Published: April 18, 2008
Porsche Holding GmbH’s subsidiary company, Porsche Bank AG, primarily offers car finance in Austria and seven Eastern European countries. In 2001, the Austrian credit and leasing receivables were first securitised into a term transaction (Fact-2001 EUR 400 million), the first transaction of this type in Austria. This was followed by alternating conduit warehousing facilities with a subsequent take-out (Fact-2004, EUR 500 million/Fact-2006, EUR 600 million). At present we are once again in a warehousing structure with Fact-2008.
As a family-owned business with high exogenous growth, it was important for us to broaden the group’s refinancing sources, to reduce dependence on banks and to structure the liability side of the balance sheet in terms of duration. It should also be noted that the Porsche Holding group is not a capital market address in the narrow sense and will not become so in the foreseeable future. Routes therefore need to be found to indirectly access the capital market.
Furthermore the margin level of this finance was extremely attractive. In recent years spreads have actually only moved in one direction - downwards. This can be seen from the margins of the AAA tranches of our former term transactions (Fact-2001 33 bps, Fact-2004 10 bps and Fact-2006 5 bps).
Refinancing in the ABCP market has been at the Euribor flat rate for many years. This was until the first signs of bad news due to the sub-prime crisis emerged.
The combination of falling real estate prices and rising interest rates in the USA led to a considerable rise in default on loans to clients with low credit ratings.
The origin of the sub-prime crisis lies in the aggressive lending by US banks to consumers in the USA. If European lending terms had been employed, many clients would not have been granted finance by banks due to their low credit ratings. However, US banks only partly included these risks in their own balance sheets as the majority was restructured into RMBS, placed on the capital market and bought by investors.
Although the difficulties were initially dismissed as individual isolated problems, by August 2007 the position on the securitisation markets had deteriorated considerably.
Spreads on both the ABS and ABCP markets rose dramatically. Due to the ensuing negative mark-to-market valuation of their positions, investors were required to make forced sales which exacerbated the price slump of the loans.
Currently spreads on AAA-rated ABS tranches range from 70 bps to 150 bps depending on the duration. The funding in ABCP conduits is also noticeably more expensive mainly because banks are no longer active on the market as investors through their own SIVs or credit arbitrage conduits in the normal way. The position intensified sharply in particular at the year end. Current funding levels for 1 month-CP are around 15-30 bps and are noticeably more volatile than before the crisis.
For a long time, this crisis has not just been limited to the US real estate market and products which include a sub-prime risk. There is more bad news in the media every day - fund closures, higher write-offs, the threat of reduced ratings for monolines and the related risk of downgradings of transactions hedged against monolines, banks on the verge of insolvency etc.
While in recent years the ABS market has recorded considerable increases - for example the European ABS market doubled between 2003 and 2006 - the whole securitisation market has since come to a standstill.
It is increasingly common to hear that only issuers which are really compelled to go to the market do so at present as pricing has reached levels which were recently considered as unimaginable as well as collateral mechanisms, also part of the total costs, have changed considerably. [[[PAGE]]]
Conduit
In the CP market, the originator is dependent on the placing ability of the selected conduit. As the EUR CP market has currently dried up, various currencies (EUR, USD, GBP) and various durations (1 month, 3 months) now need to be used on a regular basis to refinance a 1-month EUR CP. While before the crisis, there was surplus liquidity and, put simply, the work of a CP dealer consisted of ‘distributing’ existing CPs, they now have to fight to refinance their volumes.
The originator has to observe closely the refinancing spreads of the various bank conduits as the wheat is now separating from the chaff and showing which banks have the required placing ability to offer attractive funding levels even in difficult times. Comparing spreads is the only method corporates have of checking the spreads made from their own conduit at least for plausibility, as the actual funding of a conduit is still not transparent for the originator.
The security of CP funding offered by many arranger banks is being driven ad absurdum by the events already taking place. Security in terms of liquidity and conditions can be achieved by an originator only by a mere term deal. This, however, requires a minimum volume of sold receivables in order to avoid endangering the efficiency of the transaction by the high one-off costs.
The strong rise in spreads makes it necessary to examine alternative refinancing of the CPs.
In the event of an extremely strong rise in the CP margins, a last resort for the originator may be to buy the CPs issued by the conduit itself. This does, however, require the existence of other financing options such as committed syndicated loans. The balance sheet treatment of the securitisation transaction also needs to be taken into consideration as any off-balance sheet solutions become invalid through a measure of this type, as a result of the retransfer of the economic risks to the originator.
When selecting a conduit, care must taken to choose one which exclusively or at least primarily contains customer receivables rather than functioning primarily as an arbitrage vehicle. This arrangement will simplify and thereby also benefit the sale of papers to investors. It is further recommended to select fully supported conduits as this further raises the quality and security of the issued CPs.
