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Tag >> asset backed
Securitization, at its most basic, is a sound financing technique. This is my basic tenet for today’s blog. With the ABS markets again beginning to pick up, spreads tightening and investor demand growing but supply still limited, it is time for a revisit of just what makes this market so important from a corporate perspective, and why it is way-past time for stakeholders to get it right in rebuilding the market.
I am not here to argue the validity of the regulatory arbitrage that drove the market to such great heights before the crisis. In fact, that is most definitely one of the things that should be addressed as the new world of securitization takes shape. What I am here to argue is the validity and soundness of securitization at its most basic, as a financing structure for corporates.
The FDIC and SEC are working hard to enact government-mandated regulatory reform for the US ABS markets as called for in Dodd-Frank. However, the two agencies, along with four other agencies that oversee the ABS markets in some way, each have proposed specific guidelines that interpret how market reform should be implemented.
Congress is finally working on a bill on covered bonds, hoping to boost investor demand and give banks another route to fund some of their loans. But if passed in its current form, the bill will have some flaws, including insufficient overcollateralization and inconsistent regulatory regimes for different types of issuers.
The House of Representative Financial Services Committee sent the United States Covered Bond Act of 2010 to the floor of the House last week.
The impact of regulatory reforms signed into law last week is already being seen in asset-backed securities, as Ford Motor Credit pulled an ABS deal last week after the major rating agencies confirmed that they will not allow their ratings to be used in bond prospectuses for such securities—thanks to changing liability under the regulatory overhaul.
The regulations set new liabilities for ratings agencies that consent to allow their ratings to be used in public ABS offering prospectuses. Under the new law, ratings firms are subject to “expert liability”—which means that they will have the same liability and legal risks as accountants and others specialists that are involved in bond sales, as Marine Cole reported in her blog last week.
The main three credit ratings agencies have told Wall Street in recent weeks that underwriters won't be able to use their credit ratings in documents selling asset-backed securities for fear of being sued.
While it has already placed the ABS market on hold and has securitization professionals up in arms, there are several ways for banks to continue to sell ABS going forward.
One more sign that the economy is stabilizing: nearly one-third of asset-based lenders, which includes banks and other commercial lenders, reported an increase in new credit commitments during the first quarter of 2010. That's according to the Quarterly Asset-Based Lending Index compiled by the Commercial Finance Association (CFA). What's more, respondents also reported a slight decrease in write-offs and non-accruing loans, along with a small jump in credit line utilization, says Andrej Suskavcevic, chief executive officer with the CFA. "We're seeing across the board greater volume and better quality deals," Suskavcevic says. As their name suggests, asset-based loans are loans that are backed by the borrower's assets, such as accounts receivable, inventory or equipment.
That's not to say that asset-based loan market is immune to forces in the larger economy. At the end of 2009, asset-based loans outstanding totaled $480 billion, a drop of almost 20 percent from 2008's high of $590 billion, and the lowest level since 2005, also according to the CFA.
Conduits and structured investment vehicles didn't completely disappear with the financial crisis, but banks that sponsor them are now being cautious with the types of assets they fund.
In particular, they are shying away from assets with long-term maturities such as mortgages and instead sponsoring new conduits with short-term assets that match the maturities of the commercial paper that funds them.
We've just come across one of the more intriguing suggestions for how to tweak fair value accounting that's been made since mortgage-backed securities cratered, sending the financial markets into cardiac arrest. The observation was made via an SEC comment letter from late November, from one William T. McGonagall III.
"I don't reckon none of them asset backed securities oughta be accounted for at alls," McGonagall wrote. "I reckon we ought not to mark them to market or anything. We oughta mark 'em to my butt."
Corporate debt issuance may have picked up significantly this year, but that doesn't necessarily signal that companies are so comfortable in their economic outlook that they're levering up.
In actuality, the amount of corporate debt outstanding globally shrank for the first time in at least 15 years in the first half of 2009, according to new research from Mizuho Securities, Bloomberg reported Wednesday.