Despite a banner year so far for volume and demand in the asset-backed securities market, certain structural aspects, particularly those associated with accounting standards (or lack thereof), have weathered a "confluence of elements coming together to create something no one expected... a perfect storm," said Jason Kravitt, partner at Mayer Brown Rowe & Maw, a speaker at a seminar hosted last week by the American Securitization Forum in New York.
It's old news by now, no doubt, but most of the industry's woes are being attributed to the fallout and abuses of SPE's by Enron Corp. that were revealed last fall, followed by events such as a group of law professors lobbying against the securitization-friendly safe harbor provision that was to be written into the bankruptcy reform act. Most currently, the market is waiting for the Financial Accounting Standards Board's final rules on the consolidation of SPEs.
Old news or not, last week's ASF seminar attracted roughly 160 market participants, according to ASF Executive Director Dwight Jenkins.
This Wednesday (Sept. 25), FASB will discuss, among other things, the elusive paragraph 17, which alludes to the conduit "silo" interpretation, in the SPE exposure draft. The Board also plans to begin deliberations on some of the other issues raised in commentary received from the industry participants.
According to seminar speaker Marty Rosenblatt, of the securitization practice at Deloitte & Touche, FASB has received more than 120 commentary letters as of the Aug. 30 deadline. Perhaps testament to the severity of the "consolidation threat," one letter, said to be pushing for more stringent criteria, came from Sen. Carl Levin (D., Mich.), who is heading up the Enron investigation.
Rosenblatt added that, of all the commentary letters, Levin's "would not be ignored."
Still in the pike, FASB's Emerging Issues Task Force (EITF) has yet to take a conclusive stance on issue 02-12, which addresses the permitted activities of FAS 140 QSPEs issuing beneficial interests.
This issue is especially pertinent to ABCP conduits, as they continually issue notes and determine factors such as terms, rates and durations. Also potentially impacted are revolving structures, such as credit card securitizations, where the transferor continually sells assets into the SPE, accruing beneficial interests prior to issuing term notes.
One consideration is whether or not these "activities," such as deciding when to issue beneficial interests and on what terms, could be automated via legal documentation at the onset of the structure - such that, once the QSPE is set up, it acts according to a predetermined set of rules.
According to the discussion document FASB made available prior to the meeting, other issues include the ability of the transferor to modify the structure (for example, via waivers from note holders), and whether the discretion given the SPE is consistent with FAS 140 requirements that qualifying SPEs are "limited to passively holding financial assets on behalf of the [beneficial interest holders]."
According to informal commentary distributed by Deloitte following the meeting, the EITF is leaning toward what the documents refers to as Approach B2, which states that the QSPE could decide terms, rates and durations if these are limited to the issuance of beneficial interests that are "well supported", meaning that the "expected cash inflows from the underlying assets (including guarantees of the timing and amount of those inflows) need to be sufficient to pay the cash outflows expected by the beneficial interests holders."
Approach B2 would call for more clarification on what is or is not considered "well supported."