The need for better disclosure from issuers and greater transparency as part of the securitization process was a major theme at the ABS West conference last week in Phoenix. Attendees ranging from investors, sell-siders and rating agencies agreed that various aspects of the market, including disclosure from issuers, need to improve if the market is to steer clear of arduous Securities and Exchange Commission regulations. Issuer transparency is particularly topical given recent blowups at the corporate level, such as NextCard Inc., that have trickled down to supposedly-remote vehicles because the servicing of assets has deteriorated.
To get to the point where enhanced levels of disclosure are the norm and not the exception, participants agreed it will take more then just non-participation by investors. For example, Marjorie Anderson, senior portfolio manager at AllState Investments, said she would like to see specific agreements on in-depth information such as servicing costs and how delinquencies are handled. She added that high ratings volatility in the securitization markets, compared to the unsecured corporate markets, may be an indication that assets cannot be separated from their originator in some cases. "Maybe you can't separate the seller/servicer from the pool for some assets," she questioned.
Karen Weaver, managing director and global head of securitization research at Deutsche Bank, recommended that investors steer clear of bonds containing underlying assets that are difficult to service. She said investors should be particularly vigilant now, given the improving economy, since risks in the ABS market tend not to come from macro shocks and are usually more business-oriented. And, positive factors such as low rates may have masked other weaknesses that could crop up amid an improving economy. Kent Williams, executive v.p. at LeaseDimensions Inc., speaking on a panel related to servicer fraud, said investors should look out for red flags that might hint at troubles, such as rapid growth. He said buyers should beware if an issuer's performance is 20% greater or, obviously, worse than the norm.
For now though, non-disclosure is widespread, according to Mark Adelson, director and head of structured finance research at Nomura Securities International. "Investors can't vote with their dollars because non-disclosure is so prevalent," he noted.
