The pending changes in the Erisa guidelines could boost the use of swaps on the sell-side, sources speculate, as transactions with swap structures which have traditionally been ineligible, may be available to Erisa investors.
"There probably haven't been a lot of issuers that have used interest rate swaps yet, just because of the Erisa rules," said one issuer.
"Let's say the department of labor comes back and says swaps are eligible, I think you'll see a lot more of that," the issuer said. "It'll make it easier to incorporate those in transactions."
An issuer dabbling in swap-like structures, GMAC-RFC is considering increasing its use of interest rate caps this year, as market conditions dictate.
"In a rising interest rate environment, it may become beneficial," said Diane Wold, managing director of securitization at RFC. "But you really have to have a view as an issuer of where you expect rates to go, and weigh that against the cost of putting an interest rate cap into a transaction, because it may not make sense. An investor may really require a cap to increase the available funds profile to their bond which in turn should translate to better pricing which can then be weighed against the cap cost."
Wold admits that the strategy of using such structures can be complicated.
Said Stenpen S. Kudenholdt, of law firm Thacher Proffitt & Wood, "When ABS professionals, whether they are issuers or underwriters or investors, start seeing or using swaps in transactions, they really need to get a quick education on how swaps work unless they already have a solid background."
