In light of the Bond Market Association's recent plea to the Treasury and IRS to further examine the somewhat nebulous regulations issued for financial asset securitization investment trusts (Fasits) in regard to CMBS and ABS, the general market consensus seems to be that the attractiveness of this no-longer-new structure is beginning to become less and less important in the structured finance world as time marches on.
"Now, non-Fasit structures are so much more favorable than what Fasits provide," said an ABS expert familiar with the structure. "A few years ago, when the Fasit was first created, everybody asked, How would our deal be structured if it was done as a Fasit? What are the advantages and disadvantages?' Now, people are not even thinking about it - it's not even an option."
A few weeks ago the BMA urged the IRS to revise its proposed Fasit regulations in order to make it a more viable securitization vehicle, especially for CMBS and ABS. Since the innovative securitization structure was accepted by the federal government in 1997, the market seemed to be waiting forever for the IRS to issue regulations for the new structure.
Finally, after almost three years of waiting, the government published Fasit regulations earlier this year. Congress first passed legislation in August 1996 creating the new securitization structure, which was an attempt to apply the real estate mortgage investment conduit (Remic) structure to other non-real-estate asset classes, particularly credit-card receivables and construction loans.
The guidelines issued this past February proved to be mostly a disappointment to those that were awaiting it, creating more confusion regarding the relative advantages of the Fasit.
"The Fasit continues to be plagued by uncertainty that impedes its use by issuers and the investment community, who demand greater certainty as well as the need to have the Fasit be competitive with non-Fasit structures," said Stephen Whelan, chairman of the corporate department at the law firm of Thacher, Proffitt & Wood. "The Fasit became effective September 1, 1997, and since then there were approximately three Fasit deals done."
An Artificial' Method,
According to the letter that the Bond Market Association wrote to the IRS recently, Fasits have been severely underutilized since legislation was passed in 1996 because they are not advantageous for CMBS or ABS deals.
The original statute passed in 1996 provides that there is to be "gain recognition" on transfer of the assets by the originator to the Fasit. According to sources, the Treasury, at the time, was frightened that it might somehow lose revenue by permitting people to use the Fasit structure.
"The Treasury has been very hostile to the whole idea of Fasits since it was first dropped into the legislative hopper," said an ABS expert. "Back in June1995 they viewed this as special-interest tax legislation, which first they opposed and then they grudgingly went along with."
Therefore, the federal government basically extracted a price for issuers to have the certainty which the Fasit legislation seemed to secure. This price came in the form of a capital gains tax on the net proceeds of a securitization, and included a formula for valuing the assets.
Regardless of the proceeds of the securitization, the Treasury figures out the amount to tax by taking the basis and valuing "gain" at something called the applicable federal rate (AFR), which is an artificial number announced in the Federal Register every month for short-term, medium-term and long-term securities.
"So the Treasury says, We value these at a certain percentage times the AFR, and that artificial value will be what we think you're going to gain on securitization," said a source knowledgeable about the structure. "But that artificial value bears no resemblance to the actual profit. In many instances, the amount that is taxed is not even close and under current tax law for common debt ABS securitizations, the gain is recognized over time rather than being recognized up front."
Therefore, the Treasury has not only has gain recognition but also gain acceleration: "It's the double whammy of having to recognize gain right up front and paying a tax in year one, but also doing this pursuant to a formula which may or may not be close to what the actual cash gain may be," the source said.
"This led many people to say, Forget it, it's not worth it....'."
As far as CMBS and ABS are concerned, the BMA suggested that the artificial gain rule should not apply if price quotes are readily available.
In other words, if there is some sort of secondary market for auto loans or credit-card receivables, then it would be more beneficial to use the actual value for those receivables rather than this artificial formula which can bear no resemblance to the actual cash gain.
As to whether price quotes are actually available, sources indicate that it is spotty at best: "If you're dealing with an arcane asset class, like timeshare receivables, then you're much less likely to gain price quotes than with something like auto, credit-card and equipment-lease receivables," noted one source.