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Read on for chronological listing of events, most recent on top:

• European Securitisation Forum seeks clarifications on IASB changes to securitisation standard
  Added August 27
  Though broadly appreciating the proposed changes, the European Securitisatio Forum has sought clarifications on pass-through approach, contraditios with SIC 12 etc.
• Spielberg studios raise USD 1 billion by securitization
  Added August 26
  A mega securitization deal helped DreamWorks to raise USD 1 billion by securitization of future film earnings.
• India: professional discuss securitisation Ordinance
  Added August 26
  In a recent workshop on the Securitisation Ordinance, a broad cross-section of finance professionals, regulators and lawyers discussed the recent securitisation law in India.
• US ABS first half scores record volume
  Added August 22
  Bouyed by home equity and brushing aside off-balance sheet concerns, US ABS first half has shatterred the previous records.
• Equity investment vehicles growing fast: S&P
  Added August 22
  In a recent release, S&P notes increasing interest in CDOs backed by equity investments.
• CDO volumes shoot up in Japan
  Added August 22
  Half-yearly data review by Moody's states that the CDO market is growing in Japan like never before.
• Structured finance pros do not think FASB rules are going to help
  Added July 31
  Standard and Poor's recently and collected market feedback on the new FASB rules, and the structured finance community in undivided in its opposition of the new FASB rules on SPEs.
• CMBS performance sterling, says Nomura Research
  Added July 19
  Nomura Research finds the performance of the CMBS segment the best among fixed income options in first half of 2002.
• European rating actions mirror the US trend
  Added July 12
  European rating actions reflect the same trend - a record number of downgrades led by CDOs.
• Downgrades hit new peak in US securitization
  Added July 12
  During the second quarter of 2002, downgrades hit a new peak in the US securitization, worst affected by CDOs and CMBS deals.
• Future of Argentine future flows is not safe: S&P
  Added July 11
  Rating agency S&P cautioned that though the Argentine future flows have so far not been disrupted, all is still not over.
• New consolidation interpretation vague; would make little difference to securitisation industry
  Added July 11
  The new US draft interpretation on consolidation of SPEs will not make much difference to the securitisation industry.
• IMF sees problems in Philippine future revenues securitisation
  Added July 10
  An IMF working paper warns that secured borrowing on future flows is not a free lunch and can impair future borrowing ability as also affect other creditors' interests.
• Italian fiscal deficit rejected under new securitisation accounting rules
  Added July 10
  Eurostat revised upwards Italy's deficit account for 2001 treating securitisation of real estate earnings as borrowing rather than income.
• European regulator sets national accounting rules for securitisation; deficits cannot be lowered by future flows securitisation
  Added July 10
  Eurostat, the EEC regulator, has set rules for national accounting for securitisation of future flows and ruled out attempts to cut fiscal deficit by sale of future earnings.
• International securitization accounting standard heading for a change
  Added July 4
  The IASB has issued an exposure draft for amendments to IAS39 - the international accounting standard dealing with accounting for financial instruments including securitization.
• Inventory securitization may be the latest hot idea
  Added June 12
  There have been 3 cases of inventory securitisation so far, and like whole business securitization, it may soon be a hit idea.
• SPVs, securitisation are accountants' latest nightmare
  Added June 11
  "Play it safe" is the rule when it comes to accounting for securitisation and SPVs, thanks to all the controversy after Enron.
• CDOs account for most rating downgrades in Europe
  Added June 11
  A Moody's transition history of European structured finance reveals that more than 90% rating downgrades in European markets relate to CDOs..

European Securitisation Forum seeks clarifications on IASB draft standard

The European Securitisation Forum, a body of securitisation professionals in Europe has generally appreciated the recent draft of changes in international accounting standard on securitisation IAS 39, but has expressed concern on several areas where the provisions of the draft standard are not clear.

The concern areas are:

• Where assets are not derecognised, there remains a contradiction between “continuing involve-ment” and the “risk and rewards” approach of SIC-12.
• The proposed tests for the “pass-through arrangement” would not lead to derecognition of the financial assets in a number of common securitisation transactions, such as commercial paper conduits.
• Additionally, the proposed tests for the “pass-through arrangement”, are in many respects unclear, which will potentially lead to divergent results. Specifically, “without material delay” is clearly one issue that needs to be explored further.
• It is unclear how the “pass-through arrangement” applies to revolving structures.
• The proposed prohibition of buying and selling assets, in order to qualify for the pass-through arrangement, may significantly limit the derecognition of assets that are within a securitisation structure, such as in the case of a managed CDO structure.
• The concept of continuing involvement, may lead to double accounting, more specifically, for issues surrounding residual interest. It is unclear how the concept of continuing involvement will be reflected in accounting entries, depending on the nature of the retained interest.

