S&P launches pioneering service for valuing European structured finance bonds

New initiative responds to growing concerns about illiquidity and opaque pricing of asset-backed and mortgage-backed securities in Europe

London, 20 March 2006 — Standard & Poor’s, a leading global provider of independent securities evaluations, today announced the launch of the first service that uses cashflow analysis and modeling to evaluate prices of European structured finance securities.

The Standard & Poor’s Evaluated Pricing Service, which initially covers European asset-backed and mortgage-backed bonds, offers a solution to growing market and regulatory demands for more transparent and consistent pricing of illiquid securities. It provides fund managers and securities firms with daily and intraday evaluations of securities prices based on analysis of their underlying collateral and cashflows and latest market data. It represents a major advance over existing valuation methods, which rely on obtaining trade prices, sometimes from originating banks that, are frequently stale or based on minimal transactions.

“The rapid growth in securitisation issuance in Europe in recent years has not been matched by the development of a liquid secondary market, and this has raised concerns about the transparency, reliability and consistency of valuing many structured bonds,” said Peter Jones, Director of European Securities Evaluations at Standard & Poor’s. “Our new service provides an independent, rigorous and credible answer for daily valuation and mark-to-market problems within this important but thinly traded market.”

A number of market and regulatory developments are encouraging securities firms and investors to focus on how they value illiquid securities and the level of transparency behind the price formation process:

• New regulations (Basel II, MiFID, IAS39, UCITS III) require securities holdings – including structured finance deals - to be marked-to-market on a regular basis.
• The UK Financial Services Authority’s Financial Risk Outlook 2006, published 25th January, highlighted operational risks arising from opaque pricing of illiquid securities, including concerns about the accuracy and validity of margins, capital, collateral, hedging and reporting. It also warned of risks for investors arising from performance-based fees on funds that include illiquid securitised bonds, noting that “since the fees are a function of asset valuations, there may be incentives to overvalue assets”. (Financial Risk Outlook 2006, FSA)
• Pension funds have significantly increased their investment in structured finance debt securities.
• Concerns about the reliability of systems within financial institutions for valuing and reporting positions in structured finance securities have refocused attention on improving risk management.

Standard & Poor’s Evaluated Pricing Service currently covers more than 2,300 ABS/MBS/CMBS/RMBS securities in Europe, and further coverage will be added at the request of individual clients.

Describing the evaluation methodology used by Standard & Poor’s, Peter Jones said: "We have engineered a unique solution that combines sophisticated cash flow modelling – carried out in conjunction with ABSxchange - and the creation of standardised data items for terms and conditions across the market. It means our team of evaluation analysts can factor in cashflow data, appropriate pre-payment speeds and credit spreads to generate a weighted average life and valuation of each security.

“As a result, Standard & Poor’s is the first to offer daily opinions of values across the whole capital structure of European securitised deals, including tranches rated below AAA and the thousands of outstanding deals that are illiquid, sensitive to pre-payment and not currently valued on a daily basis".

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