Details of Bank of America's $17 billion balance-sheet securitization last quarter are leading some analysts to believe the bank does not intend to sell off the resulting securities, which was a move widely anticipated by the market this year.
In fact, according to one analyst, it is possible that spread levels on triple-A floaters are artificially wide, if the market has factored in a $17 billion sell-off that will never happen.
"Are triple-A floaters wider because of the BofA overhang?" asks one researcher. "And if so, maybe they shouldn't be if they're not really going to sell it?"
This is, of course, pure speculation. And, predictably, BofA had little to say on the matter. "It's a balance-sheet management decision, which would be a decision made by our Treasury department," said a company spokesman. "The securities [resulting from the securitization] are indistinguishable from any other triple-A security we own."
A spokeswoman for BofA added, "Those securities are in our held-for-sale portfolio at the bank, but they are not currently for sale. And when we first announced it, we made it clear that we had the option to retain any portion of what we securitized."
BofA securitized the bulk of its massive portfolio (upwards of $26 billion) in the last few weeks of December 2001. The bank structured two securitizations, both wrapped to a triple-A by Financial Security Assurance. This followed the announcement that BofA had sold its $25 billion servicing platform to Fairbanks Capital Corp.
Triggers from the wrap
Noted in recent research from Credit Suisse First Boston, BofA would have a more difficult time placing the first loss piece of the securitizations because of the triple-A insurance policies. Being wrapped deals, the triggers are more stringent, and the chances for the deal capturing cashflow is greater, which typically makes it tougher to sell the retained interests.
Cited from the research: "On the other hand, selling the triple-A securities may provide no regulatory capital relief due to requirements to fully capitalize retained interests."
Accounting regime
As suggested by one researcher, perhaps BofA is not intending to sell the securities, but merely arbitraging the new regulatory capital guidelines, which lower from 100% to 20% the risk weighting on highly-rated ABS.
"Essentially, depending on your view of the accounting circumstances determines your view on whether any of the stuff ever really comes to market," commented one ABS analyst.
Others still think BofA intends to trickle these securities out over time.
According to an ABS accountant, BofA would have scored regulatory capital relief on anything rated single-A and up. Interestingly, if a company securitizes a portfolio of mortgages without selling at least 10% of the securities, there is no regulatory relief, unless a third party is brought in to guarantee the securitization, as did BofA.
In BofA's case, the company has stated that it is accounting for the triple-As as "available-for-sale." However, the company has not indicated how it has accounted for the residuals, which could be in the $2 billion range, according to sources.
Residuals can be accounted for on balance sheet as either available-for-sale or trading, but not held-for-maturity, the accountant said. The residuals, which are marked-to-market, are subject to write-downs but cannot be written up. Any write-downs would be passed through the income statement. The triple-As can be held for sale, held for maturity, or held for trading.
"There should be no immediate gain or loss if they took back everything," the accountant said.
Prior to the securitization, their regulatory capital is 8% against the loans. Depending upon what they take back, and after the allocation, it will be 20% of 8%, or $1.6 for each $100 of anything rated single-A or above. Double-B assets would be subject to the full 8%. For residuals, it's dollar for dollar.
"At the end of the day, you would add up what all the individual capital charges would be, and if you were able to create enough single-A and above securities, you probably have a net reduction in regulatory capital," the accountant said. "So it is possible they did this purely for that reason."
