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Prof. Ian Giddy New York University Structured Finance: Asset-Backed Securities
Copyright ©2002 Ian H. Giddy Structured Finance 2 Structured Finance l Asset-backed securitization l Corporate financial restructuring l Structured financing techniques
Copyright ©2002 Ian H. Giddy Structured Finance 3 Asset-Backed Securities: The Typical Structure FORD (SPONSOR) SPECIAL PURPOSE VEHICLE LOANS. ISSUES ASSET-BACKED CERTIFICATES SALE OR ASSIGNMENT LOANS. Servicing Agreement
Copyright ©2002 Ian H. Giddy Structured Finance 4 Legal Aspects Goal: Credit quality must be solely based on the quality of the assets and the credit enhancement backing the obligation, without any regard to the originator's own creditworthiness Otherwise, quality of the ABS issue would be dependent on the originator's credit, and the whole rationale of the asset-backed security would be undermined. LEGAL
Copyright ©2002 Ian H. Giddy Structured Finance 5 Three conditions enable the separation of the assets and the originator The transfer must be a true sale, or its legal equivalent. If originator is only pledging the assets to secure a debt, this would be regarded as collaterized financing in which the originator would stay directly indebted to the investor. The assets must be owned by a special- purpose corporation, whose ownership of the sold assets is likely to survive bankruptcy of the seller. The special-purpose vehicle that owns the assets must be independent LEGAL
Copyright ©2002 Ian H. Giddy Structured Finance 6 The Alternative: Synthetic ABS DB (Originator) SPECIAL PURPOSE VEHICLE REFERENCE POOL OF LOANS (Stay on balance sheet) ISSUES ASSET-BACKED CERTIFICATES CREDIT SWAP AGREEMENT TOP QUALITY INVESTMENTS
Copyright ©2002 Ian H. Giddy Structured Finance 7 Finance Co. Ltd (Seller) FCL 1997-A (Special Purpose Co.) Investors Financial Guarantee Provider (if required) Servicing Agreement Proceeds Sale of Assets Proceeds Asset-Backed Securities Guarantee Agreement Rating Agency Top Rating Trustee Trust Agreement Finance Co.’s Customers Hire-Purchase Agreement Credit Enhancement: Guarantee Method
Copyright ©2002 Ian H. Giddy Structured Finance 8 Finance Co. Ltd (Seller) FCL 1997-A (Special Purpose Co.) Senior Proceeds Sale of Assets Rating Agency Top Rating Credit Enhancement: An Alternative Approach Subordinated More Subordinated Lower Rating No Rating Financial Guarantee Provider (if required) Guarantee Agreement
Copyright ©2002 Ian H. Giddy Structured Finance 9 Atherton Capital (Seller) Atherton FLF 1998-A (Special Purpose Co.) Investors Servicing Agreement Proceeds Sale of Assets Proceeds Asset-Backed Securities Mellon Mortgage (Servicer) Franchisees (Borrowers) Loan Agreement Example: Franchise Loan Securitization Servicing Advisor Loan Payments
Copyright ©2002 Ian H. Giddy Structured Finance 10 Deal documentation List information requirements Due diligence & Meeting with management Issuer/Banker Requests rating Pool credit analysis Legal analysis Stress testing Credit enhancement negotiation Rating committee Presale report Final report Rating Process Surveillance “Rating CLOs” (Fitch) on Workshop Website giddy.org/abs-hypo.htm “Rating CLOs” (Fitch) on Workshop Website giddy.org/abs-hypo.htm
Copyright ©2002 Ian H. Giddy Structured Finance 11 Example: Ford Credit Owner Trust 1999-A
Copyright ©2002 Ian H. Giddy Structured Finance 12 Ford Structure FordFord Motor Credit Ford Credit Auto Rec. Two LP Ford Credit Auto Owner Trust Receivables Class A-1 to A6 Class B Class C Class D Class A-5 and A-6 Class D Sale
Copyright ©2002 Ian H. Giddy Structured Finance 13 Trade Receivable Backed CP l Over $500 billion outstanding in US alone l Key feature is pooling of different companies’ trade receivables, allowing smaller companies to take advantage of ABS market l Need two-tier legal structure – SPV at level of each company’s receivables pool, and at multi-company program (the “conduit”)
Copyright ©2002 Ian H. Giddy Structured Finance 14 Corporation A Corporation B Corporation C SPECIAL PURPOSE VEHICLE “CONDUIT” Credit enhancement facility provider Liquidity facility provider Sponsor/ administrator Legal owner INVESTORS Trade receivables Payments on maturing ABCP Fees Nominal dividends Trade Receivable-Backed Commercial Paper (ABCP) Pool A Pool B Pool C
Copyright ©2002 Ian H. Giddy Structured Finance 15 The Process Is the company ready? Is the company ready? Are the assets suitable? Are the assets suitable? What pool? What legal structure? What legal structure? What credit enhancement? What credit enhancement?
Copyright ©2002 Ian H. Giddy Structured Finance 16 Case Studies Evaluate the pool and legal structure in: l Belenus l Ford
Copyright ©2002 Ian H. Giddy Structured Finance 17 Belenus l What is the nature and value of the assets? l How strong is the legal structure? l Is the collateral sufficient? Would you recommend purchasing the second (B) tranche? l What could go wrong with this deal? What could go right?
Copyright ©2002 Ian H. Giddy Structured Finance 19 Belenus Credit Enhancement 38 48 62 Orig C/E 12/96 75.6AA-BBBC 95.5AA+AB 0PaidAAA Curr C/E 11/98 Curr rating Orig rating Class
Copyright ©2002 Ian H. Giddy Structured Finance 20 Ford Structure: Default or Loss? Receivables Class A-1 to A6 Class B Class C Class D
Copyright ©2002 Ian H. Giddy Structured Finance 21 Can an ABS SPV Declare Bankruptcy? Only assets in SPV available to protect investors No need for protection from creditors Obligations are defined as limited to those available from the assets No recourse to originator So default and bankruptcy have different meaning than for normal corporation.
Copyright ©2002 Ian H. Giddy Structured Finance 22 Ford Structure: Waterfall Receivables Class A-1 to A6 Class B Class C Class D
Ford Structure: Waterfall
Copyright ©2002 Ian H. Giddy Structured Finance 25 Other Deals – Check the Paydown Structure l DVI Receivables l Stratford ABSresearch.com
Copyright ©2002 Ian H. Giddy Structured Finance 26 Paydown: Waterfall vs Soft Bullet Structure
Copyright ©2002 Ian H. Giddy Structured Finance 27 Implications of Waterfall Upgrades l The capital allocated to a well-balanced ABS portfolio should slowly decrease over time, whereas the same cannot be said of a similar corporate loan portfolio. l Rating upgrades should be the norm in the ABS world, and downgrades the exception (currently, the situation is exactly the opposite). In the corporate world, we should rather expect downgrades to equal upgrades over long time intervals. l An ABS portfolio should be traded much more actively than a corporate loan portfolio to take advantage of its inherent rating volatility.
Copyright ©2002 Ian H. Giddy Structured Finance 32 Contact Info Ian H. Giddy NYU Stern School of Business Tel 212-998-0426; Fax 212-995-4233 Ian.firstname.lastname@example.org http://giddy.org
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