Smart Securitisation?Goldman has apparently been doing something similar to "smart securitisation". So what is it?
It looks as though it's driven by Basel II considerations. Regulators and others may go on about real equity in the form of ordinary shares being the desirable form of Tier I capital, but regulatory capital is still the key measure.
So the deal seems to be that you write off the bottom 20% or so; sell on the next 20 or 30% to an external investor; and keep the top bit in a rated form, thereby using less capital. Its not securitisation for leverage and arbitrage purposes any more" says the man from BarCap. Oh yes it is! The game is to transfer risk from regulated to non-regulated entities. Arbitrage of Basel II using securitisation is built into the system, as I wrote in an article the first version of which was penned in early 2007. (You can find this article, "Securitisation Still Works! on http://www.robinhoodfinance.com/articles.html)
One question is : who are the buyers? The IFR mentions "asset managers, private equity firms and hedge funds". I know of several operations trying to get such investors to make a start with basic underpriced AAAs, with IRRs well into double figures, and they are not having an easy time getting signatures on cheques, so I wonder how deep this market really is.
Perfectly good AAA paper has been selling at 70 or so for some time now-BarCap itself recently tendered just this price to buy back AAA bonds it had issued. I'd take a look at buying bonds in the market, and applying a modest level of gearing myself (back-to-back with a bank and its central bank?) to replicate this structure with me as investor in the driving seat, rather than buying pre-packaged stuff from investment banks. Caveat emptor.
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From today's FT highlights email:
"Investment banking league table
See how the world's leading investment banks are fearing"
It looks as though the fear inadvertently referred to by the FT still has considerable hold in some sectors.
The figures show that M&A is still a shadow of its boom years self. Investment grade loans are running at half 2007 levels, leveraged loans less than that, and highly leveraged loans have dropped off the radar. Equities are showing some resilience, with more firms showing an increase than a decrease in net revenue.
Corporate bonds are up: European nonfinancial companies outside the U.K. have raised some $318 billion from the bond markets, up 45% from the whole of 2008 and more than any entire year on record (per Dealogic)
Although structured finance is a shadow of its former self, two factors will very likely cause a renaissance in the medium term:
-Many major banks are now rated lower than the corporate customers which are issuing bonds in such numbers;
-Banks are not lending to smaller and medium-sized companies. These companies can't generally issue bonds, but they can issue rated instruments via structured finance.
There will be a time lag whilst the market wakes up to the ridiculous undervaluation of some ABS and buys for value. Once this anomaly has gone, the market will pick up again, with investors looking for solid assets with a clear story and a good rating, i.e. the likes of trade receivables rather than US Sub-Prime or the ludicrous CPDOs.
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The first answer has to be "when it's an Icelandic bank". In early 2007, only a couple of years ago, Moody's had a brainstorm and rated all Icelandic banks Aaa. Fortis too, come to that. All gone now, in any recognisable form. So much for long-term ratings. And another illustation of the folly of relying blindly on the output of rating agencies.
I've recently been looking into the reliability and stability of ratings for an ABS fund. (This is of course based on the fact that some ABS is ludicrously underpriced-but we have to avoid the dogs!). Fitch has produced some useful research in the last couple of months.
There are interesting conclusions regarding 2008.
-98% of all RMBS downgrades were in the US; but we're not looking there
-99.8% of European prime RMBS AAAs remained AAA.0.2% was downgraded to AA. No downgrades below this
-Only 50.9% of US Alt-A AAAs remained AAA. A massive 36.4% went to sub-investment grade
In European CMBS, 98.9% of AAAs remained AAA, 1.1% went down only to AA.
Remember, these were all AAA 12 months earlier. The obvious conclusions are
-Not all AAAs are going to stay that way
-Some sectors look pretty solid and, subject to some professional credit, modelling and monitoring work, there are good profits to be made.
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There was talk of the market turning at the recent IMN conference. We have to draw a distinction here between a move from ludicrous to merely silly levels of undervaluation on the one hand; and a return to the "good old days" of originating, parcelling up then flogging off the lot, including the equity piece, on the other.
It's only 18 months since I attended a conference where the head of securitisation of one of the big US investment banks (RIP) stated quite seriously in public that retaining or selling on equity pieces was of no consequence. Authorities in both Europe and the US are now insisting on risk retention, so that one has been put to bed.
When we see the likes of Barclays and Rabobank offering to buy back their ABS (Barclays tendering 70% for perfectly well-performing assets), it's a clear sign that there's real value there. There is a clear difference between European and US paper, with the latter coming in much tighter. Mind you, we don't have a TALF in Europe. Yet.
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The ECB is now pushing for more disclosure (also known as "transparency") regarding the underlying assets of securitisations. What's that all about?
It seems to be based on the assumption that data and information are the same thing. They are not. Just as you have to mine many tons of rock to get at a small quantity of gold or diamonds, masses of data are only useful when presented in a digestible form. I've seen cases where passing on reams of data is a means of obfuscation: "I've passed it all on, so nothing to do with me if it goes wrong".
The proposal from the ECB is that all of this stuff be passed on to ratings agencies. Yes, ratings agencies, those Aunt Sallies pilloried by various EU parties from McCreevy downwards. But raters have always had the right to ask for whatever information they want, so nothing really new there.
Then there's the suggestion (in the FT) that "analysts say the ECB should also push for full public disclosure of the loans that back these securities as in the US and not just to the ratings agencies." Would that be the highly liquid and successful US market we are all familiar with? Phew, the answer at last, just disclose a load of data and everything will be fine!
Hector Sants of the FSA said in a speech this week that investors should not buy investments they don't understand. That probably limits us all to Gilts.
A friend recently invested in a bond from the West Bromwich, which now appears to be in some difficulty. She did not engage in a rigorous balance sheet analysis, nor compare various ratios on an international basis. She would certainly not have been in a position to do a loan-by-loan analysis of several thousand borrowers-which is after all the real risk of a building society, whether in balance sheet or securitised form. She lacked both the skills and the time to understand all of this complicated stuff; but did understand that there is a government guarantee on deposits up to £50k.
There's nothing wrong with disclosure, but it should be in the form of information, not data.
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