December 1, 2003
2003 Deal of the Year Award
This year’s ASR Awards sum-up
Drawing a common theme from worldwide securitization is not an easy task, as each marketplace, at different points of evolution, seems to have its own story.
With that in mind, we present the 2003 Annual ASR Achievements in Securitization Awards, a diverse set of deals, programs and, in a few instances, turnaround stories fueled by securitization, though the underlying transactions themselves may not have seemed particularly innovative. That said, we chose to honor and recognize achievements that captured the true challenges of the market and its participants, as well as the latest advances in design.
On that front, our U.S. securitization award went to Oncor Transition Funding, the first of many rate reduction deals expected out of Texas. Oncor featured many first-time enhancements, such as performance based underwriting fees.
ACHIEVEMENTS IN SECURITIZATION
|U.S. SECURITIZATION||EUROPEAN SECURITIZATION||LATIN AMERICAN SECURITIZATION||ACHIEVEMENTS IN INNOVATION|
|Oncor Transition Funding LLC||RMBS first-loss tranche for DZ Bank||Visanet cross-border credit card||FIN 46 innovators: Bank of America HSBC and Citibank|
|Runner up||Runner up||Runner up||Runner up|
|Terrapin Funding||ELOC No. 16 for BBC||Development of Colombian MBS program||Georgetown Funding|
|Honorable mentions||Honorable Mention|
|Turnaround programs for AmeriCredit and Capital One||Development of HBOS platform|
Revitalizing an entire asset class
Oncor Electric’s first stranded cost securitization was a landmark for the stranded cost sector, which at the time had yet to fully mature. While roughly three years old, stranded cost ABS, or rate reduction bonds (RRBs), had been brought primarily by non-programmatic issuers, with the intention of never returning. And although called rate reduction bonds, most issuers were more concerned with recovering costs associated with prior investments made in a pre-deregulated environment.
With the combined efforts of Public Utilities Commission of Texas (PUCT), and advisory firm Saber Partners, Oncor changed the stranded cost ABS landscape — creating investor reporting standards. Issuers in Texas — the state with the most potential supply — must allow investors to fully understand and gauge performance of this relatively new asset class. The goal of the PUCT, Oncor and Saber was to achieve the most inexpensive all-in cost for the issuer, and in turn keep charges to the consumer as low as possible.
In addition to increasing transparency for investors through reporting, Oncor utilized an unheard of “performance based” underwriting fee, rewarding lead and co-managers for broadening investor distribution and tightening spreads.
Joseph Fichera , CEO of Saber Partners calls the performance-based compensation “revolutionary.”
“In Oncor’s offering we created additional relative value through the structure, increased disclosure and transparency and broader liquidity by expanding the buyer base,” Fichera said. “For the bookrunners and co-managers, we tied compensation to performance on price and distribution so that everyone’s incentives were aligned — the investor buying the bonds and the ratepayer paying for the bonds received the best deal possible at the time.”
The result was broad distribution to non-traditional ABS investors, with heavy corporate overlap. Also, Oncor priced at the tightest levels the sector had seen to date through secondary RRB spreads, pricing just behind the largest and most liquid asset classes of the ABS market, rather than a “one-off” collateral type. Moreover, in the weeks following Oncor’s pricing, the entire $30 billion stranded cost sector tightened four to 10 basis points, depending on maturity, and has remained at those levels throughout the year.
“The concept is essentially investment bankers earning their compensation during the underwriting and sales process, as opposed to being guaranteed compensation before a single bond is sold,” Fichera added. “We wanted an incentive-based compensation plan that prevented the bookrunners from controlling everything while giving the co-managers a greater incentive to work.”
The Deals ONCOR TRANSITION BOND LLC 2003-1 Date: 8/14/2003 Seller: Oncor Electric Delivery Co. Amount: $500 million Collateral: stranded cost
Credit Enhancement: sr/sub Manager : Lehman Brothers, Morgan Stanley Notes: Settles: 08/21/03; Co-mgrs: Goldman Sachs, Merrill Lynch
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