U.S. structured finance players are exploring new frontiers. With ABS issuance volume not as robust as it once was, yield-hungry investors have turned to esoteric assets.
The sector has not only broken new ground in terms of market share versus other ABS asset classes, but has also branched out into nontraditional products.
Next stop: residential and commercial solar financing, the subject of Nora Colomer's cover story. Lawyers from Bingham have helped introduce first-of-a-kind, multi-tiered capital structures that fund loans and leases related to solar panels - proof that this funding avenue has gained traction.
But it's not only that nontraditional esoterics are gaining relative ground. How business is conducted between rating agencies and the bankers that are structuring and selling these deals is also undergoing a transformation.
The initial brainstorming - a more common occurrence in esoteric deals because of their rarefied nature - that used to happen informally between these parties is now verboten. Rule 17g-5 has pushed bankers to hire their rating agency of choice before these talks can even take place. Rule 17g-5, adopted as part of the Credit Rating Agency Reform Act of 2006, compels SEC-registered credit rating agencies to comply with certain limitations and procedures as a way to mitigate perceived conflicts of interest.
In September, the ASF put out a letter exhorting the use of 17g-5. Opposed to having the SEC board as gatekeeper for selecting rating agencies, ASF Executive Director Tom Deutsch has pushed for a modified version of Rule 17g-5, used together with the myriad reforms required under the Dodd-Frank Act. Deutsch said that this combo will better serve investors and the public interest. John Hintze tackles this topic in his story this month.
John also looks into another issue that the SEC is closely monitoring. The government agency has launched a query into whether REITs still warrant an exclusion permitting them to use generous amounts of leverage in their business models - an investigation that hits at the heart of today's mortgage market.
The market believes that REITs will be the buyers of private-label RMBS once the sector bounces back. These companies have also been active investors in agency MBS. Should the SEC pull the leverage reigns on the REITs, these companies might curb the growth in their mortgage exposure. But the question remains as to how far the SEC will go.
Tweaking policy seems to be the theme nowadays. The Fed has recently announced its intention to buy agency MBS again. There has also been lots of talk about modifying the government's HARP program. Sally Runyan says these changes can lower mortgage rates, which the government hopes will lead to more borrowers who can refinance into loans with better terms. GSE regulator FHFA, however, has signaled that any changes made to HARP will be strategic and not a ticket to a mass-refinancing of all troubled borrowers.
Meanwhile, in emerging markets, there are signs that issuance is either materializing in new asset classes or returning to old ones.
Felipe Ossa conducts a Q&A with Zeki Onder of Turkey's Sekerbank a couple of months after this issuer debuted a covered bond - the first of its kind in Turkey and first globally to be backed by SME loans. What's up ahead for Sekerbank was the focus of the conversation.
And Felipe revisits an area that used to see more activity in the capital markets: states and munis in Mexico. After a period in which bank funding eclipsed issuance, the state of Chihuahua floated a bond deal and it looks like conditions are coming together for more paper up ahead.