INFORMATION AND DISCLOSURE ISSUES
IN THE ASSET-BASED SECURITIES
MARKETS
José Antonio Trujillo
InterMoney Titulización SGFT, SA
WPFS WORKSHOP ON SECURITIZATION
Madrid, 27 and 28 May 2010
1
OVERVIEW
1.
2.
3.
4.
5.
6.
7.
The importance of information
Information and ABS market collapse
What information do ABS markets require
The ECB triple-A rating requirement for ABS
The Spanish ABS information framework
Securitisation versus covered bonds
The future of securitisation
2
1. The importance of information
•
Asset information management demands enhancement across the
banking industry
–
–
–
–
Dynamic data on debtors and guaranties is not always updated
Information may be disperse in non-related data-bases
Data may not be readily and easily exportable
Data responsibilities are disperse not well defined, and rank low in
management scale
the
•
Problems to generate information and make it easily available to third
parties (supervisors, rating agencies, markets), is an indication poor risk
control
•
If loan information had been better across the banking system, alarms
would have turned on at an earlier stage of the bubble
•
Enhancing information standards at originator level for internal control
and external supervision is a much more important objective than
disclosure for ABS markets
3
2. Information and ABS market collapse
•
ABS opacity may have contributed to the collapse of markets but it was
not its main cause.
•
The nature of ABS makes it difficult for them not to be relatively illiquid,
which has resulted in unbearable levels of market risk for most investors.
•
Their apparent liquidity before the crisis was a mirage, produced by a
market in continuous expansion, fed by SIVs, Conduits, and other low
capitalised term-transformation vehicles.
•
Too high expectations have been placed on information enhancement as
a means of restoring ABS markets.
•
Investors in (triple-A) ABS are concerned mainly with market risk not with
credit risk.
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3. What information do ABS markets require (1/2)
•
Two different issues
–
–
•
Enhancing the quality of information
A balance between disclosure and efficiency
The ECB proposal
a)
b)
•
A complete data template, to homogenise content and terminology across
EU jurisdictions.
Required disclosure (for ABS ECB discount) at loan by loan level during the
life of the ABS to all investors. How to implement this disclosure remains
open.
Is it a good proposal to restore ABS markets?
–
–
–
–
The template is a very positive initiative
Broad loan-level disclosure of granular portfolios is irrelevant for credit risk
analysis
A unified portal open to all investor to access loan-level data is costly and
unnecessary
As a requirement for ECB discount, it is irrelevant to asses credit risk (ABS
are required to exhibit 2 triple-A ratings) and penalises relatively
securitisation versus covered bonds, which is not neutral across jurisdictions
5
3. What information do ABS markets require (2/2)
•
Same benefits could be attained simply by
–
–
–
•
Requiring better information at the originator’s and cash-flow
servicer’s levels, which is the objective of the template,
Standardising and enhancing reporting obligations with some level
of aggregation, and
Facilitating access to information on a decentralised basis.
Market risk
–
–
–
–
Some investors demand loan-level data for cash-flow analysis.
The necessities of investors for this matter, at least for the
European market environment, have been overstated.
It is possible to give sufficient information without descending to
loan-level data. The information provided by cash-flow servicers
on alternative prepayment scenarios may be a reasonable second
best.
Leave the issuers to decide if they open their ABS portfolios for all
investors at loan-level data.
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4. The ECB triple-A rating requirement for ABS
•
The triple-A requirement (2 agencies) doesn’t have a solid justification and
damages the ABS market
•
The introduction of rating requirements in Regulation, in particular in what
refers to triple-A levels, has corrupted the ultimate sense and purpose of credit
rating.
•
Triple-A is a thin and blurred line, understood but by a few, that in the financial
world separates heaven from hell. Such a line should not be used as an
instrument for regulatory discrimination
•
Data shows that the refinement of CRA analysis in the upper part of the rating
scale is no more than an illusion and the product of models that produce thin
results out of gross hypothesis
•
The financial system is wasting resources dancing around a notion of total
absence of credit risk which neither logic nor reality sustains.
•
Triple-A requirements benefit some, because resources are distributed in their
favour, but damages all by introducing instability in the system
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Standard & Poor’s | RatingsDirect on the Global Credit Portal | May 17, 2010
8
9
ABS
S&P Default Probabilities
Term
AAA
AA
A
BBB
BB
B
CCC
CC
1
0,000%
0,001%
0,006%
0,062%
0,493%
1,246%
12,595%
100,000%
2
0,003%
0,019%
0,041%
0,266%
1,939%
4,086%
21,179%
100,000%
3
0,008%
0,042%
0,088%
0,488%
3,259%
6,987%
27,086%
100,000%
4
0,021%
0,083%
0,155%
0,822%
4,490%
10,013%
32,503%
100,000%
5
0,043%
0,144%
0,269%
1,255%
5,704%
13,073%
37,767%
100,000%
6
0,073%
0,218%
0,405%
1,699%
6,942%
15,963%
40,832%
100,000%
7
0,116%
0,315%
0,576%
2,203%
8,296%
18,599%
43,803%
100,000%
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ABS
Moody's Loss Default Table
Term\Ratin
g
Aaa
Aa2
A2
Baa2
Ba2
1
0,0000%
0,0007%
0,0060%
0,0935%
0,8580%
2
0,0001%
0,0044%
0,0385%
0,2585%
3
0,0004%
0,0143%
0,1221%
4
0,0010%
0,0259%
5
0,0016%
6
7
Caa2
Ca
3,9380%
14,3000%
55,0000%
1,9085%
6,4185%
17,8750%
55,0000%
0,4565%
2,8490%
8,5525%
21,4500%
55,0000%
0,1898%
0,6600%
3,7400%
9,9715%
24,1340%
55,0000%
0,0374%
0,2569%
0,8690%
4,6255%
11,3905%
26,8125%
55,0000%
0,0022%
0,0490%
0,3207%
1,0835%
5,3735%
12,4575%
28,6000%
55,0000%
0,0029%
0,0611%
0,3905%
1,3255%
5,8850%
13,2055%
30,3875%
55,0000%
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B2
5. The Spanish ABS information framework (1/2)
•
The ABS market started in Spain in 1993 and it is regulated by law
•
Each ABS has to be structured by means of a SPV (Fondo de Titulización
(FT)) and approved for registry by the CNMV
•
FTs are represented and administrated by management companies
(Sociedades Gestoras de Fondos de Titulización (SGFT)).
