Based on the results of a recent Structured Finance Market Opinion survey conducted by Standard & Poor's, securitization professionals named operational risk as the second most significant factor that is likely to affect the outcome of a deal, reinstating the fact that it continues to be a looming concern for players in the marketplace.
According to the study, more than 75% of the participants named servicer quality as the most critical element of a transaction's operational risk profile. This in large part relates to blowups in the asset-backed market that date back to 2000, Michael Gutierrez, a director in S&P's structured finance group and head of the servicer evaluations team. It started with LTV Steel, continuing to manifest itself with a flurry of market mishaps involving such companies as Heilig-Meyers, Conseco Finance, National Century Financial Enterprises, and NextCard, added Ted Burbage, a managing director in S&P's structured finance group.
"A lot of these situations that occurred three, four, even five years ago are still fresh in people's minds," Burbage said, adding that non-pool or general corporate credit-related factors have therefore come to the fore recently. "Market participants must now also be comfortable with the business model of a company, or with the industries these companies and assets participate in, or the assets themselves," he said.
When asked for the epitome of an "experienced" servicer Gutierrez said, "We look for servicers with a certain track record in the assets they are servicing." Included in the track record is a good performance history in terms of loss severity, full compliance with laws and regulations, good internal controls, experienced management, low turnover in staff, and strong systems in place to handle the data and make sure its integrity remains the same throughout the deal.
In addition to seller/servicer quality, a total of 54% of respondents voted for transaction structure ranking it as the second most critical element of a transaction's risk profile. Inherent asset serviceability of a particular receivable and the quality of a transaction's deal administration was tied for third place with votes from 43% of the participants.
The results of the survey also showed that 52% of respondents felt newer, esoteric, assets are more prone to operational risk than commoditized assets. Mortgage and home equity (13%) and credit cards (10%) were considered the least prone to operational risk.
The results largely get to the specialized nature of servicing esoteric assets, said Burbage, explaining that the population of credible servicers for such assets is usually limited to the company in question, plus a few competitors. "Very often there are a lot of secret ingredients that go into effectively managing esoteric assets," he said. "Secondary markets, for instance, are limited. It tends to become a highly specialized situation where perhaps there are not a lot of other people out there that could effectively do the same job as the seller/servicer," Burbage said.
In all, 197 people that took part in the survey, among which 28% listed themselves as investors, 26% as investment bankers, 20% as issuers, and the remaining 26% were a mix of different securitization professionals. This is the fourth "SF Market Opinion" survey that S&P has released to follow the thought process of market pundits relating to the issue of operational risk.
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