Moody’s Investors Service believes that the modifications that Brazilian regulators have proposed to the regulatory framework governing ABS are a credit positive for the country’s securitization market, according to its Weekly Credit Outlook.
“It would be detrimental if these rules got watered down,” said Johann Grieneisen, senior analyst in Moody’s Sao Paulo office.
Brazil’s Securities and Exchange Commission, the Commisao de Valores Mobiliarios (CVM), issued a request for comment on the proposed modifications on July 17.
Moody’s stated that the extensive proposed modifications are credit positive because they would remove any structural residual connection to the financial strength of the transaction’s seller.
First of all, analysts noted that the proposed changes no longer permit the seller to commingle cash belonging to the ABS with its own accounts, which, in turn, eliminates exposure to the seller’s corporate credit risk – a credit positive.
Another suggested modification will hold the securitization’s custodian to more accountability, which Moody’s said is again a credit positive. This is especially important for Brazilian securitizations due to fact that their rotating nature involves the continual addition of new loans.
A third reason that these recommendations are also credit positive is because it does not grant sellers physical access to original loan documents anymore, which diminishes potential fraud by the seller.
Finally, the proposed modifications remove conflicts of interest and clarifies the roles of the transaction parties, making it a credit positive that more specifically aligns the interests of the transaction parties with those of investors. For instance, the RFC no longer allows the trustee to act as custodian to the same securitized transaction in addition to requiring future transactions to have two separate “gatekeepers,” the trustee and custodian.
Therefore, Moody’s reasoned that the scenarios in which ABS investors would have losses after the default of a seller of securitized assets would be dramatically lower in the future than it is now.
If the proposed changes are passed, they will immediately affect all new transactions that sellers register with CVM. The RFC grants 120-day grace period for compliance to outstanding transactions, including over 300 ABS as of 31 May that totals $38 billion in outstanding balance.
