Disclosure requirements under Regulation AB (Reg AB) might not be terribly useful to ABS investors for the time being, but in due time, periodic updates might allow investors to conduct meaningful, time-series analysis of ABS issues, particularly in the credit card ABS sector, according to market sources.
The Securities and Exchange Commission (SEC) began implementing Reg AB in January. However, nearly ten months later, some continue to question whether those reforms are actually helpful to investors. The mandate was supposed to spell out the registration requirements for the securitization industry under the Securities Act, and presumably give ABS investors more insight into the credit profile of underlying assets.
"Is this really helpful and are investors really using it?" said Ed De Sear, a partner in the securitization and structured finance practice of McKee Nelson. "Now it becomes how do we comply with the law? The SEC qualifies a lot of the requirements by materiality. Basically they say that if something is not material, you don't have to disclose it."
Moody's Investors Service also addressed the issue in a special report published in late September.
"Investors in credit card ABS have long requested statistics that would provide more insight on the underlying collateral's credit profile," wrote Moody's analysts. The rating agency found that, "reporting differences among issuers somewhat limit the value of cross-issuer comparison for a variety of reasons."
One area where clarity has not fully materialized is the disclosure of credit scores on underlying credits in credit card ABS deals. Moody's acknowledged that credit scores offer some forward-looking insight to the credit quality of a given pool of receivables, but they do so for typically two years, which is relatively short. That limits their value when analyzing securitized bonds, which mature between five and ten years. Further, credit scores might effectively segment credit risk in a portfolio, but they do not necessarily correlate to the credit risk associated with the asset-backed bond that it is securing, said Moody's. Those who observe credit scores might expect that issuers with a higher proportion of 700+ FICO scores would have lower triple-A credit enhancement levels, but that is not always the case, said Moody's.
Moody's did highlight one improvement from Reg AB: issuers are required to publish static pool data. Previously, when issuers added or removed collateral from master trusts, the practice tended to distort the traditional performance metrics that track the entire pool.
Static pool data has only been out on the market for a short period of time, and historically it was not very detailed, said David Lukach, a partner at PricewaterhouseCoopers.
"I think if the information is presented properly, it should help you understand underwriting and performance trends," Lukach said. "We will need to wait until 2007 or beyond to truly see any trends which will then require analysis to understand the drivers of the trends."
Another new disclosure requirement, servicer attestation reports, assures investors that servicers are collecting money that is contractually due to the trust, and forwarding them to investors in accordance with the terms of the agreement, said John Gibson, also a partner at PricewaterhouseCoopers.
If, for instance, an issuer added a large portfolio of unseasoned credit card receivables, that move might result in an understatement of loss and delinquency rates for the entire trust. Vintage data, however, are not as affected by that type of distortion, which makes them useful for establishing baseline expectations of collateral performance, Moody's said.
"The inclusion of static pool data is an improvement on the practice of simply reporting performance metrics on an aggregate pool of receivables because vintage data directly incorporate the relative seasoning of the receivables," the rating agency said.
Over time, however, periodic updates will give investors access to a broader and deeper database.
"The overarching theme is that the new level of servicer attestation is all relatively new," Gibson said. "The market has not had an opportunity to react to the new attestation process."
(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.