1. Structured Financing Prof. Ian GIDDY Stern School of Business New York University

2. Copyright ©2003 Ian H. Giddy Structured Finance 2 What is Structured Finance? Tailored financing solutions Financing with hybrid securities Asset-backed securitization Leveraged and acquisition finance

3. Debt? Equity? What kind? Debt? Equity? What kind?

4. Copyright ©2003 Ian H. Giddy Structured Finance 4 When Debt and Equity are Not Enough Value of future cash flows Value of future cash flows Contractual int. & principal No upside Senior claims Control via restrictions Contractual int. & principal No upside Senior claims Control via restrictions AssetsLiabilities Debt Residual payments Upside and downside Residual claims Voting control rights Residual payments Upside and downside Residual claims Voting control rights Equity What if... Claims are inadequate? Returns are inadequate?

5. Copyright ©2003 Ian H. Giddy Structured Finance 5 Equity-Linked Eurobonds Convertible Eurobonds  Korea Tobacco Eurobonds with warrants  Keppel Index-linked Eurobonds  Credit Agricole Indosuez

6. Copyright ©2003 Ian H. Giddy Structured Finance 6 Convertibles Conversion Value Straight Bond Value Market Value Market Premium V a l u e o f C o n v e r t i b l e B o n d ($) 0 Price Per Share of Common Stock

7. Copyright ©2003 Ian H. Giddy Structured Finance 7 Warrants Theoretical Value Market Value Market Premium V a l u e o f W a r a n t ($) 0 Price Per Share of Common Stock ($)

8. Copyright ©2003 Ian H. Giddy Structured Finance 8 Index-Linked PRINCIPAL REPAYMENT

9. Copyright ©2003 Ian H. Giddy Structured Finance 9 Breaking Down a Convertible: Unisys

10. Copyright ©2003 Ian H. Giddy Structured Finance 10 Motivations for Issuing Hybrid Bonds Company has a view There are constraints on what the company can issue The company can arbitrage to save money Always ask: given my goal, is there an alternative way of achieving the same effect (e.g., using derivatives?)

11. Copyright ©2003 Ian H. Giddy Structured Finance 11 Case Study: Banpu Convertible n How did this work? n Why did Banpu use this technique? n Why did investors buy it?

12. Copyright ©2003 Ian H. Giddy Structured Finance 12 Banpu Convertible Huh?

13. Copyright ©2003 Ian H. Giddy Structured Finance 13 Thai Time n 1994 n 1997 n 1999 n 2004

14. Copyright ©2003 Ian H. Giddy Structured Finance 14 Why Use a Hybrid? Motivations for Hybrids Linked to business risk Linked to market risk Cannot hedge with derivatives Driven by investor needs Company hedges Company does not hedge Debt or equity are Not good enough

15. Asset-Backed Securities

16. Copyright ©2003 Ian H. Giddy Structured Finance 16 Asset-Backed Securities: The Typical Structure FORD (SPONSOR) SPECIAL PURPOSE VEHICLE LOANS. ISSUES ASSET-BACKED CERTIFICATES SALE OR ASSIGNMENT LOANS. Servicing Agreement

17. Copyright ©2003 Ian H. Giddy Structured Finance 17 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

18. Copyright ©2003 Ian H. Giddy Structured Finance 18 Case Study: Finance Company Bhd Finance company whose growth is constrained Has pool of automobile receivables Has track record Plans to use this as an ongoing source of financing

19. Copyright ©2003 Ian H. Giddy Structured Finance 19 Finance Co. Ltd (Seller) Finance Co.’s Customers Hire-Purchase Agreement Case Study: Initial Exchanges

20. Copyright ©2003 Ian H. Giddy Structured Finance 20 Finance Co. Ltd (Seller) FCL 1997-A (Special Purpose Co.) Investors Proceeds Finance Co.’s Customers Hire-Purchase Agreement Case Study: Initial Exchanges

21. Copyright ©2003 Ian H. Giddy Structured Finance 21 Finance Co. Ltd (Seller) FCL 1997-A (Special Purpose Co.) Investors Servicing Agreement Proceeds Sale of Assets Proceeds Asset-Backed Securities Trustee Trust Agreement Finance Co.’s Customers Hire-Purchase Agreement Case Study: Initial Exchanges

22. Copyright ©2003 Ian H. Giddy Structured Finance 22 Finance Co. Ltd (Seller) FCL 1997-A (Special Purpose Co.) Investors Servicing Agreement Proceeds Sale of Assets Proceeds Asset-Backed Securities Rating Agency Top Rating Trustee Trust Agreement Finance Co.’s Customers Hire-Purchase Agreement Case Study: Initial Exchanges

