If the recently released Bank of International Settlements (BIS) risk weighting proposals are adopted as they stand - and that is a very big "if" - market watchers expect that they will boost demand for international asset securitizations and will prove a boon for rating agencies and the monoline insurers.
The blueprint from the BIS, the Switzerland-based umbrella group for central banks, suggests that, instead of all asset backeds being 100% risk weighted as they are now, there will be a sliding scale depending on ratings, from a risk weighting as low as 20% for top rated paper, and as high as 150% for deals rated below investment grade.
This will mean, for example, that holders of a triple-A deal, who currently have to set aside 8% risk capital against their investment, will only need to hold 1.6% against the same paper - greatly increasing its effective yield.
"It's a positive step as it finally recognizes the need to carefully differentiate between levels of risk and it is likely to boost demand ... but there will be terrific pressure on banks and issuers to get the highest possible ratings," said Alexander Batchvarov, Merrill Lynch's head of international asset backed research.
While market watchers agreed that demand for asset-backeds in general will be boosted, the proposals are likely to have the opposite effect on lower rated, subordinated tranches. "It's going to be even harder to find people to buy sub pieces - particularly if it is less attractive to put them into conduits - and that will impede the market to some extent," said the head of a London-based securitization team, though he added that this will have less effect outside the U.S., as non-U.S. subordinated tranches are normally retained by issuers or arrangers, rather than passed on to investors.
Similarly, operating business or leveraged securitizations, which often find it difficult to reach the higher rating levels, may prove more expensive and therefore less attractive than they are now. CLOs may also fall away, as the regulatory arbitrage involved in getting 100% risk weighted loan assets off balance sheet will no longer exist.
The blueprint is likely to prove positive for monoline insurance companies who may be among the biggest beneficiaries of the proposed changes. They offer the easiest way to achieve top ratings and also the cheapest way for deals that would otherwise need massive - and expensive - levels of overcollateralization to achieve the same ratings.
"It is a migration towards ratings and within that it is a migration towards higher ratings. That is what we offer and there will be even more of a financial incentive for people to come to us," snickered a managing director at one of the biggest monoline insurers.
The big four international rating agencies are also seeing dollar signs before their eyes, though the proposals do not suggest that only the big four will be accepted as rating arbiters. Rather, the blueprint recommends that the decision as to which agencies are acceptable will be left with each country's banking regulators, allowing the smaller international agencies and the many single country rating firms to stay in the game.
Some market watchers suggested that the proposals will give the rating agencies even greater power to make or break deals and wondered whether this would be a healthy development. "This puts the rating agencies in a position where they become gods," said one banker.
Damian Thompson, director of European Structured Finance at Duff & Phelps, disagreed with this analysis and suggested that in fact the agencies will come under greater pressure than ever before to award the highest, most sought after ratings.
The full BIS proposals are that triple and double-A paper would be risk weighted at 20% (a capital charge of 1.6%); single-A paper at 50% (a capital charge of 4%); triple-B at 100% (a capital charge of 8%); double-B at 150% (a capital charge of 12%); and that paper rated single-B or lower would incur a 100% capital charge.
Some securitization pros stressed, though, that the chances of the guidelines being adopted as they stand are slim and expect the haggling to go on well after the deadline for comment in March next year. - MD
