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Despite the fact that the National Credit Union Administration (NCUA) finalized (more than 24 months ago) the new required securitization safe harbor rule and other legal requirements to facilitate securitization by federal credit unions (FCUs), an FCU only recently closed the first securitization of a prime auto portfolio. This is rather surprising because banks and other credit providers have widely and actively used securitization as an important means for funding such credit activities and as a tool for active portfolio management to enhance related investment returns. TOPICS:Credit risk management, information providers/credit ratings Key Findings • Banks and other credit providers have widely and actively used securitization as an important means of funding credit activities and as a tool for active portfolio management to enhance related investment returns. • Securitization has not been widely used by federally insured credit unions (FICU’s) because of NCUA’s authority to disaffirm or repudiate contracts of a failed FICU, which powers apply to the transfer of financial assets in connection with a securitization. • Recognizing the chilling effect this authority has had on securitizations sponsored by FICU’s, NCUA has issued a safe harbor that defines the conditions for protection for securitization transactions for any transfer of financial assets. • A recent FICU securitization has demonstrated that the safe harbor is opening the door for future FICU securitizations that rely on the safe harbor.

From 2011 through 2014, new issuance of U.S. structured products backed by subprime auto loans and leveraged corporate loans grew by 55% and 716%, respectively. The authors analyze the recent activity in these markets, as well as the activity and risks in the loan markets underlying auto asset-backed securities (ABS) and collateralized loan obligations (CLOs). Despite the empirical evidence of higher risks in auto and leveraged loan collateral, the analysis does not indicate a commensurate increase in risks to investors in the structured products based on those loans. For a comparison, they review market activity and risk indicia in U.S. insurance-linked securities, which, unlike auto ABS and CLOs, serve a pure risk-transfer purpose and do not result in any significant extension of credit by investors to sponsors. The authors also consider the likely impacts of the Volcker Rule and Credit Risk Retention rule on U.S. structured product markets, and they conclude that the regulations are likely to stifle market activity and discourage legitimate risk transfer.

On December 10, 2013, the Federal financial agencies issued the joint final regulation implementing Section 619 of the Dodd–Frank Act, commonly known as the “Volcker Rule.” This article addresses the impact of the final regulation on securitization activities and therefore focuses on the prohibition on covered funds activities and certain of the exceptions thereto. The final regulation provides for 14 separate exclusions from the definition of covered funds, including the loan securitization, qualifying asset-backed commercial paper (ABCP), qualifying covered bond, and wholly-owned subsidiary exclusions. Although securitization transactions generally do not utilize entities that would be regarded as private equity funds or hedge funds and the statutory text of the Volcker Rule expressly required that the final regulation not prohibit the securitization of loans, the final regulation will impact certain securitizations in a material way due to the breadth of the definition of covered funds.

In this article, the authors review the recent activity in U.S. structured finance markets and offer some comments on the changes in certain structured finance products resulting from the global credit crisis. They believe that these changes have helped foster an environment consistent with the return of economically legitimate uses of fundamentally sound structured financing techniques. The authors discuss specific changes in the market for collateralized loan obligations (CLOs) as an illustrative example. They also discuss the potential impact of various ongoing regulatory initiatives that may affect (perhaps significantly) the near- and long-term prospects for U.S. structured finance products and markets. The data currently indicate renewed investor interest in many of these products, and in the authors’ view, the post-crisis changes in the design and documentation of these products together with heightened investor awareness and better access to information suggest that such interest is not merely irrational yield-chasing. Yet, the ongoing regulatory uncertainty poses significant potential threat to the future of the U.S. structured finance market. Many of the possible dangers arising from pending or proposed regulations seem, moreover, to be unintended consequences of rules that were not specifically aimed at structured finance (e.g., the Volcker Rule). Unless regulators address those unintended consequences (and perhaps some intended ones), the prospects for the return of a vibrant and well-functioning structured finance market to facilitate legitimate risk transfer and asset funding may be much dimmer than recent market experiences otherwise suggest.

The stated purpose of Dodd–Frank is to reduce systemic risk, increase transparency of the financial markets, and promote market integrity. Most likely, Dodd–Frank will affect energy companies in connection with their energy marketing, hedging, and trading activities – in other words, in connection with energy “swaps.” The consequences will range up and down a sliding scale depending on a particular firm's activities and the outcome of a federal rulemaking process still many months from completion.

