Although mutual fund fees have come under heavy scrutiny from Wall Street's favorite Attorney General, it is unlikely to have a negative impact on the credit quality of any outstanding transactions, sources said. New supply, however, may become sparse, after seemingly reinventing itself at the start of 2003. At the very least, one of the remaining two issuers will not likely be securitizing its 12b-1 fees going forward.
In a worst-case scenario, if too many retail investors opt out of their mutual funds, early paydown triggers may be tripped, but ABS investors would still be made whole.
"It is possible that mutual funds become less popular with investors," noted Moody's Investors Service Senior Vice President Michael O'Connor. "But in that case, this does not pose a credit risk as much as it does a duration risk."
Citibank, which completed the largest 12b-1 fee ABS to date last year, is expected to remain active in the market. Constellation Financial Management, however, has found securitization an expensive option since being acquired by Societe Generale last year. Citibank issued three 12b-1 fee ABS from its Hedged Mutual Fund Fee Trust totaling $990 million - making up the entire sector last year.
Constellation, by contrast, will keep its mutual fund fee assets on balance sheet, according to Joe D'Anna, formerly of Constellation, who is now with Soc Gen. "For now, we will maintain the headline risk associated with mutual fund fees, which is a risk we are comfortable with."
Despite mainstream press reports of Attorney General Elliott Spitzer calling for limits to the fees a mutual fund charges its investors, and possibly even returning them to shareholders, it is not believed there is a threat to the fees already sold into trusts. The typical breakdown of a 12b-1 fee is a 75%/25% split between distribution and servicing costs, the latter more likely to be targeted for reduction, sources added.
This is just the latest twist and turn for the sector. Mutual Fund fee deals began as private placements and grew alongside the ABS market as a whole in the late 1990s. As of late 2002, mutual fund fee ABS had become being one of the most downgraded asset classes, despite its small percentage of the overall market.
Adapting to a more volatile equity market in 2001 and 2002, Citibank and Constellation each began hedging their securitizations using various equity put options (see ASR 5/27/02) in late 2002. Last year, Citibank made the jump to the quasi-public 144A market, which it is expected to continue tapping.