nissan also tapped the market this week with the US$1.54bn Nissan Auto 2012-A series. The deal was led by JP Morgan (structuring lead), Credit Agricole and HSBC and was increased from an initial offering size of US$1bn.

The Triple A rated classes consisted of average lives of 1.10, 2.30 and 3.55-years, respectively. Price talk was seen at EDSF plus 8bp-10bp, interpolated Swaps plus 19bp area and interpolated Swaps plus 29bp area. Final pricing spreads firmed to 6bp, 15bp and 25bp, respectively. The money-market class was printed at a whopping record low (pre- and post-crisis) of 22bp less than interpolated Libor.

Ally was back in the market last week with its first dealer floorplan transaction of 2012, the US$750m Ally Master Owner Trust (AMOT) 2012-1, via the three-way lead of Barclays, Deutsche Bank and RBC. The collateral consisted of passenger vehicles as well as light and medium duty trucks (limited to 2.0% of the pool) inventory of dealers financed by Ally. The majority of AMOT is secured by new vehicles, with used vehicles representing approximately 11.0% of the portfolio. The deal is also said to have strong ageing distribution with only 3% inventory aged past 270 days.

The 2.98-year fixed and floating-rate Triple A classes were sized to demand and publicly offered. Guidance levels were seen at one-month Libor and interpolated Swaps plus 70bp-73bp. At pricing both spreads were softened to 80bp.

The Double A, Single A and Triple B rated subordinate tranches were offered as a 144a and consisted of the same weighted average lives. They were offered at interpolated Swaps plus 135bp, 180bp and 250bp.  A majority of the subs were heard to be sold, according to market sources. In the September 2011 AMOT 2011-4 transaction, the three-year Triple A fixed-piece priced at 90bp and the floater at 80bp. The subs of that transaction were not offered.

Wells Fargo was sole lead on the US$150m 144a American Credit Acceptance Receivables 2012-1. The deal was backed by sub-prime auto receivables and solely rated by Standard & Poor’s.

The Single A plus tranches offered average lives of 0.35 and 1.46-years, respectively, and were initially seen at EDSF plus 165bp-175bp and EDSF plus 265bp-275bp. Final pricing was set at 155bp and 255bp, respectively. The 2.48-year Double B slice was priced at interpolated Swaps plus 675bp after being talked in the area of 700bp. The 2.33-year Single A and 2.48-year Triple B classes were pre-placed.

Wells Fargo was also sole lead on the US$150m 144a sub-prime-backed First Investors Auto Owner Trust 2012-1. The 0.19-year class was priced at 15bp over interpolated Libor while the 1.66-year Triple A tranche was printed at EDSF plus 140bp. The 3.40 and 3.93-year Double A and Single A rated slices were priced at interpolated Swaps plus 210bp and 265bp, respectively. The Triple B and Double B rated notes offered average lives of 4.12-years and were stamped at interpolated Swaps plus 475bp and 600bp.

Credit Suisse (structuring lead) and Citigroup priced the first equipment floorplan transaction of the year for GE. The GE Dealer Floorplan Master Note Trust (GEDFT) 2012-1 was increased to US$750m from US$400m and included three tranches with weighted average lives of 2.99-years. The Triple A slice was the only tranche to disclose pricing at one-month Libor plus 57bp. It was originally talked three basis points wider in the 60bp area.                       
                                                                                     
The majority of the portfolio is secured by various types of equipment with power sports, marine, technology, lawn and garden, recreational vehicles, and consumer electronics and appliances, making up the majority of the portfolio, according to Fitch. The transaction comprises receivables associated with approximately 2,200 manufacturers, 24,000 dealers, and 13 separate product lines.

Adam Tempkin and Charles Williams

Reuters IFR: Tick-tock! US hastens crisis probes

NEW YORK, Feb 3 (IFR) -

Election-year pressures to deflect the anger of the “99%” – and a race against time to bring charges before statutes of limitations on crisis-era RMBS and CDOs run out – are spurring both the US government and private investors to push ahead with RMBS law enforcement and litigation, respectively, according to people close to the probes.

