Slowly and surely, trickles of deals are getting financed. Markets, as we all know, are cyclical, with some bubbles, booms, and busts.
The financial meltdown of 2008 was caused by bad credit decisions of all kinds financed over the course of a decade by asset securitization. The business of making loans, putting them into bankruptcy remote trusts, getting bond ratings through structure and selling them was at its height in 2007. This ultimately fractured the system.
Packages of bad loan credits placed in bond structure formats and sold to investors primarily based on rating and yield was the lending formula in the last decade. Now, loan credits and the structure of securitization are far more bulletproof and robust.
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Consequently, we are now faced with a situation where the hurdles of credit, credit enhancement and structure are three to four times higher for clearing the securitization market. An issuer, who would have been able to get the 5% subordination required for an AA rating in 2007, now faces credit enhancement four times as large, with stricter underwriting guidelines.
Likewise, accounting treatment is no longer as favorable as it once was. Today's accounting treatment requires issuers to keep loans on their books for financial purposes. This essentially eliminates the possibility of getting off-balance sheet treatment for securitizations. While it used to be that the motivation for securitizing was sale treatment for financial purposes and shrinking the balance sheet, this treatment is no longer useful. Lost in this change is that the advantages of securitization – providing term financing away from deposits or bank financing – is now extremely difficult to get.
While this may seem like a brutal impediment for growth, there is a solution – one that provides a great investment vehicle for financial institutions such as credit unions – asset securitization.
Securitization is not just a viable form of finance for non-bank lenders, investors, and financial institutions to put money to work, but it's also vital for those that may not have the size or scale within a small market. Through asset securitization, institutions are able to seek out bonds backed by loans or seek to buy participations in loans. It is possible for companies to buy loans or loan participations that are government guaranteed, AA rated or in loan participation format.
Credit unions need to put low cost, deposit money to work and as the securitization and loan participation market recovers, the activity in this area will grow.
We plan on regularly issuing securities, government guaranteed participations, and loans for investment. As a non-depository, we see the market reemerging from the ashes with superior underwriting, better rating agency structure for credit enhancement, and better risk-reward as this market recovers from its collapse in 2007.
By far, the largest issue that credit unions face today is quality asset generation. Additionally, most portfolios are concentrated in consumer loan risk, whether it be auto, residential, or credit card. Historically, this risk appetite has been the bread and butter of investments in loan form or securities form.
The opportunity to invest in quality loan participations with full faith and credit government guarantee that float over prime rate with no caps and yield in excess of 4% with a four year average life is attractive in a sub 1% Treasury bond market for similar durations. The securities that are created in the market throw off similar great yield, where you get well paid and compensation for the risk.
We see securitizations and the loan participation business coming back at a slow and steady but rational pace.
Barry Sloane is president/CEO of Newtek Business Services.
Contact 212-356-9566 or [email protected]
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