Like others in the securitization and private placement markets, John Loofbourrow is paying close attention to the Securities and Exchange Commission's (SEC) proposed changes to disclosure regulations.
His firm, New York-based investment banking firm John W. Loofbourrow Associates, focuses on private placements and ABS, and will certainly be affected by changes.
The firm, which was founded more than 30 years ago by Loofbourrow, services mainly mid-sized companies. In 1986, John W. Loofbourrow Associates was the first to do a home equity loan, which was then called a second mortgage, he said, and it deals with unique ABS on a regular basis.
The SEC’s proposed regulations for ABS under Rule 144A would change requirements regarding the disclosures made by issuers and banks to the SEC and to investors. Under the new rules, data related to each public loan or asset pool will have to be disclosed to investors. Once these new regulations are implemented in the private market, upon request an ABS issuer will have to provide its investors with the same information required in a public offering. These proposals are meant to provide increased transparency.
According to data gathered by Thomson Reuters, year-to-date 2010 ABS market volume, which includes public and 144A issuance, is approximately $38.8 billion. The volume for ABS 144A alone is $25 billion.
ASR sister publication Private Placement Letter spoke with Loofbourrow about the SEC's proposed changes and the impact they might have on the private market.
Private Placement Letter: Do these new regulations in essence blur the line between the public and private markets?
Loofbourrow: No, not necessarily. All they are doing is saying, “Look, there is a certain amount of information you have to provide.” In many 144As [at least the ones our firm has done] the material (available to the SEC and investors) had already been provided… The purchasing institutions have a lot more clout under 144A, than they do in the public markets
Under these new proposed regulations, what is the difference between the private and public disclosures?
Well, I think the main change is on the public side. Previously, when they were selling [collateralized debt obligations] CDOs and other asset-backed deals, they did not have to give [particularly in the mortgage world] details of the underlying pools. Especially in the case of CDOs, which were repackaging previous securitizations, there might have been a tranche with a subprime mortgage behind it. By the time it was sliced and diced, it was almost impossible to figure out whether a particular mortgage in Oshkosh, Wisconsin was in the pool. The idea is that investors are able to track the original assets that are under the pool. This is long overdue, in my opinion.
Private Placement Letter: And on the private side? These disclosures will likely make things more transparent?
Loofbourrow: It will make things more transparent, and I think that is healthy. There was probably too much reliance on the rating agencies, while doing rated transactions, and acceptance of what they were doing, without digging in to find out what was underneath. This was not true for nonrated transactions, where the investor really does dig in.
Private Placement Letter: A lot deals are going the private route, which some say is due to the disclosures involved on the public side. Once the new rules come into play, do you think issuers may steer clear of the private market?
Loofbourrow: Sometimes it is quick to go the private markets and stay away from disclosures. But it is hard to know the impact (of the proposed rules). In the public market, they have the "skin in the game” proposal, and that is going to have some impact. Again, favorable impact. But the impact on volume is not clear yet. It is possible that as an alternative the issuer could go to the private market. In the private market you have to disclose as well with SEC Rule 10b-5. Otherwise you’re potentially liable as an issuer.
Private Placement Letter: So, then, are these proposed regulations a boon for the private market? Will issuers favor the private over the public markets?
Loofbourrow: It is too early to tell, I think. These are some pretty substantial changes. They are important in the long run for the market, but how that’s going to affect everything, it’s just too early to tell. So if this brings some rationality into the markets, even if it drops the volume, then great! That’s the best thing that could happen.
Private Placement Letter: How long will it take to see the effect of these new rules on the market?
Loofbourrow:I think it is going to take a year or two. Issuers are going to have to adjust to the new rules. The economics are going to be different. Everybody’s going to have to go through a learning curve before this [the impact] is really clear to everyone.
Private Placement Letter: Will all these new rules and regulations scare people off?
Loofbourrow: I don’t think so. Because there is such a need to get the securitization market going again. And I think everybody will make a real effort to make it work… The sooner this market returns in a rational form the better. I just think it is needed for the economy.