Asset Securitization Is Alive and Well
An April 1 article ["Securitization, After Fast Growth, 29% Below Last Year's First Quarter," page 1] gave an incomplete picture of bank loan securitization and could stigmatize banks that use it.
The writer cited several reasons why first-quarter securitizations fell below the year-earlier level. These include easier access to alternative markets, investor concerns over the quality of loans securitized, a reduced supply of loans available for securitization, and higher transaction costs.
Though I agree with much of the article, I have several criticisms:
* It addressed securitization only in terms of the experience of large, somewhat troubled banks that securitize via the public markets.
* It referred to securitization solely as a balance-sheet management tool used by institutions with capital adequacy problems and limited alternatives; no mention was made of securitization's value as a strategic tool.
* It suggested that if causes for the slide in issuance persist, securitization will decline as a key funding strategy.
By focusing only on large, troubled banks, the article ignored the benefits that can be realized from securitization by a large segment of your readership -- managers of healthy banks with assets in the range of $500 million to $3 billion.
The president of one of my company's clients, a well-capitalized and very profitable $1.5 billion bank holding company, recently commented to me that securitization must be viewed as a process, not an event.
It is not a one-time quick fix of a problem, he said. Rather, it is an ongoing means of responsibly meeting loan demand while capturing the fee income and ancillary business generated by such loans, and of subsequently selling the loans in a securitized form -- normally at a tidy profit.
He also recognized that securitization is valuable in managing asset allocation and liquidity.
Troubled institutions view securitization as a problem-solving event. Healthy ones treat it as an ongoing way of doing business, with multiple benefits.
The reasons the article gave for the recent decline in securitizations apply mainly to large, troubled banks and should not be regarded as leading to a shift away from securitization by the industry as a whole.
Consider the following:
* Easier access to alternative markets. It is true that larger institutions in general have gained greater access to the capital markets over the past few quarters. However, this should not be construed as meaning that alternative funding mechanisms are preferable.
Because of economic and financial influences, securitization fluctuates in relative attractiveness. But smaller banks, which rely less on the capital markets, have continued to successfully employ it as a funding tool through many credit cycles and will continue to do so.
* Investor concerns over the quality of loans securitized. Though the recession has increased delinquencies and losses at many banks, the impact has been most profound at larger ones.
Smaller banks may promote one segment of their lending activity to increase volume, but larger banks have tended to conduct crusades into new geographic regions and products (for example, in consumer credit, particularly credit cards.)
The larger banks' initiatives have led to higher levels of delinquency and loss, raising concern among investors, credit enhancers, and credit rating agencies. Lower delinquencies and lower losses at smaller banks make their securitizations well-received in the market.
* Reduced supply of loans available for securitization. The economic downturn has indeed slowed the growth in consumer receivables, but not to the point where there is a paucity of loans available for securitization.
Such loans may be scarce at many larger banks, which have shown a tendency to enter a market (for example, indirect automobile lending and leasing), abruptly leave, then reenter at a later date.
Larger banks suffer little if any hometown embarrassment if they abruptly bolt from a market. But behavior of this kind may account for the diminished stocks of consumer loans at many institutions.
* Higher transaction costs. I am unaware of any fundamental change in the investment-banking price structure for asset securitizations. But one factor behind the recent increases in spreads over Treasuries is the declining credit quality - as measured by delinquency, default, and loss experience - of large banks' recent transactions.
In my experience, the market has not penalized smaller institutions that have shown the ability to intelligently underwrite and collect consumer receivables within their territories.
Mr. Marc A. Reich is president of Ironwood Capital Partners Ltd., Hartford, Conn., which does structurings and private placements of asset securitizations for banks and leasing companies.