Drawing a common theme from worldwide securitization is not an easy task, as each marketplace, at different points of evolution, seems to have its own story.
For example, while the Colombian domestic mortgage market is still cutting its teeth, traditional securitization of European RMBS could decline going forward, as issuers look to diversify their funding sources, which has prompted the development of the covered bond market.
With that in mind, we present the 2003 Annual ASR Achievements in Securitization Awards, a diverse set of deals, programs and, in a few instances, turnaround stories fueled by securitization, though the underlying transactions themselves may not have seemed particularly innovative. That said, we chose to honor and recognize achievements that captured the true challenges of the market and its participants, as well as the latest advances in design.
On that front, our U.S. securitization award went to Oncor Transition Funding, the first of many rate reduction deals expected out of Texas (see p. 14). Oncor featured many first-time enhancements, such as performance-based underwriting fees.
For the second year in a row, survival emerged as a theme for several areas of the market, particularly consumer lending. As you may recall, last year ASR honored the in-bankruptcy rental car fleet securitization for ANC Rental Corp. This year, we look at the turnaround securitization programs of Capital One Financial and AmeriCredit Corp.
Meanwhile, much of the asset-backed commercial paper industry fought for self-preservation in the face of changing accounting rules that threatened the economics, especially those subject to U.S. generally accepted accounting principles (GAAP). As the accounting and regulatory landscape changes in Europe, expect more rules-driven structures emerging over the next few years.
In the end, bankers, accountants, rating agencies and other parties to the industry were able to devise a livable solution to the new guidelines. The "expected-loss tranche," which we describe in more detail in the Innovations in Securitization award pages (20-21), satisfactorily transfers the expected loss of a VIE to a third party, which is paid a premium.
Interestingly, though worth mentioning for its timing, in a report last week, Nomura Securities argues that these expected tranches do little to transfer the actual economic risk in an ABCP conduit, but are rather loopholes tied to a rules-based approach to accounting guidelines. Time will ultimately tell (or not). ABS research head Mark Adelson, who is always good for the contrarian view, believes that in the next three to five years, the Financial Accounting Standards Board will move toward a principles-based approach to accounting guidelines, a direction the Securities and Exchange Commission is heading.
So, in our awards process, are we honoring the exploitation of loopholes as examples of innovation and ingenuity? Why not? The FIN 46 rules are, in most of the industry's eyes, convoluted and non-differentiating to the point where the original purpose and meaning is lost.
The real question is whether the inclusion of a conduit's assets and liabilities on a bank's balance sheet better represent that bank's exposure to risk. Normura's Adelson argues yes. The vast majority of the market says no.
Adelson argues that there is little differentiation between the risk of conduit lending and secured lending, as the pristine history of conduit losses is skewed by the sponsors funding out problem assets as soon as they emerge.
The opposing argument is that conduit purchases are securitizations benefiting from structure, and generally fund investment-grade pools of assets, usually in the single-A to double-A range, according to an ABCP source. Aggregated, the default potentials plus the expected recovery through a conduit's senior position, statistically mitigates the sponsor's credit risk, the source argued.