This article reviews several provisions of the recently-enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and seeks to assess their likely effect thereof on structured finance. The authors review the provisions contained in Title VII [Wall Street Transparency and Accountability Act regulating the over-thecounter (OTC) swaps markets]; Subtitles C (Improvements to the Regulation of the Credit Rating Agencies) and D (Improvements to the Asset-Backed Securitization Process) of Title IX (Investor Protection and Securities Reform Act of 2010); and Title XIV (Mortgage Reform and Anti- Predatory Lending Act) of the Dodd-Frank Act as the effects of these reforms will be intrusive into many key areas of structured finance. Moreover, the exact nature and degree of the effects have to be established in over 300 mandated regulatory rulemakings, studies and reports in a relatively short period with an uncertain degree of effective coordination among the many regulatory agencies involved. Notwithstanding the Dodd-Frank Act’s numerous required rulemakings and the limitation on the authors’ discussion due to possible changes that result from such rulemaking, this initial and preliminary review should still be instructive to readers if for no other reason than to inform those potentially affected by the related reforms so that they will be prepared to participate in the related rulemakings and minimize the risk of further unintended consequences of the Dodd- Frank Act. Readers will judge for themselves whether the reforms are sufficient to address the causes of the recent financial crisis so as to avoid its repetition or whether this intrusion will fail to obtain the benefits for the considerable cost likely to be involved under the reforms.

The OTC derivatives market is increasingly the policy focus of lawmakers in the United States, Europe and elsewhere. The objective and details of reaching the goals of transparency and regulatory reform continue to prove elusive, however, and the various legislative efforts to date leave many questions unanswered and conceivably conflict with one another. It will be important that the political need to provide a timely response to concerns about transparency and counterparty credit risk be balanced against the need to face head-on the complications that will necessarily be involved in the responsible redesign of a complex and global OTC derivatives market. This article examines proposed legislative and regulatory developments as well as OTC derivatives industry efforts that are likewise afoot, along with associated issues including proposed central clearing requirements; the definition of a standardized derivative; possible margin and capital requirements; reporting, record-keeping, and business conduct standards; preventing manipulation, fraud, and other market abuses; the respective regulatory authorities of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC); and other regulatory issues particular to credit default swaps.

Stranded cost securitization techniques were originally developed to compensate U.S. electric utilities for regulatory assets rendered obsolete and uneconomic by deregulation. These techniques permitted an affected utility to recover stranded costs in rates charged to customers and to issue bonds backed by such charges. Today, stranded cost securitization techniques are finding new applications in the financing of mandatory pollution control equipment and other similar expenditures, for catastrophic storm reconstruction expenditures and, as proposed by the author, possibly for “synthetic” carbon emission reduction for new fossil-fueled power plants or purchases.

A structured financing that was closed in late 2003 for the new St. Louis Cardinals Stadium was the largest private placement of debt for a Major League Baseball (MLB) stadium, the first MLB stadium transaction using a bankruptcy-remote structure, the first set of cash flows from a baseball stadium to be rated investment grade by both Moody?s and Standard and Poor9s and insured to ‘AAA’ by Ambac Assurance, and only the third privately financed MLB home stadium. A special-purpose vehicle formed by the Cardinals will originate the contracts giving rise to the contractually obligated income (COI) pledged to support the ballpark financing. The SPV holds the naming rights, rights to conduct concession activities, rights to license luxury suites, and certain sponsorship (signage) rights, all collectively called dedicated property. The Cardinals conduct MLB games under a license agreement with the SPV. The dedicated property is isolated from the credit risk of the Cardinals because it is not owned by the Cardinals. COI from the dedicated property pledged to bondholders was sufficient to earn the bonds an investment-grade credit rating.

Special purpose entities (SPEs) are widely used in a variety of project and other structured financings as they generally facilitate the isolation of risk and the assignment of responsibility therefor under definitive transaction agreements and other documents and instruments. In addition, if the SPE is not consolidated with a transaction sponsor, this may allow the sponsor to participate in more transactions than it could if the SPE had to be consolidated in the sponsor9s financial statements. Recently, under substantial political and other pressure to act following the alleged abuses of special purpose entities (SPEs) by Enron and others, the U.S. Financial Accounting Standards Board (FASB) issued new guidance on consolidation—FASB Interpretation No. 46 (FIN46), Consolidation of Variable Interest Entities. Many existing SPEs that were not consolidated under prior guidance likely will be consolidated by their sponsors under FIN46, unless they are substantially restructured. Similarly, sponsors entering new structured financing transactions likely will need to structure them differently than in the past to avoid consolidation. The two key determinations in FIN 46 are whether an entity is a variable interest entity (VIE) and, if so, whether an interest holder is a primary beneficiary (PB). The PB of a VIE is required to consolidate the VIE.

Project-finance collateralized debt obligations (CDOs) will allow portfolio investors a greater opportunity to participate in power and other infrastructure debt markets and will bring additional liquidity and transparency to such markets. Project-finance CDOs also will allow commercial banks, which have a long and successful history with project finance, to better manage their balance sheets and asset-liability mismatches. This article reviews the structures and features of a CDO and why project-finance debt is an attractive asset for a CDO.