Summary
Securitization started off as a technique that was used to help clients achieve their corporate finance objectives. We are now seeing a return to that approach. It is refreshing, long overdue, and will be rewarding for the industry.
Analysis
Securitization is a technique that can be used to provide solutions to a wide variety of client needs such as raising funding for companies at interest rates lower than they could borrow otherwise, transferring certain types of risk away from companies, and create liquidity for assets that are otherwise illiquid. It use to be used as such, however solutions became standardized and codified into products, which led to increasing specializations within subfields such as ABS, MBS and CDOs. Incremental product improvements over the years made the products horribly complex and difficult to understand which may have contributed to the making of the financial crisis we’re currently in. There are now three trends that suggest we are returning to the solutions era of securitization. These trends are: 1. When in the summer of 2007 MBSs started taking higher losses than were anticipated investors went back to doing what they should have done all along, investing only in instruments they understand. The lesson has been to keep structures reasonably simple which is taking the technique back to its roots. Gone are the complex arbitrage structures and back are the customer solutions. 2. The accounting rules making board, FASB, has released two new rules that come into effect at the start of 2010 for calendar year end companies, called FAS 166 and 167, which make off-balance sheet structures and “sale” accounting harder to achieve. Since a structured transaction is more expensive to execute, any securitization will have to be a more value-added solution to be worthwhile. 3. A lot of companies need to de-lever and securitization provides techniques to permit them to do so. So what does this mean for securitization? Bankers will still sell the simpler products, such as ABS for consumer assets and MBS, but increasingly will focus on talking to their clients about “needs” and trying to address those needs with the various tools and techniques they have. These techniques are very versatile and will certainly remain useful. The result will be a greater responsiveness to clients as well as higher profitability for banks as higher value products command higher pricing. The author runs a structured corporate finance advisory practice where he uses structured techniques, including securitizations, to help clients achieve their corporate finance objectives.
