Securitisation market needs accounting rule change to aid recovery: Barry Sloane profile

Securitisation market has a long way to go before its reputation is restored, says industry veteran

Barry Sloane: securitisation expert

Barry Sloane has almost 30 years of experience in the securitisation market. His career, which includes stints at Bear Stearns, LF Rothschild, Smith Barney and Aegis Capital, has made him a witness to securitisation’s evolution from a niche funding tool in the early 1980s to a capital markets behemoth by the mid-2000s.

And, after the market was at the epicentre of the global financial crisis of late 2007 to early 2009, Sloane is keenly watching the efforts to restore its battered reputation with investors.

Sloane is currently chairman and chief executive officer of Newtek Business Services, a provider of business services and financial products to small and medium-sized entities. The largest non-bank lender in the US, Newtek completed last December a double-A rated $16 million deal backed by SME loans, the proceeds of which will be used to take out a bank loan and fund new origination.

While Sloane said the company was “very satisfied” with how the transaction went, he says the fact that it got done at all shows how far the market has changed since its heyday.

“Nobody used to do $16 million securitisations: nobody would have cared about them, and dare I say nobody would have wanted such a small-scale deal to happen. But in today’s markets, there are bankers looking for opportunities; rating agencies looking for deals; and there are entities like ourselves that want alternative financing options open to them. The confluence of events has made a deal of this size of interest,” he says.

“Even with the significant amount of credit enhancement and over-collateralisation versus 2007 standards, it is still a more attractive financing source for us than bank lines of capital and the cost of equity capital today. The only inexpensive capital today has been created by the US Federal Reserve. Away from that, capital is extraordinarily expensive and rare for most organisations and individuals, with the exception of the corporate titans.”

A mountain to climb

Although the secondary market has rebounded, new securitisation issuance, particularly in the private label MBS market, remains thin on the ground. Sloane says the full recovery of the market “will take many years”, based on new regulations, accounting treatment and a general level of market nervousness. He argues investor fears are completely justified given the almost total collapse of the market in 2007 and 2008.

“The market is still prohibitively expensive for the majority of issuers for a number of reasons. Financial institutions used to issue securitisations off-balance sheet, which created accounting gains and increased their leverage: that’s no dice any more. That is going to kill the new issuance market unless we have an accounting rule change. We are subject to the same accounting rules, but we never got mixed up in the game of hiding leverage and booking false profits.

“We are three times leveraged, and legitimately so. All these other zeros of the last 15 years – I still think they are playing hide the banana in terms of assets being held in special-purpose vehicles. And they are being allowed to do that because the regulatory authorities have given them grandfathering treatment on their old deals,” says Sloane.

In no small part, the breakdown of the securitisation market was caused by flaws in origination and underwriting practices. Sloane believes financiers must be held accountable for assets on a long-term basis for this to change. “When that is in place, it seeps right into the underwriting. So the day that the financial markets become less transaction-orientated, you will have wholesale changes in how things are done,” he says.

More positively, he believes the relatively few deals getting done today are of a much better quality than their pre-crisis predecessors, due to higher levels of credit enhancement and improved disclosure. While that is partly a function of market demand, Sloane believes the much-vilified rating agencies also deserve some credit.

“The rating agencies are probably the only entities that have moved in the right direction [since the crisis]. The whole process broke down because of excessive leverage, fraud and poor underwriting standards. The overall methodologies used by rating agencies weren’t necessarily wrong, but now they have to add a few more factors into the equation and reset their view points on what a real downturn could look like.”