•
There are 7 active SGFTs, with control of all the ABS transactions issued
under Spanish legislation since the origin of the market in 1993.
•
SGFT functions
–
Loan-level monthly control of loan servicer data (typically on monthly
basis)
–
Portfolio and bond information to supervisors and market on regular
basis
–
Track performance of SPV contracts and rating compromises. Watch for
any breach of contract, act accordingly to demand responsibilities if any
and take the necessary steps to substitute counterparties if required.
–
Responsibility to liquidate the FT in favour of investors.
•
Spanish ABS require rating and external audit of the portfolio
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5. The Spanish ABS information framework (2/2)
•
The ABS information framework is well established In Spain and
applies to all underlying portfolios without distinction of asset type.
•
However, as of today, loan-level information doesn’t satisfy the
standards of the ECB template, in particular in what refers to debtor’s
data.
•
The Spanish ABS market, by means of the role played by SGFTs, is
well positioned relatively to other EU markets to accomplish with the
ECB information requirements.
•
The SGFT have in their data systems all the information on a loan by
loan basis of all the Spanish ABS now in the market.
•
The Spanish SGFT in conjunction with the official market AIAF,
where all ABS are listed, are proposing the ECB to create a unified
web portal for Spanish ABS, to give investors access to whatever
bond and loan information is required.
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6. Securitisation versus covered bonds (1/2)
•
Transferring credit risk by means of securitisation and consequently
reducing capital consumption has become more difficult.
•
Derecognising securitised assets has been increasingly difficult even
before the crisis, at least in what refers to Spanish banks due to the
supervisory practices of the Bank of Spain.
•
Expected new regulation to align issuers and investors and
disincentive originate-to-distribute strategies, by requiring some form
of tranche retention by originators, will also amount to a reduction in
risk transfer, and consequently make securitisation less attractive for
issuers.
•
Rating agencies have modified their criteria giving more importance
to counterparty risk and commingling risk. This increases the cost of
securitisation, in particular to those issuers which do not have
maximum short-term rating level.
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6. Securitisation versus covered bonds (2/2)
•
The SEC amendment to Rule 17 g-5 complicates ABS rating
processes and increases its costs.
•
Requirements of information for accounting and supervisory
purposes have increased dramatically for ABS as compared to CB.
•
Investors penalise the complexity of pass-through structures, typical
of securitisation, in relation to the simplicity of CB.
•
SIVs had close to 60% of the outstanding volume of European ABS.
It is very unlikely that these vehicles or other similar alternative play
the same role in the future to sustain the ABS market.
•
The lack of homogeneity of ABS, even within the same class of
collateral, reduces the possibility of liquidity.
•
The ECB discount facility penalises securitisation given both the
double triple-A requirement, the higher haircut compared to the rest
of discountable bonds and the opacity of the ABS valuation criteria.
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7. The Future of Securitisation
•
If securitisation has been reduced to a funding tool and no longer can
be used to optimise capital, why not use covered bonds instead?
•
The benefit of matching cash flows within the originating bank can not
be the only justification for securitisation.
•
The concept of secured loan, which is the covered bond concept, can
be easily expanded to all types of assets.
•
Bank funding should concentrate in high rated bonds, with simple
financial characteristics: that is, adequately secured bullet bonds.
Issued in ample and potentially liquid markets, where investors are
concerned by and properly informed about the cover pools, but do not
require loan-level information to evaluate market risks.
•
Risk transfer and capital optimisation, could be left to illiquid markets,
where specialised investors will demand high information quality.
•
This could be the future of securitisation: transfer of risk by means of
illiquid transactions where funding is not the issue, and a tool for
(non-banking) future flows transactions.
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José Antonio Trujillo – Chairman and CEO: jtrujillo@imtitulizacion.com
Carmen Barrenechea – General Manager: cbarrenechea@imtitulizacion.com
Manuel González Escudero – General Manager: mgonzalez@imtitulizacion.com
Borja Sáez - Director: bsaez@imtitulizacion.com
Mónica Hengstenberg - Director: monicah@imtitulizacion.com
www.imtitulizacion.com
www.imcedulas.com
Plaza Pablo Ruíz Picasso 1, Torre Picasso, planta 23, 28020 MADRID
Tel. +34 91 432 64 88
Fax +34 91 597 21 75
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