Overseas investors are increasingly providing funding for senior settlement securitizations backed by pools originated in the U.S., where issuers have had a hard time lining up financing.
Investors in countries that benefit from a double taxation treaty, such as Germany and Austria, currently make up the primary market for these deals, said Boris Ziser, a partner at Baker & McKenzie. "Attractive rates of return combined with favorable tax treatment have been driving these transactions."
Interest in these vehicles has increased notably during the past year, Ziser said. During the past nine months, his firm completed five of these transactions, and currently has three more pending. Ziser expects these funds to expand into other countries offering similar tax treatment.
The pools are typically comprised of individuals over the age of 65 with life expectancies of 10 years or less. These transactions are being privately placed with a single fund that then becomes the beneficial owner of all the policies, Ziser said. Moody's Investors Service Vice President and Senior Analyst Rochelle Tarlowe said that more of these deals could show up in the U.S. term market eventually.
"They are going abroad to generate the portfolio with the hope of bringing them back here and ultimately doing a term transaction," Tarlowe said.
To date, none of the cross-border transactions have been rated. However, Moody's did rate the Legacy Benefits Corp.'s $70 million transaction that came via Merrill Lynch in March of this year (see ASR 3/22/04). The Legacy deal is the only visible senior settlement term securitization.
The ratings were based on the mortality projections of the individual insured lives, the credit quality of the insurance and annuity providers, most of which hold a rating of Aa3 or better, subordination and amounts on deposit in the Interest Reserve account, the rating agency said in a press release.
A lack of existing pool information can hold up a rating, Tarlowe said. Furthermore, there are not many pools already in existence that have a strong enough structure to merit an investment-grade rating, she said.
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