The Federal Deposit Insurance Corp. (FDIC) yesterday morning issued an interim rule to extend to March 31, 2010 the safe harbor rule related to its treatment as conservator or receiver of financial assets transferred by an insured depository institution in connection with a securitization.
The market welcomed FDIC's move. "We view the FDIC's extension of the safe harbor rule and supportive comments regarding the ABS markets as positive first steps in resolving the issues related to the potential loss of legal isolation due to the adoption of FAS 166 (GAAP standards for transfers, including securitizations, of financial assets)," Bank of America Merrill Lynch analysts wrote.
This interim rule grandfathers all securitizations for which financial assets were transferred or, for revolving securitization trusts, for which securities were issued before March 31, 2010.
The FDIC is set to publish in December a Notice of Proposed Rulemaking regarding the treatment of ABS that are issued after 3/31/10.
According to BofA Merrill analysts, the board members of the FDIC agree with the securitization industry that modifications to existing rules are needed so that banks can continue to access the ABS markets.
The FDIC thinks the modification should have further conditions to protect the FDIC and the deposit fund. Only a few details have been offered, even though board members think the conditions need to address past misaligned incentives as well as lapses in regulatory oversight, capital requirements and underwriting standards. This is especially for lapses related to the mortgage markets.
Analysts, meanwhile, said that the FDIC will also consider the ability to modify existing structures.
They added that the grandfathering of existing transactions, specifically credit card ABS, eliminated market concerns around the possible downgrade of certain triple-A rated classes of deals that will be consolidated on banks' balance sheets starting Nov 15.
After March 31, 2010, the impact on bank-issued deals will depend on the revised conditions placed on these offerings, analysts said.
BofA Merrill analysts said credit card securitizations raise "unique issues" because they have revolving structures or, in other words, these deals "buy" receivables and issue series on an ongoing basis.
The primary issues will be the banks' ability to transfer receivables to existing trusts and existing trusts' ability to issue additional series. At a minimum, analysts think banks will be allowed to still transfer receivables to their trusts to maintain the required receivable balance and seller interest.
Otherwise, these trusts most probably would experience an early amortization event. The ability to issue additional series will depend upon the ability of the bank and trust to meet the revised conditions. The outcome here, BofA Merrill analysts said, is less certain.
The analysts said the FDIC should grandfather not only existing series issued by a credit card trust but future series issued by the same trust so the trust can still finance receivable growth and maturing deals.
As reported earlier by StructuredFinanceNews.com, the American Securitization Forum (ASF) has made a sale proposal and a secured financing proposal to the FDIC.
Although BofA Merrill analysts think a workable comprise will be achieved, more safe harbor conditions, along with others being proposed by Congress, will most likely result in higher costs or less efficient structures for banks funding through securitizations.