There are few capital market transactions that rely as much on data and detail as securitisation. EuroWeek reviews the growing role that trust banks can play in disseminating data to the secondary market.
Before an arranger can begin to structure any securitisation, an inordinate amount of historical data needs to be assembled, assessed and then repackaged for easy consumption.
"The detailed analysis of cashflows, intricate prepayment modelling, the final selection of the asset pool and associated documentary support is all essential to the primary market," explains Andrew Mulley, general manager at Shinsei Trust & Banking. "But this all begs the question - what happens to data flows once the bonds are placed with investors? This is where we as a trust bank are now building our expertise, to add further value to the market."
Shinsei Trust's parent, Shinsei Bank, has since its takeover by the US fund Ripplewood and other investors in 2000 forged a reputation as one of the most professional issuers of ABS in Japan, hiving off a variety of assets from its loan books. More recently, the bank has put aside ¥500bn to invest in ABS.
"As a major investor, there are several areas of the domestic securitisation market in which we would like to see improvements," says Douglas Kennedy, deputy general manager of the structured trading division of Shinsei Bank, "notably, more open price discovery at the primary level, and much improved liquidity and transparency in the secondary market.
"Underpinning that, we would like to see far more transactions providing frequent and comprehensive information on the performance of outstanding issues and the underlying assets."
As things now stand, after a transaction closes, a variety of parties, including the investors, back-up servicer, rating agencies, trustees and transaction administrators, all require varying degrees of reporting and analysis.
"These reports and analysis are derived from underlying asset data, but this begs the next question," says Mulley. "Who is preparing and monitoring this data?"
As recent experience in some problem US deals has highlighted, failure to adequately monitor a transaction's performance and take action can result in real losses.
"In Japan the trustee, as legal owner of the assets, is the natural conduit for this reporting and analysis," says Mulley. "However, historically trustees have been reluctant - or have not had the infrastructure - to provide the kind of analysis required."
Mulley's thesis is that trustees should also fulfil the roles of transaction administrator and master servicer.
"As it now stands, the data in the primary market gives some rough indication of where the secondary market should trade," explains Kennedy. "However, without more sophisticated monitoring and reporting of the deals as they mature, it is difficult to determine whether the performance of a transaction in the secondary market really warrants comparison with the primary market. This hurts both primary and secondary pricing of quality originators, as investors discount their bids where they don't have confidence in the quality of the underlying assets and servicing."
Kennedy argues that the growing professionalism of some of the leading trustees should change the way information is disseminated to the market.
"The biggest challenge we face as an investor is determining relative values," says Kennedy. "That is an advantage for the major players that can import sophisticated investment analytics while having a window on the market as domestic arrangers and traders of ABS. They can spot the pricing anomalies that render the extra returns that an inefficient market permits. However, for the growth and health of the market as a whole, we would like to see greater professionalism and transparency at all levels."
As there are not many frequent ABS issuers in Japan, few if any originators have designed their procedures and systems with ABS pool segregation, servicing and reporting in mind.
"Since it is inefficient for the many less frequent issuers to change, we anticipate servicing and reporting in the domestic ABS market will gradually consolidate around a cadre of professional trustees and servicers," says Kennedy.
"They will be the trust banks that have invested the time, money and energy into the appropriate data management systems and distribution templates that can be grafted on to or run in parallel with those of the servicer."
As a new import, master servicing has yet to become a standard feature in Japanese transactions. "Not every transaction will require this form of detailed analysis," says Mulley. "However, for any transaction with large amounts of underlying assets, it should become a 'must-have' for investors and rating agencies."
To create the analysis investors require in their reports - often to run their own cashflow and performance models, as Kennedy and his team do - the master servicer has to work hard to extract and organise data from the borrower's systems.
Many participants in Japanese ABS are crying out for greater transparency - a trend that is repeated right across the country's capital markets, as a benign side-effect of financial sector and corporate reform.
"We are offering an enhanced level of service that will ultimately result in a lower cost of funds for the originators and greater price determination for investors," says Mulley.