In addition care must be taken in the contractual documentation that the agreed term of the programme or the term of the liquidity facility does not require an involuntary redemption of the warehousing through a term transaction at an inconvenient point.
Term
The originator is required to raise the transparency of the transaction by improving the reporting (for example monthly pool analyses). The time has come for investors to set and require efficient standards for ABS information. Furthermore, existing ABS platforms such as Hypoport make it easier for the investor to access the required information.
Equally the return to plain vanilla structures is also a tried and tested method to simplify due diligence for investors and generally increase the transparency of the deal (‘keep it simple’).
When making a placement, particularly a term deal, it will be an advantage to strengthen the active investor policy, for example through roadshows. This means actively providing investors with information and thereby increasing confidence.
While before prior to the crisis one single bookrunner bank was normally sufficient, this is now increasing to two or more banks. The additional costs are compensated for by a successful placement in volume terms and by the lower spreads payable.
It is also an advantage if the own SPV is registered in an EU country and not, for example, in Jersey. This allows the banks acting as investors to use the ABS tranches bought with a high rating for repo business and thereby improve the bank’s liquidity position.
Naturally it’s hard to find an originator to take on the role of frontrunner in the present circumstances and thereby take on board the risk of an unsuccessful or very expensive placement. With this type of transaction, the anticipated high spreads are set for the entire duration of the notes which is not attractive to originators. To pacify the markets regular transactions would, however, be useful to provide market participants with further security and confidence. If the originator is planning this type of term transaction but is not compelled to go to the market immediately because it has alternative refinancing options, in the present situation it can wait and hope that the markets will calm down again. Parts of a take-out project can possibly be worked on in the background and if the market position improves an actual placement can be made quickly. [[[PAGE]]]
At present investor conduct sometimes appears irrational. For example, excellent ABS transactions with a constant good risk profile are also being punished as a result of the sharp rise in spreads in the primary and secondary markets. Papers which only contained 5-10 bps for investors just one year ago and which despite this were oversubscribed several times over, now produce 60 bps on the secondary market and therefore offer investors and extremely attractive investment opportunity. However, due to the prevailing insecurity, it would be hard for an investor to find a better opportunity to get more margin for the same risk. Clearly at present anything related to securitisation is avoided and not differentiated according to the quality of the underlying portfolio. Markets which have been highly liquid for a long time are suddenly completely collapsing.
Investors must learn from the crisis that in future they need to look more closely at what they are actually buying. Until now they have largely put their trust in the ratings issued by rating agencies. Practice does, however, demonstrate that the estimates of the ratings agencies are not the be-all and end-all and that it is vital for investors to make an analysis. This could mean in the future that big investors will create their own internal rating systems for senior tranches and only use the external rating for plausibility checks.
Ratings agenciesRatings agencies must be aware of their responsibilities and analyse their ratings models for the individual classes of assets and adjust them accordingly.
The statement often jokingly made at ABS conferences that the rating is a ‘non-binding opinion’ of the agencies is definitely not satisfactory and does not do justice to the significance for the international financial markets. Possibly the existing oligopoly has contributed to a situation where many of the required further developments were not decisively pursued due to the lack of competition. European heads of government such as Angela Merkel and Gordon Brown have already brandished a stick at the existing ratings agencies.
The majority of corporates use securitisation primarily as a cost-effective form of refinancing rather than to transfer risks. In this context, securitisation is, however, in competition with other options such as syndicated loans, MTN programmes, US private placements, borrowers’ notes or corporate bonds.
In times such as these, the advantage of a diversified debt and the significance of a timely provision of liquidity are demonstrated by the expression ‘a good treasurer provides long-term liquidity for his company when he does not need it’. Accordingly, the disappearance or dramatic increase in price of a specific form of finance can be compensated for as well as possible, even in cases where a spill-over effect to other refinancing structures cannot be avoided (for example, the prevailing loss of confidence in the inter-bank money market and the ensuing rise in money market spreads).
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All market participants must do their homework in future:
Originators
- the chosen securitisation structure
- the securitised portfolio also during the term of a transaction.
Investors
Ratings agencies
Securitisation remains a tried and tested method of distributing default risk. But the instrument as such does not change the default risk of the underlying asset. If more attention is again paid to the quality of the securitised debt rather than obscuring the actual risk content through manifold repackaging, this structured product will have a future.
We need to wait and see whether the market position calms down again. If not, there is a possibility that securitisation will become a niche product in the coming years and that other refinancing sources will gain ground for corporates accordingly.
We are assuming a medium-term recovery in the securitisation markets, funding levels of 5-10 bps will, however, remain a thing of the past from a long time. The take-out of our current warehouse transaction will only happen when the markets start to calm down. As a bridging measure, it is also feasible to establish a further ABCP structure in parallel to the existing one.
The securitisations that Porsche Holding would have liked to have had in markets such as Hungary, Croatia and Romania seem to be a remote possibility at the moment due to the movement in spreads.
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