The Forum has called for interaction with the IASB. The last date for comments on the IASB draft is 14th Oct. 2002.

Links: See also our news report below, which also gives link to the full text of the IASB draft. Vinod Kothari's article on IAS 39 changes is here. Our page on accounting issues gives write ups and links.

Spielberg studios raise USD 1 billion by securitisation

DreamWorks, the Los Angeles entertainment group of Speilberg, has secured a USD 1 billion funding by way of securitizing its future film revenues. According to a report in Financial Times, DreamWorks will securitise its new live action output and films already in its library, which typically generate revenue for years from releases in home video formats and repeat showings on television. The securitisation depends on a well-established formula which allows several years' worth of revenues to be accurately predicted in the first few weeks following a film's theatrical release. Funds will be advanced in accordance with these calculations.

The funding was arranged by JP Morgan and FleetBoston. The senior tranche bears an insurance wrap from Ambac Insurance, which gives a AAA rating to the senior tranche.

Film funding by way of securitisation is not uncommon - cases of insurance-backed fundings have run into curious situations earlier like in case of Hollywood Funding, though for entirely different reasons. Funding of film library has been done in Italy as well. However, the present transaction seems to take the form of intellectual property income securitization used in David-Pullman-type transactions.

Links For more on intellectual property securitization, see our page here.

India: professionals discuss securitisation Ordinance

Organised by the Association of Leasing and Financial Services Cos. and the Asian Securitization Forum, a 2-day workshop on the recent Ordinance on Securitisation, Asset Reconstruction and Enforcement of Security Interests ended in Mumbai on Saturday, the 24^th August 2002.

Led by Mr Vinod Kothari, a leading international securitisation expert, the workshop drew participants from financial institutions, banks, law firms, Reserve Bank of India, SEBI, rating agencies, infrastructure companies, NBFCs, borrowers, etc. Mr M R Omarji, the principal architect of the Bills, also addressed the participants.

The participants discussed over the 2 days thread-bare the provisions of the Ordinance.

In respect of securitisation:

• The Ordinance mistook the concept of a securitisation SPV as some kind of a business entity with assets, net worth and employees. However, that is a concept alien to "bankruptcy remote" SPVs which are simply incorporated asset pools. Therefore, while there is no reason to stipulate minimum capital and prudential requirements for securitisation companies, the easiest way of reconciling with the law is to think of securitisation service-providers forming a registered "securitisation companies" and each such company can provide legal template to do securitisation transactions for various originators. Each such transaction can be a trust within the securitisation company, thus mutually ring-fenced.
• It was felt that the Ordinance though apparently intended to avoid stamp duty difficulties by defining a transfer of financial asset as a debenture, but the participants concurred that such intention is unlikely to be successful, as the true nature of an instrument is based not on its caption but on its real character, which will still be a transfer of financial assets, and hence a conveyance. Thus, the most important stumbling block on securitisation transactions remains unaffected.
• There is no bar on securitisation transactions outside the Ordinance, as the Ordinance merely regulates securitisation companies and not securitisation transactions.

In respect of Reconstruction companies:

• The presenter outlined international experience particularly in East Asian countries and that the most successful resolution of bad loans was done only in those cases where the loans were backed by commercial real estate. The position of East Asian bad loans, and those of India, was very different - here the loans are backed by operating businesses leading to problems of lay offs and retrenchments.
• ARCs need to be given more powers to handle bad loan situations on case by case basis instead of generic provisions relating to takeover of business. Takeover of business in most cases is unlikely to make any difference.
• Though the Ordinance apparently has visualised various ARCs, a centralised, government-supported ARC is a better idea if the experience of Malaysia and Korea is of any relevance.

