Economic uncertainty and investor attitudes
It is uncertain yet how the failure of
HIH will impact the market for securitisation, but as long
as it is a relatively isolated case, there appears to be
no immediate cause for concern.
Mortgage backed securities
are securities that are
issued by special purpose trusts or companies that invest
primarily in Australian residential mortgages. Historical
data indicates these are assets with a very low default
rate. Typically these securities also have the benefit of
mortgage insurance from highly rated insurers.
Asset backed securities are securities that are issued by special purpose trusts or companies that invest primarily in other form of assets that generate cash flows eg, trade receivables, auto loans, commercial hire purchase contracts, leases, utility payments, credit cards and a lot of other assets. They achieve a high rating because of other forms of credit support, like subordinated loans.
Regulatory changes
Tax in Australia continues to be an area of rapid, and often confusing, development. After the initial concerns following the Ralph Report that securitisation trusts would be taxed as companies, at first the Government indicated its intention to preserve the existing regime for fixed trusts such as securitisation trusts, and then resiled from taxing trusts as companies totally, at least for the time being.
Having overcome that hurdle, the tax members of our team are currently digesting the proposed thin capitalisation rules, the consolidation of groups of companies and trusts (another feature of the Ralph Report, which appears to be going ahead), non-commercial loans to closely held trusts being treated as equity and the recharacterisation of debt and equity. In the recent budget, the Treasurer announced that the new thin capitalisation rules will not apply to securitisation, but we will need to see the draft legislation before we can be confident that this will not be a problem. As with all new laws, we can but look to the meaning and apparent intent behind the words of the new laws. How the courts and the ATO end up interpreting them is quite another matter.
Basel
In January of this year the Bank of International Settlements in Basel issued 540 pages of interim recommendations and reports on the restructuring of capital adequacy for banks. One of the papers deals specifically with securitisation.
The changes are not due to take effect until 2004, and it can be expected that there will be at least fine tuning between now and then.
It is too early to tell if the changes will have much impact on securitisation in Australia. Perhaps of more interest to Australian securitisers is the extent to which the Australian Prudential Regulatory Authority (APRA) actually adopts the BIS Rules. For example, neither APRA nor the Australian Banks are happy with the proposal that they continue to hold 4% capital against residential mortgages, given that the historical loss on these types of assets is a small fraction of this amount.
Another potential challenge to securitisation is the proposal that liquidity facilities be risk weighted at 20%. Currently they are zero risk weighted if they are for a term of less than 365 days. This may put some pressure on the cost of commercial paper conduit securitisations, as well as putting pressure on arrangers to come up with ways of getting the rating agencies happy with the idea of that less than 100% liquidity.
On the positive front, the lower capital requirements for holding highly rated securities will see ADI's that currently have to hold 8% of capital against highly rated securities (including AAA rated securities) holding substantially less capital and therefore they may be more attractive investment to ADI's. This may help to broaden the investor market, and increase demand.
The BIS securitisation proposals appear to be based on APRA's guidelines: APS120 (formerly PSC2). So the new rules will have less effect in Australia than most other jurisdictions.
Accounting standards
The new US accounting standard FASB140 is already in effect. This accounting standard deals specifically with the ability to treat securitisations as off balance sheet transactions. The problem for a lawyer trying to interpret what FASB140 means is that very often the application of the rules is not entirely consistent with a literal interpretation of the rules.
Generally we are not expecting FASB140 to have a big impact upon the structure of securitisations in Australia, but no doubt there will be some issues to deal with as the accountants work through what the changes from FASB 125 mean. The area that could come under the most scrutiny is the servicing arrangements, where the seller or securitiser of the assets is appointed by the purchaser (ie the securitisation vehicle) to service the assets. The issues for consideration will include the discretion of the servicer, and also the servicer fees.
Asset classes
We continue to see a lot of work in traditional asset classes such as residential mortgages, trade receivables, commercial hire purchase and auto loans and repackaging other securities. Our team has been involved in securitising over a dozen asset classes including margin loans, charge cards and credit cards, aircraft leases, other finance leases.
In addition to the traditional asset classes, we are currently seeing a fair bit of interest in commercial property securitisations (particularly for listed property trusts), less conventional finance leases, operating leases and the assets of insurance companies.
Securitisation E-brochure
For more information on the Securitisation Team, please contact Mark Wormell.
