Investors Defend Securitization,Some Entities Tainted by EnronBy CHRISTINE RICHARD DOW JONES NEWSWIRES
3-18-02
NEW YORK -- Wall Street is scrambling to distinguish between the kind of off-balance-sheet financing used by Enron Corp. and that employed in the giant securitization market.It is an important distinction, professionals say, because securitization plays a little recognized but important role in supporting consumer spending and the broader economy.Investors have become more suspect of financing arrangements that use special-purpose entities since Enron revealed it had amassed huge off-balance-sheet debts in special-purpose entities."The $5 trillion securitization market is a market that works very well, and we don't want to disrupt those benefits from continuing to flow," said George Miller, senior vice president of the Bond Market Association, which held a media briefing on special-purpose entities Monday. Mr. Miller said that Enron's use of these entities had led to the "vilification of SPEs."But, the Enron entities were radically different from the vast majority of special-purpose entities that have been created to sell mortgage-backed debt and asset-backed, including credit card-backed, debt, according to Karen Weaver, global head of securitization research at Deutsche Banc Alex. Brown Inc.
These transactions have "enabled American consumers to spend to the extent they do," Ms. Weaver said at the briefing.For instance, only one in 10 Americans in the lowest 20% income bracket held a bank credit card in 1980, a figure that has jumped to one in three, thanks largely to securitization, Ms. Weaver said. That is because securitization allows companies to sell assets such as mortgages to entities where risk is isolated to the assets within the pool and can be structured in such a way to obtain a highly desirable triple-A-rating.One way to distinguish between reasonable transactions, such as the vast majority done in the securitization market, and suspect transactions such as Enron's, is to look at a company's motivation for putting the deal together, according to David Jacob, managing director of Normura Securities International.
"A transaction to achieve lower funding costs, improved liquidity, or asset-liability matching" falls within the definition of proper use, Mr. Jacob said at the presentation. Beware, however, the "transaction to achieve accounting results that lacks economic substance."Meanwhile, Moody's Investors Service also weighed in with its defense of the securitization market. In a report issued Monday, Moody's said, "This well-established form of financing may be receiving undeserved negative attention."Treasury SecuritiesTreasurys were mixed, with prices of longer-term debt higher but short maturities down slightly ahead of Tuesday's Federal Reserve policy meeting.At 4 p.m., the benchmark 10-year Treasury note was up 9/32 point, or $2.81 per $1,000 face value, at 96 25/32. Its yield fell to 5.296% from 5.334% Friday, as yields move inversely to prices. The 30-year Treasury bond's price was up 10/32 point at 95 1/32 to yield 5.728%, down from 5.752% Friday.
While a solid run of improved U.S. economic data has pressured Treasury prices in the past weeks, longer-dated maturities -- the most sensitive to expectations about inflation -- are gaining favor because of the belief that inflation risks are minimal and that the Federal Reserve remains vigilant, analysts said.Since December 2000, the FOMC has maintained that economic risk was tilted toward weaker growth. Now many in the market expect policymakers to shift to a balanced stance on the risks of slower growth vs. inflation.But with uncertainty remaining over the strength and sustainability of the U.S. recovery, the Fed is widely expected to leave its target short-term interest rate unchanged at 1.75% after Tuesday's meeting. Many economists expect the Fed will keep rates on hold until the summer.Corporate SecuritiesFord Motor's financing arm, Ford Motor Credit, sold $2 billion more of outstanding debt issues. They were $1 billion of the company's 6.50% notes due January 2007, priced to yield 2.40 percentage points over Treasurys, and $1 billion of its 7.25% notes due October 2011, priced to yield 2.375 percentage points over Treasurys. Banc of America Securities, Hong Kong Shanghai Banking and Lehman Brothers led the deals, rated single-A-3 by Moody's Investors Service and triple-B-plus by Standard & Poor's. |
