"Several originators have conducted tender offers to buy back their securitisation issues at discounted purchase prices. In many prior cases, the securities concerned performed within Fitch's rating expectations and had stable ratings," said Stuart Jennings, Fitch's Structured Finance Risk Officer for Europe. "Given that originators have the most direct access to information on underlying collateral performance, a tender offer could be construed as the originator demonstrating confidence in the credit quality of their transactions, given they are prepared to set a price to take those assets back onto their balance sheet," Jennings added.
Tender offers often appear to be motivated by originators taking opportunistic advantage of the apparent differential between current distressed secondary market prices - which are usually lower than the tender offer price - and the implied value that originators see, indicated by the expected credit performance of the related securities. The tender offer allows a degree of deleverage for the originator and the potential ability to book a profit. Fitch's Structured Finance group has previously commented on the apparent dislocation between the credit profile of structured finance securities and their secondary pricing.
The growing trend of tender offers is not restricted to the structured finance market as Fitch has also seen banks tender for Tier 2 securities, often at sizeable discounts to nominal value.
"For the most part, recent tender offers have come from financial institutions that are not facing any considerable distress. They continue to have ready access to alternative funding sources, giving them the flexibility to be able to pursue tender offers in order to optimise their funding profile. However, tender offers can sometimes be indicative of a coercive debt exchange, where the tender offer is effectively forced upon investors by the need to re-structure funding to avoid default." said Gerry Rawcliffe, Group Credit Officer for Financial Institutions at Fitch.
Fitch's criteria in assessing whether Coercive Debt Exchanges have taken place for a financial institution or structured finance security respectively is explained in the reports: Coercive Debt Exchange Criteria: 3 March 2009 and Coercive Debt Exchange Criteria for Structured Finance: 3 June 2009.
Fitch notes Santander's tender offer is the largest to date in Europe and consists of various RMBS, consumer ABS and SME CDO securities. Fitch rates 14 of the 27 securities that are the subject of the tender offer - seven RMBS, two consumer ABS and five SME CDOs. All of these securities were originally rated 'AAA', however most of these have since seen adverse rating action. All of the seven RMBS have seen downgrades for performance reasons and all remain on Outlook Negative. One of the SME CDO securities has been downgraded for performance reasons. While the remaining four securities' ratings remain 'AAA', three of these are on Rating Watch Negative (RWN) - together with the previously downgraded transaction -pending further analysis under Fitch's recently revised rating criteria for SME CDOs. The two consumer ABS securities currently remain at "AAA" with a stable outlook. Fitch notes that those securities that have been downgraded or remain on RWN generally have a lower tender offer price, reflecting the greater degree of perceived credit risk inherent with these securities.
