The bad rap sometimes handed down to whole business securitizations may be unmerited. According to Merrill Lynch, market reports indicating that volumes and transactions are on the downtrend while downgrades are on the rise may be inaccurate, to say the least.
With the exception of one sub-sector, issuance has actually increased from
2001, and rating downgrades are limited to certain underperforming sectors, according to a report from Merrill. In general, the report noted, the sectors that have negative debt-service coverage trends are linked to systemic, cyclical effects of regional, national or global transportation economies (motor way services and aircraft related).
Like corporate securitizations, whole business securitizations rely less on the nature of the cash flow that is securitized and more on the originator of the transaction. "These are transactions that have always been, arguably, not suitable for structured credit investors that do not have the time or expertise to dedicate to the understanding of the specific risks of the assets and cash flows that rely indirectly upon the performance of a fairly cyclical industry," explained analysts at Merrill.
Because there are multiple industries along with a number of structures employed among whole business transactions, investors must consider whether or not there is diversification within the portfolio and if there is single-entity exposure. It is therefore difficult to apply any single observation to this sector as a whole derived from an observation obtained from a specific deal, explained Merrill.
"Only certain well-defined sub-sectors like pubs and water companies may be considered additional asset classes in the traditional ABS sense," said analysts. "We have argued in the past that this is also the case for CDOs, where there exists a wide variety of underlying exposure types, upon which it is inappropriate to apply all-corporate' default and transition statistics."
According to Merrill, at the end of November 2002 $12.4 billion of corporate transactions were publicly placed, compared with the $13.6 billion completed in 2001. For whole business transactions the figures look more promising, with volumes totaling $7.6 billion at the end of November 2002 - up from the $5billion recorded last year.