23. Copyright ©2003 Ian H. Giddy Structured Finance 23 Finance Co. Ltd (Seller) FCL 1997-A (Special Purpose Co.) Investors Monthly HP Payments Trustee Responsibilities Monthly ABS Payments Servicing Fees Finance Co.’s Customers Hire-Purchase Payments Case Study: Ongoing Payments

24. Copyright ©2003 Ian H. Giddy Structured Finance 24 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

25. Copyright ©2003 Ian H. Giddy Structured Finance 25 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

26. Copyright ©2003 Ian H. Giddy Structured Finance 26 Example: Ford Credit Owner Trust 1999-A

27. Copyright ©2003 Ian H. Giddy Structured Finance 27 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 Sale

28. Copyright ©2003 Ian H. Giddy Structured Finance 28 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

29. Copyright ©2003 Ian H. Giddy Structured Finance 29 Trade Receivable Backed CP Over $500 billion outstanding in US alone Key feature is pooling of different companies’ trade receivables, allowing smaller companies to take advantage of ABS market Need two-tier legal structure – SPV at level of each company’s receivables pool, and at multi-company program (the “conduit”)

30. Copyright ©2003 Ian H. Giddy Structured Finance 30 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

31. Copyright ©2003 Ian H. Giddy Structured Finance 31 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?

32. Copyright ©2003 Ian H. Giddy Structured Finance 32 Korea Asset Funding What is the loan portfolio? What is the legal structure of this deal? What are the assets in the SPV? What is the form of credit enhancement? How does the put option work? Is this a strength or a weakness of the structure? What is the “stress testing” done by Fitch?

33. Copyright ©2003 Ian H. Giddy Structured Finance 33 Korea Asset Funding

34. Copyright ©2003 Ian H. Giddy Structured Finance 34 Korea Asset Funding

35. Leveraged Finance

36. Copyright ©2003 Ian H. Giddy Structured Finance 36 Leveraged Finance n Leveraged buyout? Company has unused debt capacity n Leveraged recapitalization? n Takeover?

37. Copyright ©2003 Ian H. Giddy Structured Finance 37 Typical LBO Sequence Company gets bloated or slack and stock price falls LBO offer made LBO completed Restructuring  Efficiencies  Divestitures  Financial ? years3-9 months5-7 years IPO or sale of company LBO financing lined up

38. Copyright ©2003 Ian H. Giddy Structured Finance 38 M&A and Leverage n Leveraged buyout? Company has unused debt capacity n Leveraged recapitalization? n Takeover?

39. Copyright ©2003 Ian H. Giddy Structured Finance 39 LBO: A Temporary Capital Structure COST OF CAPITAL DEBT RATIO Stage 1: Pre-LBO Stage 4: Debt paydown Stage 2: LBO financing Stage 3: LBO refinancing

40. Copyright ©2003 Ian H. Giddy Structured Finance 40 12-Step Method Evaluating cost of deal Estimating borrowing capacity Estimating cash costs of funding Estimating growth rates of sales, expenses, etc Projecting cash flows (FCFF and FCFE) Projecting debt amortization Calculating terminal value of FCFE and FCFF Estimating costs of capital to find PV Making sense of the deal

41. Copyright ©2003 Ian H. Giddy Structured Finance 41 Cost of the Deal lbocapacity.xls

42. Copyright ©2003 Ian H. Giddy Structured Finance 42 Borrowing Capacity From table lbocapacity.xls

43. Copyright ©2003 Ian H. Giddy Structured Finance 43 Cost of Debt lbocapacity.xls

44. Copyright ©2003 Ian H. Giddy Structured Finance 44 Capital Structure lbocapacity.xls

45. Copyright ©2003 Ian H. Giddy Structured Finance 45 LBO Financing NEWCO Cost of purchasing the business Equity $25 Senior debt $457 What securities? What returns? What investors? Mezzanine

46. Copyright ©2003 Ian H. Giddy Structured Finance 46 Mezzanine Asset-backed or cash flow-backed debt Senior debt Subordinated debt with high yield Subordinated debt with upside participation Subordinated debt with equity option Preferred equity with warrants or conversion options Restricted shares Common stock

47. Copyright ©2003 Ian H. Giddy Structured Finance 47 Case Study: Cap des Biches (B) The LBO Proposal Devise a recommended financing plan GTI (owner) BuyersOther Investors

48. Copyright ©2003 Ian H. Giddy Structured Finance 48 Cap des Biches Friday: Financial Restructuring Ashanti- Bogoso Feng-Shui

49. Copyright ©2003 Ian H. Giddy Structured Finance 49

50. Copyright ©2003 Ian H. Giddy Structured Finance 50 Contact Info Ian H. Giddy NYU Stern School of Business Tel 212-998-0426; Fax 212-995-4233 Ian.giddy@nyu.edu http://giddy.org