As Reg AB took effect Jan. 1 - just a month after securities offering reform - the impact on the ABS market appeared to be more stress and relatively little volume.
"In the space of a month, we had two of the largest regulatory rulemakings in the history of securitization go into effect," said Tom Deutsch, associate director at the American Securitization Forum. "For all the transaction parties, but especially issuers and dealers, that was an especially difficult process."
Reg AB aims to increase transparency in public ABS deals, establishing new data reporting requirements, among other things. The Securities & Exchange Commission announced the new rules in December 2004, giving the market a year to prepare. But it declined to offer guidance on interpreting the requirements.
"There are lots of interpretive issues people are still grappling with," said Bianca Russo managing director and associate general counsel at JPMorgan Chase. Meanwhile, securities offering reform, announced over the summer, took effect Dec. 1, and increased the amount of detail that needed to be provided to investors before the final prospectus is issued.
Jordan Schwartz, a partner at the law firm Cadwalader, Wickersham & Taft, said one major change with securities offering reform is that liability attaches in the offering process at the time the investor commits to purchase the securities, and delivery of a final prospectus after that time does not cure any defects in the information. Deutsch said dealing with the two new regulations at once is overwhelming market players. "In terms of resources by various issuers and dealers, it really has stretched them as far as they could possibly be stretched," he said.
It is also impacting deal flow this quarter. Kevin Duignan, a managing director at Fitch Ratings, said the rating agency expects volume for credit cards, autos and student loans to drop more than 10% in the first quarter year-on-year, because of Reg AB compliance issues. He anticipated that pockets of volume will be diverted to ABCP and said some issuers also might opt for 144As, since those deals would not fall under Reg AB.
One issuer's take
Accredited Home Lenders, a nonprime home equity issuer, will not be one of those sitting out the first quarter. The company expects to be Reg AB ready for its usual quarterly deal, slated for late February, said Melissa Dant, senior securitization and warehouse attorney for the San Diego company.
The company, which generally issues deals in the $1 billion range, securitizes about 30% of its loan volume, Dant said. It sells the remaining 70% to other companies, typically large Wall Street firms that securitize them as part of a larger loan pool from multiple originators.
So Dant has been working with those purchasers to revise agreements and ensure Reg AB compliance with its whole loan sales. Dant said she relied heavily on model contract provisions issued last month by the American Securitization Forum in that process. "Those were a lifesaver," she said.
The level of information needed on the whole loans will vary depending on the volume they represent in a securitization. At 10%, an issuer would simply need to identify Accredited. At 20%, a narrative blurb about Accredited would have to be provided to investors. And if Accredited loans represent a "material" amount of the securitization, static pool information will be required. Dant said there is some difference of opinion on what constitutes a "material" amount. Some issuers that work with Accredited are saying 20% is a material amount. Others are giving a range of 35% to 50%. At least one large issuer said it would never ask Accredited for static pool information, Dant said. Based on the way it interpreted the regulation, the only necessary static pool information would be from that issuer's own previous deals.
Dant said yet another Reg AB issue that Accredited is working on is getting its shelf in compliance by the March deadline - and that process is also on track. She said although Accredited did not participate in the SEC pilot program, it had the benefit of being selected in early November for review by the SEC and ended up with light comments on its shelf registration statement. The company is now reviewing those comments.
Russo, of JPMorgan Chase, co-chairs her company's Reg AB steering committee, which meets every few weeks and includes every line of business impacted by the new rules. "As you can imagine, in an organization this big, there are a lot of implementation issues," she said. "We're a trustee, we're a servicer, we're an originator, we're an investment bank."
Like other market players, her company is still working on some aspects of Reg AB compliance, particularly given the uncertainty in interpreting the new rules. Russo hopes to address some of those issues when she moderates a panel discussion about Reg AB at the looming ASF conference in Las Vegas.
But she said, with a year to get ready for Reg AB, her company started early. So she does not expect the new rules to be a hurdle to its own issuance in the first quarter. "Maybe it slows things down, because the first time you do anything under a new set of rules, it takes a little bit longer," Russo said. "But I don't think it should impede us in any significant way."
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