In respect of enforcement of security interests:

• The presenter discussed in detail the new powers granted to lenders. Significantly, it is important to understand that the powers granted under the Ordinance are only the powers to enforce security interest, and cannot put a lender in any better position that was intended by the security agreement. Lenders cannot end being proprietors of assets under the Ordinance. This essential distinction between the right of foreclosure and the right of sale has been clear in our legal system and continues to be the same under the Ordinance. Mr Omarji also expressed similar views.
• Takeover of business and takeover of assets are two distinct powers under the Ordinance. The former power is granted to ARCs and not to secured lenders.
• Taking possession of the asset is not an easy solution and bankers must give very serious thoughts to their duty and liability to preserve the asset as a receiver, post possession. Though the Supreme Court has considerably relaxed its earlier stand on "natural justice" for resale of the asset in its recent ruling in Jagadmba Oil Mills case, the principles of fairness and reasonability remain the same.

US ABS first half 2002 breaks past record

Low interest rate environment has pushed up the demand for long-term mortgage loans, both prime and sub-prime. Even as off-balance sheet concerns rock the financial services firms and increasing disclosure requirements raise eyebrows, the ABS volumes have been rising round the year.

U.S. ABS issuance rose to USD 166 billion in the first half of 2002, shattering the previous half-year issuance record of USD 144 billion set in the second half of 2001. The second half can see a consistent trend if the interest rate environment remains soft.

The first half's record-breaking volume was powered by home equities, which contributed USD 57 billion of the USD 166 billion. Aggressive financing schemes by auto majors pushed up volumes of auto loans, and likewise credit cards.

So much about the volumes, but what about the quality? A Moody's report says that overall credit quality in ABS transactions declined. Chargeoff rates for Moody's Credit Card Index rose in the first quarter, but then showed some signs of stabilization in April and May. Credit quality in the auto sector was more stable, but the delinquency rate as measured by Moody's Auto Loan Credit Index rose sharply, suggesting that loss rates may be higher in the future. Commercial ABS -- particularly equipment and aircraft leases, small business loans, and franchise loans -- were under substantial pressure resulting in numerous rating actions.

Vinod Kothari adds: The latest data on Asset-backed Alert shows that the cumulative issuance (US) has reached USD 211.2 billion, as against USD 176.2 last year.

Links See our page on USA here

Equity investment vehicles evince increasing interest: S&P

Vehicles which issue obligations backed by managed equity investments are growing in popularity, notes Standard and Poor's. The release of 15th August says the level of inquiry for alternative investments, a burgeoning sector of global collateralized debt obligations (CDO), has increased tremendously in 2002 as collateral managers begin recognizing the benefits and potential returns to be reaped by securitizing alternative assets.

It may be wrong to call them a part of the CDO market, since the collateral of these funds does not represent debt but equity. Collateralised Investment Obligations may be a more generic name.

The equity-based vehicles could be investing in either hedge funds or private equity. In 2002, Standard & Poor's has rated two hedge fund transactions: the $500 million Diversified Strategies CFO S.A. and the Man Glenwood Alternative Strategies transactions. There have not been any rated private equity transactions in 2002, but a number of deals are expected to close by year-end.

Links For more on CDOs, click here.

CDO market continues to grow in Japan

Japan's collateralized debt obligation transactions in the first half of 2002 grew substantially from a year before, and it is expected that the growth pace will continue, according to rating agency Moody's. Moody's estimates the total CDO issuance market in Japan at 1.46 trillion yen.

Moody's expects that the Japanese CDO market will continue experiencing an active issuance in the second half of 2002. Moody's assigned ratings to 17 CDO transactions in Japan in January-June 2002, compared with eight a year before. Moody's attributed the growth to an increase in demand for CDO transactions as a means for banks to "control risk assets and financing," and to an "expansion of credit spreads of comparatively low-rated Japanese companies."

Links For more on securitisation in Japan, see our page here.

Structured finance pros do not favour new FASB rules

The structured finance fraternity is almost undivided in its view that new FASB draft rules seeking to hike the minimum capital requirement for SPEs to 10%, and to provide for consolidation of SPEs based on "variable interest" and not voting power, are not going to help. This is the result of Standard and Poor's collection of market opinions.

More than 81% of respondents, or 247 individuals, believe that a requirement of 10% outside equity is simply not the best way to maintain the integrity of financial statements. Even more telling, perhaps, is that only 18% of participants thought that the final outcome of FASB's endeavors would be fair to all parties -- regardless of what the guidelines turn out to be -- and 60% are concerned that FASB's proposals will restrict the future growth of the securitization market in the U.S.

