Though the structure had all but vanished in the smoke of 1998's liquidity crisis, net interest margin securitizations (NIMs) are on the rise this year, following a slight resurgence in 1999.
Further, a new one-deal NIM, dubbed the "NIMlet", has become the trendy deal-type of late, according to a recent study by Jeffrey L. Wolf of Moody's Investors Service.
In a traditional NIM securitization, set portions of the residual cash flows from a series of deals are securitized through a trust separate from any of the parent securitizations. As opposed to tapping numerous deals, the NIMlet is an actual tranche attached to a larger, standard securitization.
In either case, the residuals are leveraged to provide the servicer/issuer with additional liquidity.
"There does seem to be a real increase in the number of issuers that are looking at the NIM structure," said Diane Westerback, an analyst at Moody's, and contributor to the research report on NIMs.
"I think the trend is to have a NIM off of one or possibly two deals, with a relatively shorter average life, so you're depending more upon the initial cash flow from the securitization," Westerback said.
Structuring the transactions with shorter average lives makes them less susceptible to other mechanicals, such as stepdowns (see stepdown observation, page 11).
Already this year, Moody's has rated four NIM securitizations, three of which came out of the Option One Mortgage Securities Corp. trust; another was issued off the PaineWebber Mortgage Acceptance shelf, where the issuers were NC Capital Corp. and BNC Mortgage.
Not rated by Moody's, both WMC Mortgage and Onyx Acceptance Corp. Corp. have privately placed NIM securitizations this year (see ASR 4/4/00 and ASR 4/10/00).
Because the cash flow to the NIM structure is secondary to one or more primary securitizations, there is a an inherent measure of risk and the deals are usually rated below investment grade, though actual risk varies on a case by case basis, according to Moody's.
The recent Onyx deal, for example, which was managed by Woodcliff Co., received an investment-grade rating from Standard and Poor's. The $59 million deal tapped the residual cash flow from Onyx's 15 prior auto-backed deals.
According to Moody's, NIM structures have evolved with fortifications that make the transactions perform better. The deals from the mid-90s, when issuers like ContiMortgage were first structuring NIMs, often performed worse than expected.
As a result, NIMs today often feature enhancements such as stronger collateral, asset diversity, conservative transaction size, and increased overcollateralization.
"It seems like these methods are certainly gaining currency now, and being used more often than not at this point," Wolf said.
