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

Reuters IFR: ASF 2012 - Regulations, data, high costs prevent full return of private RMBS

LAS VEGAS, Jan 24 (IFR) -

    As Tom Petty wrote in one of his many popular songs, “The waiting is the hardest part.”

     Waiting is exactly what the market will have to do before private-label non-agency RMBS can once again become fully functional, according to panelists at the “RMBS RESTART” panel at ASF 2012 at the Aria in Las Vegas. The panel was designed to look at the prospects for and impediments to the next iteration of RMBS transactions.

    From a legal perspective, John Arnholz, partner at Bingham McCutchen, believes the RMBS market is in the final stages of re-regulation. He referred to risk retention as the “grand daddy” of regulation, which is still taking shape at the present time. Dodd/Frank, as well as GSE reform, are other issues to be watched, he said.

     From an economic point of view, only plain vanilla loans, whose performance is easy to predict, will come to market in the near term. “The economics of the execution of the market” must be right for a full recovery, according to Peter Sack, Managing Director (MD) at Credit Suisse. At this time rating agency models, as well as updated loan level analysis, have not yet been completed, leaving risk unclear for marginal loans, he added.

     Pamela Westmoreland of GE Asset Management was the sole investor on the panel. She said investor confidence in the market is broad-ranging. Some investors need a lot of reassurance while others are more focused on strictly risk versus return.

     As with Arnholz and Sack, the investor base also has to deal with regulatory issues. Westmoreland acknowledged that the mechanics of the deal must be clearly labeled in the documents and all parties involved with the transaction need to know who is taking what steps on behalf of whom.

     Patrick Greene, a MD at RiskSpan, Inc., is a proud supporter of ASF’s “Project Restart,” which in addition to the main goal of reigniting issuance, aims to solve the issue of how data is perceived and found among participants.

     Deal data means different things to different people and on top of that, finding the loan-level data on the SEC website is almost impossible. The latest RMBS transaction, Redwood Trust's Sequoia deal, which priced last week, began taking the incremental steps needed to address these issues. Only three or four deals are likely to tap the market in 2012.

     While open dialogue amongst the market is generally healthy, the unsolicited comments that can be offered from a rating agency not involved in a transaction could lead to anger from several parties and delay deal pricing. Investors who committed to the deal are likely to hesitate before final orders are placed, panelists said.

      The cost of doing deals will be higher than the peak issuance years of 2005-2006 and one of the key reasons is because of the infrastructure involved in creating a proper platform. Deal papers must also address repurchase issues and new proposed regulation may make private deals subject to the same procedures as public offerings.

     Westmoreland believes that problems of future RMBS transactions will not be the loose, freewheeling underwriting of 2005-2006, but something else that is yet to be known.

charles.williams@thomsonreuters.com

Reuters IFR: Bankers decry Fed's secrecy in Maiden Lane auction

LONDON, Jan 19 (IFR) -

• Fed chooses secrecy in new Maiden Lane II bidding process
• Strictly confidential, limited auction angers those left out ; Credit Suisse wins

A new, privately arranged process used by the Federal Reserve Bank of New York this week to accept highly confidential bids from only four broker-dealers for US$7bn of its Maiden Lane II portfolio raised the ire of other market players shut out of what they call a glaringly non-transparent strategy.
    Credit Suisse ultimately won the auction today, buying US$7.014bn in face value from the approximately US$20bn remaining in the MLII portfolio of distressed RMBS assets formerly owned by AIG. The portfolio originally had a face value of more than US$30bn, but about US$9.5bn was sold in a public auction process last spring that eventually fizzled and was halted indefinitely.
    "I am pleased with the strength of the bids and the level of market interest in these assets," said William C. Dudley, President of the New York Fed, in a prepared statement on Thursday.
    The latest auction was prompted by an initial reverse inquiry from Goldman Sachs, but the Fed opted to honor an original commitment it laid out in March 2011 to adhere to a competitive process to dispose of the former AIG-owned distressed securities. It therefore opened up the bid to a limited pool of market players.
    As IFR first reported last Friday, America’s largest regional Federal Reserve Bank took bids on the MLII parcel from only four banks: Goldman Sachs, Barclays Capital, Bank of America Merrill Lynch, and Credit Suisse. The auction was tightly under wraps when it started today, as the Fed required the dealers, as well their investor accounts, to sign strict non-disclosure agreements (NDAs) regarding the specific bonds and prices on the bid list.
    "I just don't see how running a limited participation secret auction ensures that the taxpayer receives maximum proceeds for their bonds,"; said Adam Murphy, the president of Empirasign Strategies LLC, a capital markets data provider. "This auction seems inconsistent with the more open Fed that Bernanke espouses.";
    At the height of the financial crisis, the Fed bought the securities in order to rescue AIG. It was Goldman Sachs' collateral calls on CDS insured by AIG that sunk the company. Even though it didn't ultimately win the auction, Goldman is viewed as the bank driving the latest burst of interest in MLII, given its initial reverse inquiry.
    The Fed's abrupt change of course towards a non-disclosed process irked many who were left out in the cold, according to several traders and asset managers. The strategy is in stark contrast to the more public tack taken last spring.
    The Fed sold US$9.5bn, or about one-third, of the more than US$30bn portfolio via nine auctions that took place between April 6 and June 9 of last year, but interest started to wane as the increased supply drove bond prices down and global macroeconomic volatility led to a vast de-risking event as investors dumped spread product.
    The Fed has long indicated that it never committed to any timetable or schedule for winding down the portfolio of former AIG assets, and was only looking to achieve the best execution possible.
    But now, secondary non-agency RMBS paper is on average 30 cents cheaper than last spring, spurring demand for the product once again.
     "This MLII thing is a mess,"; said one securitization specialist away from the four bidding banks canvassing the market in a struggle to find the bonds on the list. "(It's) A complete insider deal orchestrated by those responsible for AIG's collapse in the first place. Hedge funds have to sign an NDA just to see the bonds on the list."
    A spokesman for the Fed declined comment. However, a press release stated that the pricing for each bond will be disclosed three months after the last ML II asset is sold, "ensuring timely accountability without jeopardizing the ability to generate maximum sale proceeds for the public."

adam.tempkin@thomsonreuters.com