How Reg AB will impact foreign issuance in the U.S. is yet to be seen, and predictions are going both ways, with some expecting more deals to result and others proving more skeptical. Tom Deutsch, associate director at the American Securitization Forum, said Reg AB allows non-U.S. issuers to have S-3 eligibility status just like U.S. issuers. As such, he anticipates greater interest in the U.S. market from issuers overseas.
"Now they can operate completely on equivalent terms with U.S. issuers," Deutsch said.
But some research analysts in London had a more tepid view, saying foreign issuers talk about the new U.S. rules as more of a hurdle than a welcome mat.
"I don't see people rushing to say, Gee, I really want to report a lot more information, so let's do a U.S. deal,'" one source said. Reg AB, which took effect January 1, requires expanded data reporting for all publicly issued asset-backed securities. The new rules affect shelf registration, static pool information and disclosures. But many market players in the U.S. and abroad are still struggling with how to interpret and implement the Securities and Exchange Commission regulation. The topic is expected to generate a lot of interest at upcoming industry conferences.
Northern Rock's not in a hard place
U.K. mortgage lender Northern Rock, one of the first foreign issuers to hit the U.S. market this year, says it is undeterred by the new rules. The company decided to go the 144A route with its Granite 2006-01 deal to sidestep Reg AB but that's only a temporary move. Northern Rock spokesman Brian Giles said the company just needed more time to comply with the regulation, and U.S. investors can expect upcoming deals to be public. Giles said Northern Rock was one of only two foreign issuers working with the SEC in a Reg AB pilot program. (The other foreign issuer was reportedly Australian.) "But we were unable to receive full SEC approval in time for this particular transaction," Giles said.
All of the U.S. issuance via Granite last year was public. The 144A status on the latest Granite deal did not appear to hurt investor interest. It priced last week at the tight end of guidance, after upsizing to GBP6 billion ($10.6 billion) from GBP4 billion ($7.07 billion). Aside from euro and sterling, the Granite deal offered eight U.S. dollar tranches, including both 2a7 and non-2a7 eligible notes. Pricing on the triple-As came in at one-month Libor minus three basis points for a 2a7 eligible tranche and plus 4 basis points for a non-2a7 tranche. The other triple-A tranche denominated in U.S. dollars, with a 2.9-year average life, priced at three-month Libor plus seven basis points.
Slow at first
Deutsch, of the ASF, conceded that the initial months might be slow for non-U.S. collateral as foreign issuers get familiar with Reg AB. But he believes the impact will be positive in the long run. Like U.S. issuers, many of those overseas are still working out how to comply with the expanded data reporting requirements, particularly for static pool information. One challenge for European issuers is that different countries have different origination standards and use different types of data to assess borrowers' credit quality, Deutsch said. "For example, my understanding is there are no FICO scores in England for credit cards. They may have something similar, but it's not the same," he said. "So it requires them to make different determinations about what information is material, and what information will be useful for ABS investors."
Market dynamics a factor too
Several London analysts said they think Reg AB is a mystery to a lot of market players outside the U.S. At least early on, they anticipate foreign issuers will be less eager to do U.S. deals regardless of the S-3 eligibility. "We expect that Reg AB will initially slow down non-U.S. issuance, rather than spur it on," said The Royal Bank of Scotland's Ron Thompson. Current market dynamics already make the U.S. less appealing for foreign issuers, Thompson added. He cited U.K. RMBS as an example. U.S. investors looking at home equities at a discount margin of plus 28 basis points or U.K. RMBS at plus 8 basis points would clearly go for the higher yield, he said.
"The U.S. market does not look as attractive as it's had for many non-U.S. issuers primarily because of all-in cost (including swaps), but Reg AB and the compliance that's associated with it makes that call just that much harder," he said.
Thompson also said he attended the Australian Securitization Forum/Insto conference in November, where Reg AB was a hot topic. "Australian issuers were nervous about how much work is this going to take?'" he said. "No one really had a clear cut view on the whole thing."
A positive outlook
Fitch Ratings analysts in New York agreed with Deutsch that Reg AB will eventually have a positive effect on foreign issuance in the U.S. "It's anticipated that the market will open up a bit," said Fitch director Michael Laidlaw. "It levels the playing field for foreign issuers." However, the Fitch analysts don't expect to see those results any time soon. "It's going to take a while," said Fitch senior director Mary Kelsch.
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