Orlando, Fla. - Issuers who want to bring new or esoteric asset classes to market should consult with rating agencies early on in the process, according to participants at the twelfth annual Information Management Network ABS East conference held here last week. These points were made at the panel entitled Bringing New Asset Types to Market: Challenges and Potential, Pitfalls for New Issuers'.
Issuers should conduct early discussions with rating agencies to determine what the potential risks and challenges of an asset class would be, Winston Chang, director of new assets at Standard & Poor's, suggested. One question that could arise: Does an issuer have the static pool information that the rating agencies need to analyze? That data is crucial to give rating agencies an idea of the potential issuer's history, servicing platform, and the role that ABS plays in the issuer's line of business. These types of details will help issuers determine whether they might get the rating that they are aiming for before they are too far into the process.
Accountants should also be involved in the initial stages of the deal, a point that was brought up by Mark Iammartino, a senior manager at Ernst & Young. Accountants would be helpful in matters ranging from making retained interest valuations to examining routine journal entries, which are all part of the documentation required in bringing deals to market. Also, there is the matter of keeping up with changes in accounting guidance.
Joseph Bramuchi, a vice president at Marriot Vacation Club International - which has become a regular issuer of timeshare receivable ABS - emphasized the importance of collecting data on the pool level. He suggested that new issuers should begin capturing and storing pool level data as soon as possible because even if there is no system in place to classify the information, these companies will eventually find ways of slicing and dicing the data when needed. He said that the pool level data that his firm collected helped them through their first deal.
Panelists also said that the historical data collected would provide trends and updates on the collateral and would allow continuity in the information flow, providing a basis for benchmarking and looking at incremental changes at the pool level.
Issuers, panelists said, must determine if they want to securitize an asset as a long-term initiative and not just as a one-off deal. Marianna Sterschic, vice president of business development at Wells Fargo Bank, said that esoteric or new assets involve a lot of time and financing. Sterschic said that there's a significant amount of expense involved in road shows and in onsite due diligence. For example, panelists said that deals that are wrapped could have a penalty if they are not part of a series of transactions with a particular wrap provider. There is also the issue of good investor reporting that might be complicated in new assets because of the differences in collection and charge-off practices as well as payment processing systems that come with a new asset class.
Moderator Paul Jenison, senior managing director at Riviere Jenison Securities, said that for many institutions, the capital arbitrage that takes place in securitization is the compelling factor in the decision to securitize a new asset, so the rationale is not fundamentally economic. "The reasons are strategic rather than tactical," Jenison said.
For many of these deals, the future is never certain, Jenison added. The first time issuers try out an asset class there is absolutely no predictive formula for success. As an example, credit cards and tobacco deals were once new asset classes but have now become cookie cutter. But there are some unsuccessful stories such as the attempt at cattle securitization back in the early 1990s.
S&P's Chang said that the securitization of any new asset is always challenging even if there have been deals of this kind done before, since, no matter what, it would still be early in the overall evolution of the asset class. He presented a list of what he considers new asset classes, which included IP, medical and cat bond securitizations, among others.
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