It was a familiar refrain, heard whenever the two sides of the securitization market are in the same room: investors complaining bitterly about the lack of deal surveillance information; and issuers, rating agencies and underwriters denying that it was up to them to do anything about it.
However, at the recent Fabozzi/IMN Global ABS summit held at Montreux, Switzerland, there was a new twist: this time there were a set of recommended deal reporting standards that everyone could at the very least aspire to.
The standards came from the European Securitization Forum, the European arm of the U.S.'s Bond Markets Association (BMA) and were officially released at the conference. They were devised by the forum members, including representatives from European banks, advisors, investors and issuers. They recommended that all deals should carry regular, standardized post-issuance reporting, generally available to the market rather than just to bondholders.
The BMA's George Miller called the recommendations "the bare minimum standards for all asset types" and said that they were necessary to analyze, price, trade and settle mortgage- and asset-backed securities. He added that in order for the standards to cover all asset types they were no more than the "the lowest common denominator" necessary, and issuers should ideally issue more comprehensive information.
The proposals were warmly welcomed by market participants, especially investors, as the only way that the market would be able to move forward. "If there is no cashflow information, how can you price a bond? And if you can't do that, then where is the liquidity?" asked Paul Michowicz, until recently an investor with Bankers Trust Proprietary Trading.
Several conference delegates made the point that greater disclosure was in the interests of the whole market: investors will benefit from a clearer idea of how underlying assets are performing; issuers will receive a lower cost of funding; and underwriters will benefit from an increase in secondary trading.
Michowicz was one of many people who argued that the importance of a minimum standard of reporting was rammed home by the blow-out in spreads last October. Though the crisis may have been triggered by concerns over Russia's default, he said, it was made immeasurably worse by the lack of liquidity caused by the impossibility of pricing deals without performance information.
He was supported by Philip Walsh of First Chicago, who said that often the first indication that a deal is in trouble was when it was put on ratings watch by the agencies. "And that is too late," he said.
While the recommendations seemed to be uniformly welcomed there was less unanimity on how to encourage issuers to follow them. Representatives of issuing companies said that they would resist providing full information while their competitors could get away with providing very little, while bankers and rating agency analysts said that competitive pressures made it impossible for them to insist that issuers do the right thing.
Miller said that any attempt at coercion would be a mistake and that it was only possible to rely on market mechanisms to reward transparent issuers with better pricing and greater liquidity. He added that the evolution of the securitization market in the U.S. showed that issuers would eventually be won over.
Matthew Webster of Fitch IBCA agreed that the U.S. experience was instructive, arguing that proper reporting only became standard after the American securitization market went through several periods of stress, during which credit tiering rewarded issuers who provided timely information. "That's not happened yet in Europe, though we did see it to an extent [in the liquidity crisis] in October 1999."
Several investors called for a boycott of issuers not committed to providing good information. Foremost amongst them was Jim Irvine, an investor at Halifax. "If securitized deals don't meet minimum standards, we need not support them," he said.
There were, however, some skeptical voices. One particular concern was that in several European jurisdictions making information available to all could infringe securities laws that distinguish between professional and non-professional investors. Similarly, others said that they had been warned by their lawyers that providing information online or via Bloomberg for European securities could be deemed by U.S. regulators as an inducement to buy.
A more hopeful, if somewhat jaded, note was struck by Ray Wyer, an investor at the Bank of Ireland. "Six or seven years ago at a conference I remember a large investor saying that all that we need is information, information, information'; last year at this conference it was the same, but this year we're still talking about it. Let's hope that these proposals make some difference, and we're not still talking about it next year."
The full proposals are available on the European Securitisation Forum's website at www.europeansecuritisation.com - MD