CMA exempts asset backed security issuers from rating

Asset backed securities (ABS) issuers will only be required to seek credit rating if targeting pension funds, insurers, collective investment schemes or the public under new regulatory guidelines.

The securities are normally tied to a specific asset with investors drawing their returns from the cash flows generated by the property.

The Capital Markets Authority (CMA) guidelines want issues targeted exclusively at other classes of institutional investors such as unit trust managers, banks and companies (classified as a limited restricted offer) to only require a credit rating if the CMA specifically prescribes so, thus easing the process of issuing the securities.

Obtaining an objective and independent rating on the creditworthiness of the issue is key to giving investors confidence and avoiding exposure to low quality assets, like was the case in the US mortgage market ahead of the 2008 financial crisis.

“All issues of ABS except those made as a limited restricted offer will be required to be rated by a rating agency licensed or approved by the CMA.

“In the case of a limited restricted offer the obtaining of a rating is optional and is dependent on the terms of the transaction documentation,” says CMA in the draft guidelines.

“Where a rating is required or to be obtained then discussion with the rating agency should be at an advanced stage prior to an application being lodged with the CMA so that the applicant has a high degree of confidence that a rating at the required level for the transaction to be economic and acceptable in the market will be likely to become available to support the issue.”

CMA has put up the draft guidelines for public debate for one month, and is looking to complement the existing regulations in the CMA Act.

While there have been laws guiding such instruments since 2007, no company has issued yet and the CMA hopes the additional guidelines will assist issuers structure their ABS to the satisfaction of investors.

This kind of instrument usually works well for large infrastructure projects such as roads, power plants and housing projects, which require huge upfront investment but can generate income over a long period of time.

An ABS that is sold to the public is usually subdivided into small units for sale through the securities exchange so that investors do not have to put in huge amounts of cash like in infrastructure bonds.