The UK’s Investment Association has taken its concerns directly to a group of leading banks, in a letter seen by FN, dated October 18, and sent to Bank of America Merrill Lynch, Citibank, Deutsche Bank, JP Morgan, Morgan Stanley, as well as the Association for Financial Markets in Europe – the bank trade body.
Deutsche Bank, JP Morgan and Morgan Stanley declined to comment. The other banks named were unable to comment in time for publication.
The buyside body is concerned that some investors are given too much of a “pre-sounding” advantage before new ABS deals become public, leaving other investors scant time to decide whether or not to back deals and creating “disincentives” for investors to participate in the primary market.
It added the way new asset-backed securities are being sold to investors could “threaten the long-term resilience and vitality of the ABS market”.
Securitisation refers to the practice of bundling together loans, turning them into bonds and selling them to investors. More or less anything with cash flows can be securitised, including mortgages, credit cards or car loans.
The market’s reputation suffered in the wake of the financial crisis, when securities backed by risky US sub-prime mortgages plummeted in value and led to debilitating losses.
Andrew Dennis, an investment manager at Aberdeen Asset Management, said: “We welcome the IA’s intervention on this emerging issue. It is in no one’s interests – including, in the long run, issuers – for this market to move from public trade to private tender.”
Dennis said: “Securitisation can be a powerful means of allocating investment capital to the real economy and the development of a broad and deep primary and secondary market is critical to achieving this. We welcome offerings where we have sufficient information and sufficient time to analyse it.”
The IA said a reduced pool of buyers when securities were issued could reduce trading volumes, which in turn threatens to result in a “knock-on” effect on liquidity in secondary trading. That could have implications for the pricing of asset-backed securities when issued and the IA called for investors in public transactions to be given more time to perform credit analysis and review documentation.
Historically, private ABS transactions were sometimes pre-marketed to select investors in Europe when a deal had some unusual features. However, the IA said this was increasingly becoming a mainstream practice – even for deals which aimed to become fully public.
It said as a rule of thumb pre-soundings should be reserved for transactions that are “truly innovative, by reference to either the issuer, jurisdiction or structure”.