A surprise criminal indictment by the US this week of three former Credit Suisse traders – who artificially boosted the prices of battered RMBS in 2007 to earn higher bonuses – raised eyebrows across the legal community, both for its noticeable proximity to the formation of an Obama-administration federal RMBS fraud task force the week prior and the case’s strikingly easy targets: alleged rogue traders.

Given two of the traders’ plea agreements, this may be the first successful criminal indictment stemming from the financial crisis.

But the case also may foreshadow the fact that federal investigations are likely to focus far more heavily on actions taken by banks and ratings agencies to cover up their mistakes as the market was imploding in 2007 and 2008, rather than on the original assembly of toxic securities in the years prior, according to people familiar with the investigations.

This is partially due to the fact that statutes of limitation are expiring on the creation of the securities.

The DOJ and SEC civil probes into Standard & Poor’s, for example, focus far more heavily on the steps the agency took to address the crisis in 2007, rather than on the initial assignment of Triple A ratings in 2005 or 2006, insiders say, which was initially thought to be central to the investigation.

Still, the timing of the Credit Suisse trader charges last week took some by surprise. The incident has been public knowledge for four years, and the Swiss bank, whose early-2008 write-down of US$2.85bn was partially due to the alleged fraud, fired the individuals at that time. The bank itself is not a target at all, and the US Department of Justice has been investigating the case since 2008.

Fortuitous timing?

In addition to the DOJ indictment, the SEC revealed its own parallel civil case this week – which has also been in the works for years – prompting experts to ask why the charges are first being brought now.

“This is a strange prosecution to coincide with the Obama administration’s RMBS Working Group. How fortuitous the timing is,” said Isaac Gradman, an attorney who has brought legal action over mortgage bonds.
“What’s more, this isn’t really the typical fraud you’d expect to prosecute from the crisis. These are three rogue traders who defrauded their institution, and were disciplined by their institution back in 2008,” he said. “The RMBS Working Group, on the other hand, pledged to look under every rock and down every avenue to go after the financial institutions that assembled toxic RMBS. That’s not what this is.”

While this rare criminal indictment may be hard for federal enforcers to repeat, there is bound to be an uptick in both civil and criminal charges related to the financial crisis in 2012, experts say. Last Friday, the DOJ issued civil subpoenas to 11 financial institutions as part of the RMBS Working Group's pursuit of cases related to the sale of mortgage bonds and CDOs in the run-up to the crisis.

Although the SEC can only pursue cases where there are violations of civil laws, it is likely that they will refer several cases with possible criminal elements to the DOJ, insiders say.

Taking its Toll

There has also been acceleration in MBS litigation brought by bondholders or civil actions brought against banks by states due to the short statute of limitations.

“Given that most of the deals were created in New York, the conservative attorney will look at the state’s six-year limitations period both for breach of contract and fraud. But every state is different,” said another prominent structured finance litigation attorney who has represented investors. "These private civil RMBS lawsuits have only really exploded last year."

But statutes of limitation have become a thorny point of contention between plantiffs' attorneys representing competing groups of RMBS investors. There have recently been many creative attempts by various legal teams to get around the statutes, Gradman said.

Some lawyers try to take a more liberal approach, hoping to extend the timeline.

For instance, in the context of loan putbacks to banks, some attorneys take the view that each time an investor tries to enforce putback rights, and the bank refuses, a new breach of contract occurs, and the clock starts ticking anew on the statute of limitation. Others say that if an investor wants to initiate litigation, it should be done six years (in New York) from when the deals close.

Confusing the issue even more is the uptick in plaintiffs asking defendants to "toll" the statutes, which means that the parties agree to stop the clock temporarily on the statute of limitations so that they can possibly negotiate a settlement.

This "time out" has become much more common in private lawsuits, sources say, but can happen in both civil and criminal cases, as well as in federal or state-led probes.

Since plaintiffs may be running out of time to bring their cases, defendants are typically eager to "toll the statute", or stop the clock, lest they be taken to court immediately. It buys them time to negotiate.

However, it's not always easy for lawyers to discover the existence of tolling agreements. Therefore, for example, one might assume that RMBS created in 2005 might be immune to prosecution at this point, but because of several tolling agreements in existence, the timeline has been suspended, and ultimately, extended.

