http://www.robinhoodfinance.com/blog/index.php http://www.robinhoodfinance.com/blog/index.php?entry=entry100727-111206
I was put in mind of this when I heard what the Germans are proposing on retained risk in ABS deals. The benchmark is 5%: see http://www.robinhoodfinance.com/blog/in ... 208-110201

That in itself was pretty much a made-up number. Now the Germans propose 10% for their own banks. This will put their banks at a distinct disadvantage, and slow the flow of credit, but heigh-ho, it looks tough and macho and will no doubt play well with the electorate short term.

Oh for rules based on evidence rather than knee-jerk reactions. I'll drink to that!]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry100715-090832
Kroll's plan is to do more in-depth work than the usual-suspect rating agencies. There is certainly room for this in the post-crisis world, where the problems with ratings on structured products were exposed.

There is also a real market opportunity in Europe for providing the level of analysis required under CRD 122a, i.e. investors must demonstrate a thorough and comprehensive understanding of the assets, risks, structural features etc. in any investment, and run models for stress testing.

Mind you, these are European requirements, and Kroll looks like an organisation with a US focus. We made multiple attempts several months ago to contact the relevant people at Kroll to discuss European opportunities, but were stonewalled. Let's hope they are better at communicating with their new customers!]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry100629-153540
Accompanied, presumably, by the usual guff from banks about lack of demand for loans. Investec has just done some research around the increase in demand for asset-based finance (a portmanteau word for factoring and leasing) "as it predicts businesses will continue to struggle to secure mainstream forms of credit from banks".

The Bank of England in its latest report says that bank leverage has come down-from an astonishing 30 times at the end of 2008 to 19 times now. The Bank also points out that, in addition to leverage, funding itself will be a problem: banks have been funding £12bn a month, and should be doing twice that to fund the £750-800bn which the BoE calculates they need to fund by the end of 2012. A further reason why lending will be squeezed.

So where's the funding for the companies which are vital to any economic recovery? There is a real opportunity for cash investors such as funds, foreign banks and Islamic institutions to get a decent yield on money out to good companies. This could be via trade receivables and supplier financing at the short end, and loans and leasing at the longer end. The mechanisms are feasible and flexible.]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry100614-123741 "Despite some improvements, euro area securitisation markets remained dysfunctional for both supply and demand-related reasons.
On the supply side, the profit-generating potential of securitisation has not been sufficient yet, since spreads over LIBOR for various asset-backed securities (ABSs) still exceeded levels that would ensure that a transaction would at least break-even from the issuer’s perspective."

A bit odd. If ABS can be issued at Libor/Euribor+150 for the AAAs, say, the cost to fund on 90%+ of an RMBS book is about 2.2%. If a bank has standard variable rate mortgages at 4%, that still leaves a healthy spread. Spreads on car loans would be even higher.

The ECB also says that "ABS spreads remained significantly above the level where securitisation would provide a cheaper source of funding than the money market." Well, it depends what value you put on term funding. If Northern Rock had not borrowed nearly a quarter of its assets on the money markets, but securitised more instead, it would probably never have needed a bailout!]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry100528-150754
• ABS issued from 1-3-2010 must have two AAA ratings to be eligible. The earlier requirement was just one A- rating
• No ABS of other ABS (this is really the dreaded “CDO squared” and other horrible constructions)
• Provision of loan-level information. This is in part for transparency for the ECB itself, and in part to force the market to adopt such standards as a norm
• No synthetic exposures
• No FX swaps or over 20% liquidity support from the arranger-a lesson from Lehman!

There are several implications:

• Banks need to start getting away from reliance on Nanny ECB and start issuing in the “real” market. They have been loath to do so since it has been hard to issue at a price they like. However, there is obviously demand at the right price-witness the secondary market rally in the last year- so banks will have to swallow hard and issue
• A lot of existing issues will have to get a second rating in order to achieve this before the ECB requirements tighten to require two ratings on 1-3-2011
• Banks are under increasing pressure to beef up capital ratios, and also hold liquid assets. The match funding provided by ABS issuance is very helpful here

On the other side, banks as purchasers will have to have, according to SIFMA “...a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of their exposures to the transaction”.

So we have more banks which need to issue, an ECB reluctant to play Nanny any longer than absolutely necessary, and some banks which will be unable to buy very much ABS due to capital and liquidity constraints, or their own negligence in not having competent people and procedures to meet the “thorough understanding” requirement.

ABS funds, anyone?
]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry100517-144409
The first is from an entity which has very large sums to invest. This means, as you can probably guess, that it isn't one of the "usual suspect" banks. This investor likes the risk-averse nature of diversified trade receivables pools, but is looking for sizes in excess of €50m from a single seller. Non-investment grade sellers would be acceptable subject to daily settlement, an appropriate 3-figure yield, and no co-mingling of cash!