Market players offered many suggestions as alternatives, including improved disclosure of: guarantees, related-party transactions, compensation agreements, and detailed risk/return estimates; the appointment of an outside auditor that reports to the SEC; more of an emphasis on the recognition of the legal status of sold assets; a limiting of recourse obligations; verification of data by an independent third party; and harsher censure for accountants and chief financial officers who fail to act with integrity.

Vinod Kothari comments: The opinion of the securitization market is hardly surprising. At the same time, the public in general is getting to learn new facts everyday on how SPEs are owned and structured, and how the effective control on SPEs is still maintained by the sponsors. This is more than clear from JP Morgan's testimony on the SPE called Mahonia.

There is little doubt that most SPEs are not independent except for a technical definition of ownership or control. It is difficult indeed to lay down any standard definition of "effective control" where more than definition, it is the judgement of the auditor that counts.

This is where the standard-setters seem to be making a mistake - defining too many things in mathematical terms, thereby pushing judgement and opinions of the auditor to the background. If too many rules specify too many numericals, it breeds irresponsbility and number-chasing. This is precisely why the 3% equity rule was put to abuse, and the proposed 10% equity is similar mathematics, only in a different magnitude. On the other hand, IASB's SIC 12 on quasi-subsidiaries does not specify any numerical test and merely sets the general principle for consolidation leaving the rest on the auditor's judgement, which places greater responsibility on the accoutand the auditor.

In my view, the recent accounting aberrations which are being termed as "accounting frauds" are a result of too many rules, rather than lack of rules.

Your views Please vote your views on this significant topic - on the index page.

CMBS the best performer in fixed incomes: Nomura

While rating agencies may be concerned with the downgrades and negative watch on several CMBS classes, the market seems to have brushed aside such concerns and simply loved CMBS investments. The performance of the CMBS has been the best in the fixed income segment. A recent Nomura Research paper says: "In addition to the time honored safe havens of US treasuries and grandma’s mattress, there now seems to be another acceptable place to invest in time of trouble, CMBS." [US Fixed Income Mid-year Review July 2002]. The paper says that during the first half, 10yr AAA CMBS had a holding period return of 8.61% which has a spread of 429 bps on 10 year US treasuries.

This is inspite of the fact that in rating parlance, the CMBS sector has suffered the worst-ever downgrades -see below. However, these two phenomena are not imcompatible. Downgrades have mostly occurred in the subordinated classes of CMBS which take the first losses and almost represent investors' equity in the real estate itself. The senior classes, on the other hand, are debt secured by real estate and not a real estate investment. As a matter of fact, if the collateral quality deteriorates at times it might only lead to a de-leveraging of the transaction with accelerated payments to senior investors. So the senior investors stand to gain at the cost of the first-loss pieces. "This may sound like a “vulture approach” to finding good news in others’ pain but this is one of the realities of CMBS, and in many respects the structured products market as a whole", says the Nomura paper.

Links For more on CMBS, see our page here.

European rating actions mirror the US trend

The US story holds for European transactions as well. There were 43 downgrades and 29 classes were placed on negative watch. Compared to this, there were only 3 upgrades.

Almost half of the downgrades resulted from the CDO segment. There were 15 downgrades in the synthetics segment.

A notable feature of this quarter's adverse changes is the downgrade of 4 classes of two whole business securitizations - Welcome Break Finance and RoadChef Finance. In case of whole business transactions, the rating of the transaction hinges on the performance of the operator - therefore, the rating actions are related to the operating business of the respective originators.

Links For more on whole business transactions, see our page here. For more on securitization in Europe, see our page here.

Record quarterly downgrades mar the US securitization markets

Standard and Poor's yesterday released its quarterly survey of rating actions in global securitization and the results were not surprising. Adverse rating actions in the ABS segment (not including RMBS and CMBS) reached a new peak of 130 downgrades. Leading the downgrades were synthetic CDOs (45 downgrades) and cash CDOs (30 downgrades). The rating agency says that the volatility in ratings is still comparatively lesser as compared to corporate finance, but CDO and synthetic CDOs compare well with corporate debt, given their dependance on the latter.

Looking at the half year as a whole, , Standard & Poor's had initiated 258 rating actions in 2002: 232 ratings were lowered across 128 transactions and 26 ratings were raised across 20 transactions. The downgrades in just 6 months have covered 95% of the downgrades for the whole of 2001 - so it is clear that 2002 will be the worst year in terms of number and reach of downgrades. The rating agency expects the total number of adverse rating migrations to reach 350.