What's more, as the timeline increases, the losses to investors increase as well. Therefore, knowledge of the existence of tolling agreements can affect how investors' attorneys size the losses taken on a bond.

However, it is impossible to toll a statute that is already expired.

The federal advantage

The statute of limitations for federal securities fraud, meanwhile, is typically five years, but at least part of the motivation for elevating the pursuit of RMBS fraud to the federal level with the formation of the RMBS Working Group was to take advantage of longer statutes of limitations.

Banks and other financial institutions have special protection under federal criminal laws: various types of bank fraud may have 10-year statutes of limitation, particularly if banks were affected by the deceit, as Credit Suisse was.

While it's not clear whether the 10-year statute will apply to all of the Working Group's cases, federal authorities typically operate under US securities laws when engaging in enforcement, and are not encumbered by the same restrictions imposed under the state, lawyers said.

“The federal laws may have longer statutes of limitations than the state laws," said Robert Anello, a white collar defense attorney at Morvillo Abramowitz. "Either way, as statutes get closer, the government, as well as private investors, are going to pull the trigger this year."

Adam Tempkin

adam.tempkin@thomsonreuters.com

Reuters IFR: ASF 2012 - ASF sees Europe looking to secured funding

LAS VEGAS, Jan 23 (IFR) - 

    Many European institutions are looking to secured funding -- both securitization and covered bonds -- to fund themselves, according to Robert Plehn, managing director and head of ABS Solutions at Lloyds Bank Corporate Markets, speaking Monday about the impact of the European debt crisis at the annual American Securitization Forum (ASF) conference in Las Vegas. 

   With nearly 5,000 market participants in attendance this year, the conference is seeing conversation focused on the sovereign debt crisis. 

   "Secured funding is replacing unsecured funding as a way for institutions to fund themselves," Plehn said, while cautioning: "You can't make generalizations about asset classes anymore. You have to look through to the assets." 

   Vishwanath Tirupattur, managing director at Morgan Stanley, said that from a secondary market perspective, the reason for the sale of secured finance assets by banks in Europe is risk-weighting, not asset quality. 

   Therefore, he said, the European assets being sold by banks are the "ultimate value play" for investors willing and able to tolerate some shorter-term volatility. 

   At the conference's opening general session, attendees were cautiously optimistic about a slowly improving US economy over the next 12 months. However, the general consensus was for global ABS issuance to remain flat in 2012. 

   One panelist, Reginald Imamura, executive vice president at PNC, was encouraged by the liquidity beginning to flow back into the mainstream economy.  

   He said he has seen "pockets of improvement", including auto spreads returning to pre-crisis levels and CLOs beginning to re-develop. But he also noted that the struggles of private-label non-agency RMBS will linger throughout the year. 

   Doug Murray, managing director at Fitch Ratings and moderator of the panel, said Europe is the "ultimate wild card" in how the year plays out. 

   The recovery in the U.S. is much more solid than in Europe, added Ganesh Rajendra, head of international asset and mortgage-backed strategy at RBS Securities in London. 

   The European region is likely to contract for two straight quarters, leading it back into a recession, he said. However, the United Kingdom would remain recession-free and only contract one quarter, with moderate growth later in the year. 

   The continental European recession will be caused by the trouble spots of Greece, Portugal, Ireland, and "the big elephant in the room, Italy", he said. 

   Rajendra believes Greece will technically avoid a default but said that even if it did occur, it has already been priced in by most in the market. 

   High-quality vanilla European ABS transactions should not be affected by the turmoil, he said. 

   When asked what the major discussions of ASF 2013 will be, panelist answers varied. Ronald Mass, a portfolio manager at Western Asset Management, wants to see investor rental housing loan transactions. He sees a real market developing as homeowners sell off property and begin to rent.  

Amy Resnick, Charles Williams, Adam Tempkin

Reuters IFR: ASF 2012 - Feel good story for U.S. auto ABS

LAS VEGAS, Jan 24 (IFR) -  
    A good story coupled with a solid 2012 outlook highlighted the annual "Auto Loan and Lease ABS Sector Review" panel at ASF. Mark Stancher of JPM Investment Management referred to 2012 as the "start to normalization" as regulations start falling into place. There could also be a buildup in warehouse facilities that could provide the beginning for new issuers both domestic and abroad to enter.

