Analysts with Fitch Ratings took a broad look at the regulatory and legislative environment surrounding the ABS market and deemed it generally non threatening for the time being. On a conference call held last week, the analysts opined on Securities & Exchange Commission's Regulation AB, the newly enacted bankruptcy reform and the reauthorization of the Higher Education Act. Though each will impact deal performance in their own ways and to varying degrees, the analysts did not give any indication that any of the issues would cause immediate changes to their ratings assessments.
Rui Pereira, managing director in the ABS group, said that while Reg AB is an overall boon to disclosure and transparency in the market, some issuers are likely to experience setbacks as they try to get their arms around the rule. Pereira said timing delays of new issuance and non-compliant servicer reports could be potential speed bumps for some issuers in the road to full Reg AB compliance. "That may spook investors and affect issuers from a pricing perspective," Pereira said. Pereira warned that price tiering could develop between compliant and non-compliant issuers, with compliant issuers able to get tighter spreads on new issues.
There is also some uncertainty about how the SEC will approach certain elements of the rule, as the regulation does not need to be fully implemented until Jan. 1, 2006. For example, credit card issuers that have acquired portfolios from other companies may not be able to provide certain static pool data regarding those loans because the information my simply not exist, noted Pereira. "It's a little bit unclear how flexible the SEC is going to be."
Mike Dean, managing director, spoke about the recently approved Bankruptcy Reform Act, saying it would have the greatest impact on the credit card sector, among all other ABS classes. It is widely expected that the act will be of long-term benefit to credit card ABS, as more bankruptcy filers are moved into Chapter 13 Bankruptcy, which does not automatically discharge credit card debt but requires debtors to repay some or all of it. As issuers begin to take advantage of the prospect of those increased recovery rates, they may start pursuing more aggressive underwriting practices, said Dean. That, in turn, could have adverse affects on deal performance and lead to more reform later down the road.
On the student loan front, David Hartung, senior director, reported on the progress of the reauthorization of the Higher Education Act, which most thought was hopelessly mired in Washington D.C.'s Potomac River for the rest of the year. Hartung noted that Congress made progress on that front in the past weeks as it approved a budget framework for $13 billion in program cuts over the next five years, roughly $7 billion of which are slated to come from the Federal Student AID program. However, it is not yet known exactly which parts of the program will be impacted. Hartung said it is now possible the Act could be reauthorized before the year is out.
Hartung said the President's budget package contains certain issues not contained in the Act that could impact how and when that act is reauthorized, and have effects on ABS deals. One of those is the reduction in FFELP guaranty insurance from 98% to 95% of the loan. Hartung said that could potentially cause Fitch to look at resizing credit enhancement for student loan transactions.
Another issue is the proposed 1% origination fee for consolidation loans. In a rising rate environment, consolidation and refinancing has declined. However, the low 1% fee could spur more borrowers to consolidate. Those would cause prepayments and thereby put pressure on excess spread in student loan transactions. There is also a proposed 25 basis point loan-holder fee, which could put added stress on borrowers.
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