In the MBS segment, there have already been 92 downgrades in CMBS deals, as compared to 62 for the whole of 2001, which was a record. Bankruptcy of some prime-time tenants as K-mart and Telcos had resulted into these downgrades. And notably, the downgrades included several default cases- "the most notable of the downgrade actions was that there were 14 classes from nine transactions that defaulted and were set to 'D'. This is almost equal to the total number of defaults that Standard & Poor's has experienced in the history of CMBS transactions."

Future of Argentine future flows is not safe: S&P

Suddenly, there seem to be too many worries over the future of future flow securitisation. The IMF frowns upon it, and the Eurostat sniffs an Enron in it. Now, rating agencies have started finding sovereign risks in future flow deals.

Isn't this a somersault, you might ask. Because the very purpose of future flow securitization from emerging markets was to isolate the transaction from sovereign risks - there was no other purpose a performance-linked future flow deal was serving anyway. But rating agencies, like the rest of us, prefer to be wiser only on the verge of a default.

A S&P report of 8th July says that so far, Argentine future flows are paying despite the forex curbs - the full payment of the first tranche of Argentine oil company YPF S.A.'s secured export notes and the continued servicing of the remaining two uninsured tranches are taken as the test cases by the market. However, in the same breath, S&P cautions "that the transactions have not been tested to determine how well their legal structures will withstand direct sovereign interference risk. This is the risk that the Argentine government could reverse the exemptions for long-term cross border future flow deals and requires all export proceeds to be immediately repatriated. The relevant legal structures include the sale of receivables to offshore single-purpose vehicles and the notifications sent to obligors requiring payment into offshore collection accounts."

Links For more on future flows, see our page here. For more on Argentina, see our page here.

New SPE consolidation rules will make little difference to securitisatioin industry

It might have been projected as the much-awaited remedy for the colossal accounting problems faced by the US capital markets, but the new consolidation rules are unlikely to change much, except increase the capital requirements for SPEs from 3% to 10%. As far as the securitisation industry is concerned, there is unlikely to be much difference.

The new draft rules bring in a concept of "variable interest" which is defined as "Variable interests are the means through which financial support is provided to an SPE and through which the providers gain or lose from activities and events that change the values of the SPE’s assets and liabilities." Leave aside all goobledygook - this definition is not very different from the classic concept of "equity". If the "primary beneficiary" holding variable interest can be identified, in absence of this interpretation, such holder could also be said to be holding substantial equity stake.

As far as the securitization industry is concerned, there is unlikely to be much impact as qualifying SPEs under Para 35 of the FAS 140 are excluded from the new standard. Arbitrage CDOs which may not so qualify can still claim exemption from the standard under the conditions of Para 9 of the draft interpretation.

Links We give comments on the new interpretation, as also link to its full text. Go to this page for more.

Do you have comments? Do you have any comments on the new interpretation? Your comments are welcome for publication on this site.

IMF sees problems in Philippine future flows securitisation

While Eurostat-Italian-government row on future flows securitisation is only an accounting issue, an IMF working paper goes into the very economics of future flows securitisation by governments, in the context of proposals by the Philippine government to securitise the revenues of Malampaya gas project and amusement park receivables.

Nigel Chalk, in a working paper published by the IMF, talks of several downsides of a future revenues securitisation by a Government including the following:

• subordination of existing and future creditors
• higher legal costs due to lack of standardisation and unique transaction characteristics
• legal issues including action by preferred creditors who may seek to block or reverse a future flows securitisation
• redution of budgetary flexibility by earmarking a certain revenue to servicing a certain debt
• cosmetically dressed fiscal position (which is what the Eurostat is opposing - see below).

The paper cites several case studies of internatioal future flows transactions to make the point that structured finance is no free lunch and sovereign borrowers should realise the long-term impact of subordinating past and future creditors..

Links Full text of the paper, see our Premium section. The premium section is open only to subscribers to the Premium list. Click here to know more.

Italian public accounts rejected amid wrong securitisation accounting charges

Securitisation accounting is suddenly a hot subject - thanks to Enron and Italy. Much as Enron's off balance sheet accounting has earned the irk and ire world-over, Italian budgetary deficit became a matter of a major controversy on a securitisation accounting related issue. Eurostat has recently set rules for securitisation accounting [see below] according to which most government securitisations will be treated as borrowings and therefore, will not help to cover budgetary deficit. The Italian government, on the other hand, has been doing, or wanting to do that, for the last 3 years - with INPS, gaming receivables and real estate securitisation.

