An Investigation of Underwriting Fees for Asset-Backed Securities

Article excerpt

I. Introduction

One of the largest financial markets is the market for asset-backed securities (ABS). Despite the growth and size of the market, no research has been done, to our knowledge, on underwriting fees in this market. The topic of underwriting fees has been previously examined in debt markets. For example, Livingston and Miller (2000) find an inverse relationship between underwriter prestige (market share) and underwriting fees charged in corporate debt markets. Burch, Nanda and Warther (2004) find that loyalty (repeat business) leads to lower fees for common stock offers, but found the opposite holds true for debt offers. In this paper, we investigate whether the relations between underwriter prestige and underwriting fees and between loyalty and underwriting fees that have been found to exist in other debt markets exist in the ABS market.

The topic of underwriting fees for ABS is of interest for two main reasons. First, ABS is a relatively new financial market leading to relatively little prior research being done on it. Second, at least part of the financial crisis in 2009 has arguably been attributed to the growth in the market of these types of securities. To better understand ABS, may help better understand potentially one of the influencing factors of the financial crisis.

ABS are inherently different from other debt instruments since they are collateralized by specific receivables. The growth of the ABS market can be attributed to two main factors: demand by investors in search of spread (above "safer" fixed income securities such as government and corporate debt) and supply by lenders wishing to offload receivables. Using a proprietary database from Bloomberg LP this paper provides an overview of the ABS market that is more detailed than the existing literature. Further, using a methodology similar to that used in Livingston and Miller (2000), this study explores the relationship between ABS underwriter prestige and underwriting fees. This study presents two key findings. First, the relation between underwriter prestige and underwriter fees is found to be positive and statistically significant, indicating that more prestigious underwriters charge higher fees. Second, the analysis identifies a positive relation between underwriter fees and loyalty, indicating that the more an issuer uses the same underwriter, the higher the fees that are charged.

The rest of this paper is organized as follows. Section II provides an overview of the market for ABS. Section III provide a literature review and hypothesis formulation. Section IV describes the methodology, Section V describes the results, and Section VI concludes.

II. Overview of the Market for ABS

In this section, we first provide an overview of the market for ABS, and then take a more detailed look at ABS collateral types, underwriters, ratings and weighted average life. The source of all data is the Bloomberg Data License product. All non-private placement U.S. asset-backed securities issued from January 1st. 1999 through December 31, 2006 are included in our analysis. The period selected represent a period in which the data are richest and most complete, and spans a number of economic cycles.

Since its inception in 1985 with First Boston's sale of lease-backed notes by Sperry Lease Finance Corporation, the U.S. ABS market has grown considerably (van Eck 1995). In addition to the sizeable U.S. market, there are markets in Europe and Japan. Growth in ABS extends to other markets such as Korea, Taiwan, and Greece (Lester, Asaria and van der Linden 2002), (Park, Han, and Kim, 2002) (Pergamalis 2003). Table 1 shows the U.S. asset-backed securities market is large and growing as compared to the U.S. corporate bond market.

The growth of the market can be attributed to two main factors: demand by investors in search of spread above "safer" fixed income securities such as government and corporate debt, and supply by lenders wishing to off-load receivables. …