(Standard & Poor's) It may take a year, or maybe more, but U.S.
securitizations of esoteric assets are expected to return. However, the
dynamics of how these types of bonds come to market may dramatically change.
These were among the points industry panelists made at a recent Standard
& Poor's Ratings Services conference on new assets and commercial assets
securitizations, which include aircrafts, catastrophe risk, franchise loans,
triple-net leases, insurance premium loans, life settlements, patent and
trademark royalties, film revenues, music royalties, oil and gas production
payments, timber assets, small business loans, structured settlements, tobacco
settlements and related legal fees, corporate securitization, shipping
containers, railcars, and equipment loans and leases.
"Clearly, the market is going to come back," said Usama Ashraf, senior
vice president at CIT Group, an issuer of structured bonds. "It's certainly
not going to be in the next couple of months. It's a fundamental question of
how long will it take to get through all the issues that we're dealing with,
like deleveraging," at the banks. Also, "everyone's very conscious of their
own liquidity positions, and the fact that there might not be a ready market
for them to get out of that position," he said.
For now, many asset classes appear to be nearly inactive. In response to
a question as to whether they would participate in the new issue market given
the attractive spreads available in the secondary markets, Ed Fitzgerald,
managing director at New York Life Investment Management LLC and an investor
of structured debt, indicated that they have been working on several
transactions but that the ongoing market volatility continues to derail
transactions. In essence, "We didn't leave the new issue market. It left us."
In this environment, the securitization market—-the issuers, chiefly—-has
to be "tremendously flexible," said Mr. Ashraf. That means being open to
reversing the traditional issuance process by determining investors' appetite
for a particular bond before that bond has even been structured. "You may find
that a deal that makes sense to one investor doesn't make sense to another,"
he said, noting that "the game around structuring and negotiating deals has
According to Mr. Ashraf, some of the major changes in the new assets
sector result from a turn away from their earlier reliance on monoline
insurance. And now that the monolines have been more removed from the
securitization process, the fundamental assessment of risk is "coming back
in-house," he said, with investors increasingly taking on the responsibility
of due diligence and risk analysis to better understand their investments.
Now, it comes down to whether investors are comfortable with that
particular asset class, Mr. Ashraf said, and if "they don't fundamentally
understand the risk, they are probably going to stay on the sidelines because
the last thing a lender or investor wants in this market is the risk of
Part of the reason investors are moving toward their own risk analysis is
not just the need for increased disclosure and transparency of the underlying
assets, but to ensure the timeliness of obtaining that information, according
to Russell J. Burns, managing director at Credit Suisse. "These are the
absolutely critical things to restore confidence" in the market. "How do you
trade a bond if you don't know the underlying information? How are you
supposed to get comfortable?"
Nevertheless, Mr. Fitzgerald said that although his team performs their
own credit and risk analysis as part of their due diligence process, investors
still reach out to securitization industry groups and rating agencies because
they've been a "very good sounding board to talk through the types of analysis
they've done, and also the stress work they've done. It's an extra group of
people to work with to discuss the risk and rewards of the transaction."
Mr. Burns said "securitization is a taboo word right now in a lot of
different quarters," but he added that securitization is a necessary part of
the U.S. economy. "At the end of the day, banks' balance sheets are not going
to be large enough and there are not going to be enough banks to finance these
assets, whether they're financial assets or hard assets. You could call it
asset-based lending, or call it securitization, or whatever you want to call
it. This plays a very key and critical role in financing a lot of businesses