Regulators looking to crack down on asset-backed securities will do little to protect investors -- and likely drive issuers from the fast-growing market, Duff & Phelps Credit Rating Co. warns.
A solid credit record of bonds backed by pools of home mortgages, credit cards, and other consumer debt -- now among Wall Street's hottest-selling products -- already makes them sound investments, according to Julie P. Schlueter, group vice president at the the Chicago-based agency.
In an article stated to appear today in the agency's Credit Decisions, Ms. Schlueter says tougher regulations would probably just make such structured financings less cost-effective for companies.
The Securities and Exchange Commission, which already requires such bonds to be registered as securities, is studying whether to apply the Investment Company Act more rigorously to asset-backed isses. The act requires "investment companies" -- which, broadly defined, includes asset-backeds -- to comply with a comprehensive scheme of regulation for investment practices, management. and capital structure.
SEC officials have said the market's astronomical growth has raised concerns about possible fraud or mismanagement that could harm investors. Banks, securities firms, and retailers sold nearly $180 billion of asset-backed securities last year, up from $500 million in 1980.
The market currently enjoys a number of exemptions from the investment Company Act, such as Section 3(C)(5)(AS), which exempts entities principally engaged "in purchasing notes, drafts, acceptances, open accounts receivable, and other obligations representing part of all of the sales price of merchandise, insurance, or services."
SEC officials say the agency may remove such privileges or increase the criteria for exemption. Regulators are also considering limiting asset pools to investment-grade debt, and requiring that pools be overseen by independent trustees.
But "it is difficult to envision any significant benefits over and above those currently structured into asset-backed securities that could result from the SEC's involvement," Ms. Schlueter writes.
Asset-backeds typically come with various protections for investors, such as bond insurance, letters of credit, and ample collateral. As a result, most issues carry gilt-edged triple-A ratings from the major agencies. All public asset-backed securities have been rated by at lease one of the major agencies, and most are rated by two or more.
At worst, the SEC's involvement "would severely restrain the asset-backed market," she says. "The investment company requirements for capital structure and net worth would make asset-backed issuance cost-prohibitive."
Moreover, because the act already limits the amount of securities investment companies can purchase from each other, the market could lose its major investors, mutual funds, Ms. Schlueter says.
"The proposals discussed by the SEC would have very little value added and the restrictions would only serve to impose more regulation and bureaucracy to the detriment of investors, issuers, and tax payers," she says. As for regulators' concerns over credit quality in the market, "to date, asset-backed performance has been excellent with the levels of credit support and emains well above the levels of loses on the underlying assets."
Most corporate bonds withstood heavy losses in the Treasury market, finishing a holiday-shortened session 1/4 point lower.
Skeleton crews manned most trading desks, and many portfolio managers also extended their July 4 holiday. Phones went unanswered at several major New York dealers by noon, EST.
No new issues hit the market.
Adding to the backlog of supply, General Motors Corp. filed a shelf registration with the Securities and Exchange Commission to offer as much as $2 billion of debt and warrants.
GM said it will use the proceeds for its global automotive and financing businesses. The filing brings the No. 1 U.S. automaker's shelf to $2.285 billion.
No underwriters were named.