Italy budget for 2001 includes a revenue of Euro 7.7 billion representing securitisation of revenues from government-owned real estate. If this is treated as borrowing rather than revenue, Italy's budget deficit rises from 1.6% of GDP to 2.2%.

It is reported that Italy has accepted Eurostat's ruling, though reacting sharply to a comment which compared the accounting to Enron.

However it is not clear whether Italy would still go ahead with its proposed INPS -III. INPS, it may be recalled, is a securitisation of delinquent social security contributions which was a beacon deal a couple of years ago and was repeated. The third repeat intends to raise Euro 3 billion.

Links: See Eurostat rules here.

Eurostat sets rules for future flows securitisation accounting by nations

In a move that stirred the hornet's nest and raked up a major controversy (see Italian future flows -news item here), Eurostat, the Statistical Office of the European Community set rules for national acconting for securitisation transactions. Several EEC members, Italy being prominent and including Portugal, Greece etc. have been trying to reduce their fiscal deficits by securitisation of future revenues such as lottery receivables, pension receivables etc.

The rules, announced on 3rd July, set the following standards:

• Securitisation of future flows not attached to a pre-existing asset are always to be treated as government borrowing.
• The granting of guarantees by government to an SPV or to another entity implies an incomplete transfer of risk and is evidence that there was not an effective change in ownership of the assets. Therefore, in the case of a securitisation operation undertaken with an SPV, it implies the reclassification of the SPV within government sector, or the recording of an implicit loan from the SPV to government.
• Whenever the securitisation contract includes, in addition to the initial payment by the SPV to the general government unit, a clause on additional future payments from the SPV, specific provisions apply. In particular, whenever the difference between initial payment and the observed market price or market-based estimated price is higher than 15%, the transaction has to be treated as government borrowing.
• The value of the initial transaction must be recorded as an amount of cash effectively paid by the SPV to government. Possible additional payments might have an impact on net borrowing/net lending in the case of sales of non-financial assets only at the time they occur.

The rules are applicable to all past and future transactions.

Vinod Kothari comments: Essentially, the rules only mirror the well-understood accounting and regulatory rules followed by private sector securitisation world-over. Future flow securitisations are akin to pledge of future incomes and should appropriately be classed as borrowings. Excessive credit enhancements by the originator lead to recharacterisation of sales as funding - which is what the Eurostat seeks to apply to government securitisations.

Links See related news items - Italian budget rejected amidst accounting charges; Philippine future flow securitisation opposed.

For accounting rules on non-government securitisation, see here.

International securitization accounting standards due for a change

The international accounting standards setter International Accounting Standards Board (IASB) has published an Exposure Draft of proposed amendments to the IAS 39 that deals generally with accounting for financial instruments, and forms the basis of securitization accounting in most non-US countries except UK.

The proposed amendment marks a change in approach by the IASB where the existing approach to recognition, that is, off-balance sheet accounting, called "surrender of control" approach, is going to be replaced by "no continuing involvement" approach. The surrender of control approach is based on the US FAS 140. The preconditions for off-balance sheet accounting under the new approach will be as under:

• Off balance sheet treatment will be denied in the following cases where the transfer of assets by the originator::
  • may result in the transferor (including a consolidated entity) reacquiring control of its previous contractual rights (for example, through a repurchase agreement, a call option held by the transferor, or a put option written by the transferor); or
  • gives the transferor (including a consolidated entity) an obligation to pay subsequent decreases, or a right to receive subsequent increases, in the value of its previous contractual rights (for example, through a credit guarantee, a total return swap, or a cash- settled put or call option).
• Transfer of assets under a pass-through arrangement is allowed an off balance sheet treatment. The pass through approach is defined as under:
  • (a) The transferor does not have an obligation to pay amounts to the transferee unless it collects equivalent amounts from the transferred asset or portion thereof that qualifies for derecognition (ie the transferee is entitled only to the cash flows of the underlying financial asset or the portion thereof that qualifies for derecognition).
  • (b) The transferor is prohibited by the terms of the transfer contract or documents from selling or pledging the transferred asset or otherwise using that asset for its benefit.
  • (c) The transferor has an obligation to remit any cash flows it collects on behalf of the transferee without material delay. The transferor is not entitled to reinvest such cash flows for its own benefit.