The second is from an investor which likes the SME market, and is prepared to take mezzanine risk on portfolios of trade receivables originated by SMEs. This is more complicated in that a platform would have to be built up, but the demand for funding from sources other than the traditional banks, which aren't lending in this area, is certainly there.]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry100414-180509
We have come to accept that the crisis since 2007 was caused by a sudden crisis of liquidity, and otherwise solid banks had the rug pulled out from under them due to a lack of liquidity from capricious markets. But more recently evidence has come to light showing that it might have been solvency after all.

Consider this from the FT: "In January 2007, Northern Rock left nearly 2,000 troubled mortgages out of its statistics by reclassifying them into a category that was not publicly reported, the FSA said". Why do that? Because to show the true picture would have spooked the wholesale funding markets. Northern Rock was excessively reliant on wholesale funding. But the markets ended up being spooked anyway, as we know. You can't fool all of the people all of the time.

What about the Icelandic banks? The commission appointed by the Icelandic parliament points to many problems, including exaggeration of asset values. So perhaps the liquidity crisis followed the markets' suspicions that all was not well on the solvency side.

Borrowing in the wholesale markets to fund longer-term illiquid assets is like borrowing on an overdraft to buy a house. Longer term funding via such approaches as ABS or covered bonds can help to manage liquidity risk. And ABS has the added benefit of managing solvency as well as liquidity: the retained piece caps what the bank can lose, whatever the performance of the assets.

(See also [url=http://www.robinhoodfinance.com/blog/index.php?entry=entry100208-110201]http://www.robinhoodfinance.com/blog/index.php?entry=entry100208-110201)[/url]]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry100325-112026
Any parent who ends up walking the kids' dog will be familiar with this. For 'urgent homework' read 'no demand for loans', each assertion as bogus as the other.

The government has now set banks targets for gross lending. Come again? So if I approach my best customers and ask them to repay their loans and sign new ones which look remarkably similar, I am on my way to the gross lending target. Even though nothing at all has changed. Expect these soft targets to be fulfilled.

The 2010 Budget also proposes a “credit adjudication service”. This new quango will in theory be able to force banks to lend. One suspects that it will end up dealing with few cases very slowly. But it is a godsend for banks: "...our results would have been fantastic, but those nasty people made us lend to companies we turned down in the interests of the taxpayer..."

A better way forward is the carrot rather than the stick: getting non-bank lending moving. There was a mention in the Budget of a study undertaken over the last year about non-bank funding for larger companies. This has reached some fairly pedestrian conclusions involving bonds and so on, which are way out of the reach of struggling SMEs.

We need private sector initiatives, with the support of government, to bypass the banks. One saver commented recently that the sad thing is that people like him are earning poor rates on savings, whilst good companies can't get credit.

]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry100318-113802
There is currently very good value to be had in CMBS. It's a market of significant size: over EUR140bn of European CMBS is outstanding, of which about half in the UK. There are some difficult deals around but, as I recently wrote to a contact in the legal world, just because crooked lawyers exist does not mean that all lawyers are crooked!

The skill is in finding the good deals, which requires specialist knowledge and careful review of the underlying documentation. Which is probably why the opportunity exists in the first place!

Yields for AAAs are currently in the 500bp over Libor area. When swapped for a fixed rate investor, this gives a huge pick-up over Gilts.

Investors looking for yield rather than the security blanket of Gilts-and who have the required skills to analyse these deals properly-can pick up some bargains.

FOOTNOTE 27-3-10
IFR writes "The CMBS refinancing time-bomb is still ticking away, but the secondary market has perked up recently. Indeed, despite the many problems, there are solid returns to be had".]]> http://www.robinhoodfinance.com/blog/index.php?entry=entry100301-143518
• the central banks continue to tighten their criteria for repo lending. The Bank of England has declined to renew its Special Liquidity Scheme (SLS). £287bn of collateral, mostly mortgage-related, was posted and £185bn of funding provided. According to Deutsche Bank, [says Euromoney], SLS swaps [i.e.repos] will begin coming due in earnest in June 2011, with between £10bn and £25bn of maturities each month until January, 2012.

• The Council of Mortgage Lenders has warned of a “huge funding gap”.

• Governments themselves have huge borrowing needs. The UK’s £198bn of Gilts issued in the last year neatly matched the amount bought by the Bank of England using money it created out of thin air under “quantitative easing”. Next year’s government borrowings will have to be funded by real buyers!

• Banks are under pressure from regulators in respect of liquidity matching.

Given all of this, it is reasonable to state that securitisation will have a significant role to play in terms of the banks and indeed the mortgage markets. And that there will be some excellent buying opportunities for those investors sated with Gilts. So long, that is, as the buyers have the expertise to meet the requirements of the Capital Requirements Directive (see Feb 8 2010 blog entry).
]]>