Orlando, Fla.- ABS analysts, traders and deal managers at Information Management Network's ABS East conference held here last week got into deep discussions about complex deal structures, regulatory issues and industry moving trends. But delegates for the session on first-time issuers got a thorough introduction to the workings of the asset securitization market, and what issues lay ahead as they tap the specialized form of financing.
The Securitization Alternatives for First-Time Issuers' panel explained the difference between asset-backed commercial paper and term funding, issuer requirements and the role of the monoline insurer, among other topics.
Credit rating agencies, for one, might have limited knowledge of the assets being securitized, so analysts rely on issuers to give them information that provides hints as to how the assets would perform under various scenarios, said Jennifer San Cartier, a senior director at Fitch Ratings. The agencies would be concerned if the issuer had a weak servicing platform in place, particularly one that misallocated capital or did not properly invest the capital. Shifts in underwriting standards would also raise eyebrows with rating agencies, because such a move might lead to questions about the company's stability and the ability of the assets to perform in various business cycles.
Rating agencies are specifically looking for information that will paint a clear portrait of the company, including its business strategy and management structure. Historical static pool data allows the rating agencies to see how the assets were managed over time, and loan development data reveals contractual attributes, including collateral information, geographical distribution and seasoning, and obligor credit tiers, San Cartier said.
New issuers should also pay attention to documentation issues, ensuring that there is uniformity in loan standards. Many smaller companies might be accustomed to granting special concessions to larger clients, said Scott Friedman, a senior vice president of securitization at Fortis Securities.
"Sometimes that presents a problem, because it hampers the due diligence process," Friedman said.
Co-branding might pose a challenge to securitizing assets, especially if they are owned with a partner, said Ed De Sear, a partner at the law firm McKee Nelson.
"You may find, when you read [the terms of the contract] that the partners have a co-ownership, and the term of the ABS deal is not longer than the term of the contract," De Sear said.
New issuers should also be prepared for the profound complexities involved in off-balance-sheet accounting, said Ann Kenyon, a director at Deloitte & Touche, who oversees its securitization advisory group.
"Accountants will look at transactions with three texts, and it can get jargonish," Kenyon said.
Although accounting issues might seem daunting to some first-time issuers, they are not insurmountable. Furthermore, being a smaller, private company can sometimes work to an issuer's favor, Fortis' Friedman said. Whereas complex financial structures might hamper large, public corporations from undertaking certain transactions, smaller entities do not have those worries.
New issuers, however, should also avoid the temptation to view attractive ABS financing as an opportunity to spend.
"There is a price," Friedman said. "All of these people have to get paid, and none of these people are cheap."
Furthermore, ABS deals are not simple one-off transactions. Rather, they are strategies that need to be funded for years after the deal is closed. Also, the management at some companies - especially if they are rated below BBB' - are taken aback when they realize that they might need to use a special or master servicer to manage securitized assets.
"It's a horrible way to start a relationship, but it is the case," Friedman said. He added that first-time issuers need to realize that ABS deal structures "are not bankruptcy-proof, but bankruptcy-remote vehicles."
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