Full text of the exposure draft is downloadable at this link.

We have also placed an article by Martin Rosenblatt and Jim Mountain on the new amendments on this page. We are coming out with more materials soon -- do watch out.

Inventory securitisation may be a hit idea

There have been 3 notable instances of inventory securitisation, all in Europe, and given the flexible and workable alternative this method provides to traditional methods of working capital funding, inventory securitisation may soon be a hit idea.

About 1 1/2 years ago, Marne et Champagne made international headlines being the first securitisation of champagne bottles. Subsequently, an Indian-owned diamond business in Belgium Rosey Blue used securitisation to raise funding for a running stock of diamonds. See a case study on our page here. More recently, another French champagne-maker Delbeck Bricout Martin.

Moody's has recently published a special report titled "Debut of Inventory Securitisation in Europe". Moody's says: "This (inventory securitisation) growing market segment confirms the appeal for corporates to use securitisation as an alternative financing technique to complement plain vanilla bank funding or bond issuance."

According to Moody's, inventory securitisation as an application will apply to cases which satisfy certain parameters, such as:

• Regulated market with generally high barriers to entry.
• Organised open market and secondary market, such as Antwerp Diamond Index for the Belgian deal, champagne open mar-ket and inter-champagne market for champagne deals.
• Liquidity and tradability of the inventory.
• “Durable” goods, which do not deteriorate due to a longer than expected storage period.

The economic rationale for inventory securitisation is the same as that for whole business securitisation (see our page on whole business securitisation) - capital market window, diversification of funding source, higher leverage, structured finance, etc.

Accountants prefer to play safe on securitisation and SPVs

"Once bitten, twice shy" is much innate, but "that fellow bitten, I should shy" is the accounting rule when it comes to securitization and SPV accounting these days. While the US standard setters are meeting week after week (Wednesday after Wednesday) trying to write rules on SPE consolidation, auditors are being far more circumspect in booking securitization assets and gains than ever before.

Securitization accounting under the current US and IAS standards is, to a very large extent, based on estimation, and estimates have a plenty of elbow-room. However, Financial Times June 6 quotes a Moody's press release saying auditors are being far more cautious in reporting these transactions after the Enron collapse.

The article cites examples. Berkshire Hathaway in March restated a previous filing to consolidate its investment in Berkadia LLC, an entity jointly owned by Berkshire and Leucadia National. The restatement resulted in an increase of about $5.5bn in its assets and liabilities. Investment company Phoenix, which had sponsored several collateralised debt obligations, began to consolidate the transactions in its 2001 year-end reporting, also increasing the assets and liabilities on its balance sheet.

In the meantime, the FASB continues to prepare a technical note relating to consolidation of SPVs. As per recent reports, the FASB staff has been asked to prepare the draft which will not be applicable to certain "financial SPVs". These will essentially cover qualifying SPEs under FAS 140. In case of these SPEs, the rules being framed, that is, those relating to identification of the "primary beneficiary" and minimum substantive equity will not be applicable.

Links For more on accounting for securitization, see our page here.

CDOs account for most rating downgrades in Europe

International rating agency Moody's recently published a report on rating transition history of the European structured finance market. Not surprisingly, the study reveals that CDO subordinate tranches are to blame for most of the rating downgrades, while rating upgrades are attributable to RMBS deals.

The study spans a period of 1998 to 2001 for all structured finance transactios rated by Moody's. A rating transition includes both a rating upgrade and a downgrade. The key conclusions of the study are:

• Ratings in the European structured finance market have overall been very stable - all 10 categories of investment grade categories have maintained stability over 89.9% of the time, and 5 of these investment grade ratings have maintained stability over 95% of the time.
• European structured finance ratings remain more stable than plain corporate debt.
• Tranches rated Aaa were the most stable across all asset classes with 99.6% of them retaining their rating.
• Tranches rated A3 were the most volatile across all investment grade asset classes with 5.9% upgrades and 4.2% downgrades.
• As is to be expected, non-investment grade ratings show the greatest rating volatility.
• The highest proportion of all upgrades, 47%, were of RMBS tranches. This is a direct effect of seasoning of transactions.
• The highest proportion of all downgrades, 94%, were of CDO tranches. This is linked to the deterioration of the global corporate sector.

Links For more on securitization in Europe, see our page here. For more on CDOs, see our page here.

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