     Panelists are estimating new vehicles sales to be anywhere from low 13m to 14.5m this year. Used car prices are also strong and are expected to remain that way throughout the year.

 

    Matthew Peters, a MD of securitization at BMO Capital Markets, referred to autos as "the benchmark class" with plenty of access to credit. As credit card issuance dwindles and student loan transactions conform to new changes, autos have become the establishment of U.S. ABS. Mark Stancher expects a 10% increase in new issue auto-related volume, which totals between $75-80bn or 60% of total market volume. Historically, autos have accounted for only 25%, but that is now a thing of the past. 

 

    The success of the sector can be attributed to a strong consistency of quality loans. The dealer floorplan segment was also highly recommended as inventory has become more carefully managed. Although the market came out of the crisis in good shape, Peters believes sponsors of autos have become a lot smarter than they were pre-2007-2008.

 

    While 2011 was highlighted by demand for short term paper, panelists feel this year will see an increasing bid for A3 and A4 classes. 2011 was also a good year for auto leases, which were supported by strong residual values. Stancher was also encouraged by credit enhancement provided by subprime or "high yield" autos as it is becoming to be known. Both issuers on the panel, Eric Gebhard of World Omni Financial Corp. and Jason Behnke of Ford Motor Credit Company, expect subordinate bonds to be an important part of the capital structure. Ford's recently completed retail transaction sold both seniors and subs for the first time in about a year.

 

    In terms of regulation, Rule 193, which relates to the due diligence process is not considered to be a major impediment for autos. Behnke said the main difference is they now use pool specific contract testing, which does increase cost. As an investor, Stancher believes the document language won't be much different. Gebhard felt in addition to driving up costs, the regulation is too complex. In terms of loan level disclosure in Reg AB II versus the old grouped data, opinions were varied as to what was most beneficial. On the issue of risk retention, issuers feel a vertical slice retention is too redundant. Ford already takes a first loss position on its deals.

 

    Stuart Litwin, moderator and Partner at Mayer Brown, thinks over-regulation is not necessary in a safe haven sector such as autos. Rule 17-g-7 regarding rating agency reports was his prime example.

 

charles.williams@thomsonreuters.com

Reuters IFR: ASF 2012 - Bankers discuss unintended consequences of complex regulations

LAS VEGAS, Jan 24 (IFR) -   

      Participants in the asset securitization market warned yesterday that the complexity of the regulatory regime being implemented from the Dodd Frank Act and by European regulators could stymie the recovery of the US mortgage market, despite that recovery being their goal.

    Speaking at the Asset Securitization Forum 2012 conference at the Aria in Las Vegas on Monday, the group of attorneys, bankers and policy advisors suggested that regulators would be more successful if they focused on getting a broad brush framework on the books, rather than write rules specifically aimed at preventing the last crisis.

     Reed Auerbach, a partner at law firm Bingham McCutchen, said regulators should "leave deals alone that worked."

     "Many would (work),  if regulators did not put all asset classes in the same boat as the mortgage business,” he added,  pointing to the ongoing functioning of securitization for auto loans and other assets.

    He warned, “Markets that are functioning can become dysfunctional” when subject to regulation tailored for problems they did not experience.

    Several speakers referred to a recent paper by Karen Petrou, co-founder and managing partner of Federal Financial Analytics, which analyses regulations for banking and other clients. Petrou’s paper, published in November, outlined the significant costs of complexity risk.

    "Complexity risk creates unintended consequences and so much uncertainty that banks have largely headed for the bunker, fearful that the next rule will contradict the last proposal and pose capital, liquidity, legal and reputational risks compounding those already facing the firm under current, tough market conditions," Petrou wrote.

    "We have concluded that what we call complexity risk – the burden on financial institutions and regulators of complex, cross-cutting and sometimes incomprehensible rules – may well now be the most significant impediment to financial-market recovery and robust economic growth."

    Such risks, said panelist Lydia Foo, an executive director at Morgan Stanley, could result in banks and other issuers turning to other markets outside of securitization for financing.

    "The regulatory burden must be weighed against other ways of financing those assets," she said. "We need to make sure it works for issuers."

amy.resnick@thomsonreuters.com