Deal Sponsor and Credit Risk of Asset-Backed and Mortgage-Backed Securities

Abstract

Gorton and Souleles (2005) and Higgins and Mason (2004) find that sponsors with higher unsecured credit ratings issue credit card securitizations at tighter spreads and have greater market access than lower rated sponsors. We extend this research by examining the performance of securitizations with different types of sponsors in multiple sectors and by discussing the various ways in which sponsors might influence the performance of their securitizations. We measure performance using two metrics, rating downgrade rates and security impairment rates. We utilize a unique dataset, consisting of over 14,000 securitization tranches issued over a 10-year period, covering a wide range of sectors within the asset-backed and mortgage-backed securities markets, and involving over 446 individual sponsors. When all the data is pooled, securitizations issued by investment-grade sponsors appear to outperform those issued by non-investment-grade sponsors, and those issued by banks outperform those of captive finance companies, which outperform those of security firms, which outperform those of specialty finance companies. The prevalence of certain types of sponsors within various asset classes helps explain the wide variation in performance observed across those asset classes. When analyzing relative performance across asset classes, we find weaker performance is strongly associated with having a higher proportion of sponsors that are specialty finance companies. When analyzing relative performance within asset classes, we find the impact of sponsor type is mostly modest or statistically insignificant. The relatively weak nonperformance of securitizations sponsored by specialty finance companies and non-investment-grade firms may be related to their weaker incentives to invest (through conservative asset selection, high quality servicing, or out-right support for troubled transactions)in long-term reputations for issuing strongly performing securities. In addition, in some sectors, if the sponsor is also the servicer and goes bankrupt, the securitization's underlying obligors, themselves, have a weaker incentive or more limited ability to make their debt service payments. Differences in performance may also be related to the tendency of specialty finance and noninvestment-grade sponsors to be more active in sectors that have historically exhibited greater asset volatility. In some of these sectors, sponsors experienced increased competitive pressure over time to grow originations and relax underwriting criteria. As a result, the securitizations of many sponsors operating within these sectors, including those of some banks and investment-grade firms, under-performed relative to securitizations in sectors with relatively few specialty finance and non-investment-grade sponsors.