Before rules requiring sponsors of asset-backed securities to keep “skin in the game” took effect in December, market participants largely saw them as a negative, something that would hinder capital formation and depress issuance.
But that sentiment is not universal, as revealed in a panel at the Structured Finance Industry Group’s ABS Vegas conference on Monday.
In an electronic poll conducted during the panel session, respondents indicated risk retention has not been as burdensome for some issuers – and that the inclusion of residual notes for issuers is an important consideration for a substantial percentage of investors weighing decisions on which ABS notes to buy.
By a 60% to 40% margin, issuers in asset-backed securities agreed there has not been a large element of surprise in how new deals would roll out under the new retention requirements.
And among investors, 45% stated that a deal’s compliance with the rules does in fact make a difference in their purchase decisions – in the understanding that issuers including residual notes for retention are making a transparent attempt to share in the risk they are asking ABS buyers to make.
That is certainly is the message that Ford Motor Credit is trying to convey to investors in its asset-backeds, according to director of funding Dave Webb, one of the panelist.
“At Ford, generally speaking, we’ve long held the belief that the alignment of interests between issuers and investors is critical to the development of our ABS platforms. For us, certainly risk retention has been key element of that, even pre-crisis,” said Webb.
Ford was the sole issuer on the panel.
Much of the discussion centered on the most efficient way of retaining the 5% interest; through either a “vertical” slice of the riskiest tranches of deals or a “horizontal” slice consisting of a portion of each class of notes issued by the trust. .
Ford, which employs the vertical strategy, had to stop issuing one of the mezzanine classes of notes in its deals. This ensures that Ford “has adequate residual interest” to meet the 5% threshold, Webb said.
Webb provided described the eight-year process of developing a framework for complying with risk retention as painstaking, involving consultations with treasury, legal and accounting teams.
The company has become a model for other issuers, according to David Beaning, another panelist and a former Securities and Exchange Commission official. “Ford’s efforts really did bear fruit,” said Beaning, now a senior director at data analytics firm S&P Global (parent firm of the ratings agency arm, Standard & Poor’s).
Ford was also the first auto-related issuer with an offering shelf to comply with with Reg AB II. That rule, which took finale effect last year, imposes additional registration and disclosure requirements, including copious amounts of data about individual loans used as collateral.