Prof. Ian Giddy New York University Structured Finance: Restructuring.
Prof. Ian Giddy New York University Asset-Backed Financing.
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Transcript of Prof. Ian Giddy New York University Asset-Backed Financing.
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 2
Asset-Backed Securities:The Typical Structure
FORD (SPONSOR)
SPECIALPURPOSEVEHICLE
LOANS.
ISSUESASSET-BACKEDCERTIFICATES
SALE ORASSIGNMENT
LOANS.
Servicing Agreement
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 3
Example:Ford Credit Owner Trust 1999-A
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 4
The Process
Is the company
ready?
Is the company
ready?
Are the assets
suitable?
Are the assets
suitable?
What pool?What pool?
What legal
structure?
What legal
structure?
What credit
enhancement?
What credit
enhancement?
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 5
Separation of Two Businesses: Origination and Lending
SPONSORINGCOMPANY
SPECIALPURPOSEVEHICLE
ACCOUNTSRECEIVABLE
ACCOUNTSRECEIVABLE
ISSUESASSET-BACKEDCERTIFICATES
SALE ORASSIGNMENT
Asset securitization makes sense when
the assets are worth more outside the
company than within
But what makes them worth more outside?
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 6
Prerequisites to Successful Asset Securitization Market imperfections are present
Investor information about the originators' operations is costly
Agency costs are high, or Issuers are constrained by capital or other
regulations, or where Investors' choices are constrainedGovernment provides explicit or implicit
backing for the issuer's debt.
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 7
For Banks: Capital Requirements
In a perfect world, adding good assets would require little additional capital, since creditors would not see any increase in the bank's risk
But if regulatory capital requirements penalize banks for holding such assets, they should: securitize the good assetsprofit from origination and servicing
In general, regulatory costs or rigidities create an incentive for banks to shrink their balance sheets by securitizing loans
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 8
A Bank’s Capital Savings
Securitization Cost-Benefit Analysis(for a regulated financial institution)
Gain/cost($ millions)
Funding cost savings Two-year bank notes vs pass-though rate
1.1
Upfront costs Underwriting SEC filing, legal fees, etc
(2.6)
Ongoing costs Letter-of-credit fee (0.5)
Capital charge Cost of capital at 25% (15%after tax)
7.7
Net benefit 5.7
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 9
Calculation
Credit Enhancement Calculation
Assets LiabilitiesLoan Portfolio Securities Classes
From A From BB+ From B
A 50 AAA 47.5 52.5 32.8 132.8BB+ 100 AA 0B 100 NR 117.2
250 250
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 10
For Corporations: “Pure Play” Argument
Separate the credit of the assets from the credit of the originator:
Identify and isolate good assets from a company or financial institution
Use those assets as backing for high-quality securities to appeal to investors.
Such separation makes the quality of the asset-backed security independent of the creditworthiness of the originator.
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 11
Sears: Asset-Backed Financing?
SEARS
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 12
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
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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 Corporate Financial Restructuring 14
The Alternative: Synthetic ABS
DB (Originator)
SPECIALPURPOSEVEHICLE
REFERENCE
POOL OF LOANS
(Stay on
balance sheet)
ISSUESASSET-BACKEDCERTIFICATES
CREDIT SWAPAGREEMENT
TOP QUALITYINVESTMENTS
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 15
Finance Co. Ltd(Seller)
FCL 1997-A(Special Purpose Co.)
Investors
Financial GuaranteeProvider
(if required)
Servicing Agreement
Proceeds
Sale of Assets
Proceeds
Asset-BackedSecurities
GuaranteeAgreement
Rating Agency
Top Rating
TrusteeTrust
Agreement
Finance Co.’sCustomers
Hire-PurchaseAgreement
Credit Enhancement: Guarantee Method
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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 GuaranteeProvider
(if required)GuaranteeAgreement
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 17
Atherton Capital(Seller)
Atherton FLF 1998-A(Special Purpose Co.)
Investors
Servicing Agreement
Proceeds
Sale of Assets
Proceeds
Asset-BackedSecurities
Mellon Mortgage(Servicer)
Franchisees(Borrowers)
LoanAgreement
Example:Franchise Loan Securitization
Servicing Advisor
LoanPayments
Class Rating Subordination
A1,A2,A-x AAA 28%B AA 22%C A 16.5%D BBB 12%E BB 8.5%F B 5.5%Issuer balance NR 0%
Class Rating Subordination
A1,A2,A-x AAA 28%B AA 22%C A 16.5%D BBB 12%E BB 8.5%F B 5.5%Issuer balance NR 0%
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 18
Deal documentation
List information requirementsDue diligence &
Meeting with management
Issuer/BankerRequests rating
Pool credit analysisLegal analysisStress testing
Credit enhancementnegotiation
Rating committeePresale reportFinal 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 Corporate Financial Restructuring 19
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”)
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 20
Corporation ACorporation B
Corporation C
SPECIAL PURPOSE VEHICLE“CONDUIT”
Creditenhancement
facilityprovider
Liquidityfacility
provider
Sponsor/administrator
Legal ownerINVESTORS
Trade receivables Trade
receivables Trade receivables
Payments on maturing ABCP
Fees Fees
FeesNominaldividends
Trade Receivable-BackedCommercial Paper (ABCP)
Pool APool B
Pool C
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 21
Example:Ford Credit Owner Trust 1999-A
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 22
Ford
What is the nature and value of the assets?
How strong is the legal structure? Is the collateral sufficient? Would you
recommend purchasing the subordinated tranche?
What could go wrong with this deal? What could go right?
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 23
Ford Structure
Ford Ford 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
Sale
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Ford Credit Auto Owner Trust
What are the economic benefits and costs to Ford in this ABS deal?
What do the underlying assets earn? What rates do the securities pay? Other costs? Who gets the excess spread?
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 25
Ford Credit Auto Owner Trust
Interest cost Underwriting fees Rating agency and other securitization costs Servicing fees Other costs Default losses
….compare with Ford Credit’s alternative
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 26
Corporation or Financial Institution requires additional funds to givecustomers financing or to finance a future revenue stream.
Are funds freely available from banks ?
Does the firm/FI have good, self-liquidatingassets ?
Do the assets have a sufficiently high yieldto cover servicing and other costs ?
Would the assets be worth more (have a cheaper all-in funding cost) if they were
isolated from the company/FI ?
Securitize the assets
Borrow frombanks
Issue equity ormezzanine capital
Get out of thefinancingbusiness
Use assets as collateral for on-balance
sheet debt
No
Yes
Yes
Yes
Yes
No
No
No
The Decision Process
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Ford Structure: Default or Loss?
ReceivablesClass A-1 to A6
Class B
Class C
Class D
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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.
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Ford Structure: Waterfall
Receivables Class A-1 to A6
Class B
Class C
Class D
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Other Deals – Check the Paydown Structure
DVI Receivables Stratford
ABSresearch.com
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 33
Paydown: Waterfall vs Soft Bullet Structure
Copyright ©2002 Ian H. Giddy Corporate Financial Restructuring 34
Implications of Waterfall Upgrades
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.
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.
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 Corporate Financial Restructuring 38
Contact Info
Ian H. Giddy
NYU Stern School of Business
Tel 212-998-0426; Fax 212-995-4233
http://giddy.org