Proposed amendments to the underwriter exemptions of the Employment Retirement Income Security Act of 1974 (Erisa) could become permanent as soon as Oct. 10 - retroactive back to Aug. 23. The amendments could significantly impact the way private pension fund investors purchase asset-backed, mortgage-backed and commercial mortgage-backed securities, tightening spreads.
The 45-day public comment period will end Oct. 10, and as of press time, no comments were received, said George Miller, deputy general counsel at the Bond Market Association, at a conference last week discussing the impact the amendments will have on existing and new transactions.
The proposed amendments could significantly impact ABS, particularly in the auto sector, as Erisa-eligible assets will include subordinated tranches rated triple-B-minus and higher for all fixed pools of assets. Also now eligible are non-revolving home-equity pools that are senior structures rated double-A or higher, with a loan-to-value ratio between 100% and 125% (see chart).
Furthermore, if a bond gets downgraded over the life of the security, the plan does not have to divest itself of that bond.
Interest rate swaps will also be eligible. "In order for a plan to buy swaps with MBS or ABS, the fiduciary has to be an individual who understands swaps, a qualified asset manager or a subsidiary of a large investment advisor ... with $1 million of assets under management," said Barbara Klippert, a partner with the law firm of Stroock & Stroock & Lavan LLP.
According to Scott Stelzer, vice president of CMBS secondary trading at Morgan Stanley Dean Witter, investors will gradually move down the credit curve, rather than jump down to triple-B investments. Spreads could also come in slightly as well.
"The impact [on CMBS] will be relatively minimal," he said, suggesting that double-A rated bonds could tighten two to three basis points, adding that it's "unsure how much tighter you can go."
As for ABS, the auto sector could experience the biggest impact, with spreads coming in three to five basis points.
However, Laurie Walters, a portfolio manager at MacKay-Shields Financial Corp., sees the manufactured housing and home-equity sectors as having the most room for spreads to move in, but she "doesn't see it happening too quickly." But in the auto sector, "Investors are comfortable. It makes sense to move down the curve."
One major concern is that mortgage CBOs invest in a majority of triple-B rated bonds and if spreads tighten as much as 10 to 15 basis points, CBOs could find the sector less attractive, said Jeff Mudrick, a vice president at Lehman Brothers.
He added that pension fund investors' willingness to invest in lower rated bonds will be a slow process as they "take time to ramp up expertise in those areas."
Once the proposed amendments are finalized and put in the Federal Register after Oct. 10, the amendments become retroactive to Aug. 23, the date of the filing of the proposed amendments. According to Miller, "the existing transaction must meet conditions as amended to sell [bonds] to a [pension] plan in the secondary market."