ABS Market Suffers New Blow From Financial Regulation Revamp

21st Jul 2010 22:46

By Anusha Shrivastava Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--The $1.4 trillion markets for bonds backed by consumer loans and commercial mortgages were thrown deeper into turmoil Wednesday over uncertainty about a provision of the financial regulatory overhaul requiring public disclosure of third-party advice to companies issuing those securities. The new hitch follows a decision by credit ratings agencies to forbid their clients to include ratings in documents filed with the Securities and Exchange Commission, fearing that the new law, which President Barack Obama signed the bill into law Wednesday, will expose them to unknown new liabilities. The credit agencies' decision has stopped the public sale of asset-backed securities--bonds that aggregate credit card debt, student loans, commercial mortgages and other borrowing. The requirement to disclose third-party advice, which could include ideas from lawyers and accountants, threatens to freeze up even the private sale of such securities. "Issuers have stopped issuing bonds in the public market while they evaluate their alternatives," said Paul Jablansky, senior ABS strategist at the Royal Bank of Scotland in Stamford, Conn. "This could go on provisionally for a month or longer." No new asset-backed deals have come to market this week, compared with $3 billion of new bonds a week ago. Banks say these securities help to make affordable credit more available to consumers, and consumer spending is a key to economic recovery. Asset-backed bonds were deemed important enough that the federal government created the Term Asset-Backed Loan Facility to keep the market for them during the credit crisis of 2008-09. That program, TALF, facilitated the sale of $100 billion of bonds before it ended this spring as issuers were once again able to sell bonds without government help. A provision of the new law creates uncertainty by requiring that the findings and conclusions of all third parties to asset-backed deals be made publicly available. That appears to include statements from lawyers and accountants that until now have been treated as privileged and confidential information. "Lawyers and accountants would be highly reluctant to publish their opinions and conclusions because their letters are specifically for parties to whom they are addressed," said Ed Gainor, a partner in the structured finance group at the Bingham McCutchen law firm in New York. It is also unclear what "publicly available" means, especially since the law does not clarify if private deals under Rule 144a are exempt from this provision. The clause was probably included to cover third parties that conduct due diligence on loans but it could extend to lawyer and accountant letters. "There is a lot of uncertainty about what it covers," Gainor said. An SEC official said Wednesday that the commission will look for ways to ensure that asset-backed bond deals can continue. "Our staff has been talking to market participants, looking closely at the issue and reviewing what, if any, transitional steps may be appropriate," said Meredith Cross, Director of the SEC's Division of Corporation Finance. Uncertainty about a different provision of the law, requiring credit rating agencies to serve as providers of "expert" opinions on public asset-backed deals, has led four of them--Standard & Poor's, Moody's Investors Service, Fitch Ratings and DBRS--to say they will not give consent for clients to use their ratings in SEC filings. In the crisis, when hundreds of billions of dollars of securities were downgraded as--or after--they collapsed, rating agencies fended off investor lawsuits by characterizing their ratings as opinions and by asserting that investors should have conducted their own due diligence. Gainor said the regulatory change--making ratings agencies' grades "expert opinions" when included in securities registration and other documents filed with the SEC--is key because under securities law "experts have a greater risk of liability." In a press release, Fitch said it was "not willing to take on such liability without a complete understanding of the ramifications of that liability to Fitch's business and the means by which Fitch may be able to effectively mitigate the risks associated therewith." While some industry participants had thought issuers could tap the private Rule 144a market--which gets its name from the section of securities regulations that govern their sale--this is also unlikely since these issuers will not be able to get any opinions from their lawyers or accountants either. Issuers might be forced to withdraw from the asset-backed securities market and either raise money by selling corporate bonds, which attract a different type of investor, or by borrowing in the commercial paper market, where short-term loans are arranged. The commercial paper market has also been shrinking so these issuers would likely have to pay higher rates if they turn to this market, where debt matures in 270 days or less. -By Anusha Shrivastava, Dow Jones Newswires; 212-416-2227; [email protected] (Fawn Johnson in Washington also contributed to this report.) (END) Dow Jones Newswires July 21, 2010 17:46 ET (21:46 GMT)