securitization
Broad-based programs
The American way
Solid protection
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'TïïflJNrn
What'sNewS Issue 4 July/August 2001
capital bases aren't regulated and have no
specifie size requirements beyond market
forces. A First objective is off-balance sheet
treatment due to the sale of assets. Second,
corporates seek di-
versity of funding
away from tradi
tional banking lines
at a cost which
should be relatively
favourable com-
pared to traditional
options.' The most
common corporate
asset securitized is
trade receivables or
debtors. Alongside
residential mort-
gages, trade receiv
ables are the most
consistently securi
tized asset class globally, currently ac
counting for more than USD 100 billion.
This is an asset class in which RI's securiti
zation teams have considerable experi-
ence. 'In recent years we've seen the asset
types securitized for corporates expand
significantly beyond the traditional trade
receivables pools,' Mason continues.
'We're seeing transactions that securitize
major corporate headquarters, royalties
from brands, pubs, service stations, inven-
tory, equipment leases. While still func-
tioning as funding alternatives, these deals
are increasingly used as part of sophisti
cated corporate finance solutions. RI's se
curitization teams have undertaken many
transactions in these areas, ensuring the
specifie requirements and circumstances
are met to make the securitization
feasible.'
Once a pool of assets is securitized, RI has
two options when it comes to building a
securitization platform - the long-term as
set backed securities (ABS) market (or
MBS in the case of mortgage assets), into
which term ABSs can be originated and
sold on the public bond market, or the
ABCP market, short-term asset backed
commercial paper. Long-term securities
are generally match funded in that the ma-
turity profile of the debt security matches
the underlying cash flows of the securi
tized pool of assets. Adds Mason, 'This is
a very well-established market in the US
and is rapidly expanding in Europe -
issuance is expected to exceed USD 100
billion for the first time in 2001.' In addi-
tion, most major US and European banks
administer large
ABCP programs.
Initially focused on
existing clients,
banks have now
developed excep-
tionally broad-
based programs in
terms of asset
classes, structures,
and customers.
'While the ABCP
market is also a
vast and mature
global market, it's
distinct from the
ABS market since
the maturity of the ABCP does not neces-
sarily reflect the maturity of the pool of
asset,' Mason explains.
Our New York team has proven track
record in the complex ABCP market. Why
the choice for ABCP? According to Eraj
Asadi, although the term ABS markets re-
main a viable option, in the US markets
competition is fierce among bulge bracket
investment banks with their large sales,
trading and research staffs. 'Offering
securitization capability through ABCP
better suits the niche capital markets strat-
egy being spearheaded by New York's
capital markets team,' he says. 'It allows
us to bui ld a prof-
itable business
with a recurring
annuity stream
that can be lever-
aged into cliënt
opportunities in
the term markets
as they arise. The
term markets are a
great alternative
when we can
source assets directly, through purchasing
securities directly for example. It's a
different ballgame when RI has to con-
vince a US customer that we're better
positioned to place debt than some of
their existing investment banking
advisors.'
So, what are the basics of the ABCP busi
ness? In general, asset securitizations in-
volve a 'true sale' of a company's financial
receivables to a special purpose bank-
ruptcy-remote entity. The separation of as
sets and the client's repayment cash flow
allow the rating agencies to assess the risk
of the transaction independently of the
seller's credit rating. In theory, any pool of
assets can be rated to high investment
grade levels, depending on the factors that
the rating agencies assunte will impact
timely payments in a troubled economy.
The loss assumption established by the
rating agencies (i.e. USD 10 million may
be lost of a USD 100 million pool of
receivables in a single-A stress situation),
determines the amount of ABCP that will
be issued by Nieuw Amsterdam to fund a
specifie transaction. Transactions are also
monitored on a monthly basis to track as
set performance against the critical factors
used by the rating agencies to gauge credit
quality. (Three rating agencies have to
agree that the risk profile is at least single-
A or higher.) The default and loss history
of ABS, particularly at these high ratings,
compares very favourably to direct corpo
rate credit exposure. In the case of asset
deterioration, RI, as sponsor of Nieuw
Amsterdam can simply allow the pool to
amortize without further advances, or, in
drastic situations, can trap cash in lock-
boxes, divert it from the seller, and even
transfer collections to a third party if the
credit profile of the company appears suf-
ficiently weak.
The ABCP market is
dominated by what is
called 'conduit vehicles'.
Special purpose entities
set up by sponsoring
banks to offer a number
of clients access to a
capital markets issuing
vehicle, conduits enable
customers to justify cost or access the
long-term capital markets indirectly or on
a standalone basis. As the vehicle pur-
chases assets from a number of different
clients - or 'sellers' - it's often referred to
as a 'multiseller conduit'. Banks often use
conduit type vehicles for special
New York's team: back row Eraj Asadi (left) and
Wing Ng; front row Alyssa Jaffe and James Han
