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Dr.
Ian
Gid
dy
NY
U S
tern
Sch
ool o
f Bus
ines
s
New
Yor
k U
nive
rsity
/IDC
Ass
et-B
acke
d S
ecur
ities
II
3Copyright ©2005 Ian H Giddy
Col
late
raliz
ed D
ebt O
blig
atio
nsC
olla
tera
lized
Deb
t Obl
igat
ions
�C
olla
tera
lized
loan
obl
igat
ions
(C
LOs)
�C
olla
tera
lized
bon
d ob
ligat
ions
(C
BO
s)
4Copyright ©2005 Ian H Giddy
Col
late
raliz
ed D
ebt O
blig
atio
nsC
olla
tera
lized
Deb
t Obl
igat
ions
�C
ash
flow
bac
ked
CLO
s an
d C
BO
s�
Mar
ket v
alue
bac
ked
CB
Os
�S
ynth
etic
CLO
s
Sou
rce
: C
om
me
rzb
an
kSt
ruc
ture
d F
ina
nc
e B
iwe
ekl
y o
n a
bsn
et.
ne
tSo
urc
e: b
on
dm
ark
ets
.co
m, R
ese
arc
h Q
ua
rte
rly
5Copyright ©2005 Ian H Giddy
Cas
h F
low
Bac
ked
CLO
sC
ash
Flo
w B
acke
d C
LOs
BA
NK
(S
ELL
ER
)
SP
EC
IAL
PU
RP
OS
EV
EH
ICLE
LOA
NS
ISS
UE
SA
SS
ET
-BA
CK
ED
CE
RT
IFIC
AT
ES
SA
LE O
RA
SS
IGN
ME
NT
LOA
NS
Mot
ivat
ions
:
�F
ree
up c
apita
l
�Lo
wer
cos
t of
fund
ing
�D
istr
esse
d lo
an
arbi
trag
e (3
rd
part
y sp
onso
rs)
Mot
ivat
ions
:
�F
ree
up c
apita
l
�Lo
wer
cos
t of
fund
ing
�D
istr
esse
d lo
an
arbi
trag
e (3
rd
part
y sp
onso
rs)
6Copyright ©2005 Ian H Giddy
Str
uctu
reS
truc
ture
7Copyright ©2005 Ian H Giddy
CLO
Rat
ing
Crit
eria
CLO
Rat
ing
Crit
eria
�In
itial
Rev
iew
�O
rigin
ator
’s c
redi
t eva
luat
ion
syst
em�
Poo
l com
posi
tion
& s
tres
s te
stin
g
�O
n-S
ite D
ue D
ilige
nce
�Le
gal I
nteg
rity
�B
ankr
uptc
y-re
mot
enes
s of
SP
V
�V
alid
ity o
f ass
et tr
ansf
er to
SP
V�
Per
fect
ion
of s
ecur
ity in
tere
sts
in u
nder
lyin
g co
llate
ral
�D
eter
min
ing
Cre
dit E
nhan
cem
ent
8Copyright ©2005 Ian H Giddy
Sou
rce:
Fitc
h,
”Ban
k C
LOs:
an
Ove
rvie
w”
9Copyright ©2005 Ian H Giddy
Cas
h flo
w B
acke
d C
LOs
Cas
h flo
w B
acke
d C
LOs
CR
ED
ITE
NH
AN
CE
ME
NT
SP
VLO
AN
SIn
vest
ors
�S
enio
r-S
ub w
ith
prio
ritie
s of
cas
h flo
ws
�C
ash
rese
rve
acco
unts
�Le
tters
of c
redi
t�
Gua
rant
ees
Cas
hflo
ws
AB
Sflo
ws
10Copyright ©2005 Ian H Giddy
Sen
ior
Sen
ior --
Sub
CLO
Str
uctu
re: E
xam
ples
Sub
CLO
Str
uctu
re: E
xam
ples
Sou
rce
: N
om
ura
CD
O/C
DS
Up
da
te o
n a
bsn
et.
ne
t
11Copyright ©2005 Ian H Giddy
Cas
h F
low
Bac
ked
Cas
h F
low
Bac
ked
CB
Os
CB
Os
SP
EC
IAL
PU
RP
OS
EV
EH
ICLE
ISS
UE
SA
SS
ET
-BA
CK
ED
CE
RT
IFIC
AT
ES
SA
LE
BO
ND
PO
RT
FO
LIO
BO
ND
SM
AN
AG
ERM
otiv
atio
n:
�C
ash
flow
ar
bitr
age
(bon
ds
have
goo
d re
turn
s re
lativ
e to
ris
k, b
ut m
ay
be il
liqui
d)
Mot
ivat
ion:
�C
ash
flow
ar
bitr
age
(bon
ds
have
goo
d re
turn
s re
lativ
e to
ris
k, b
ut m
ay
be il
liqui
d)
13Copyright ©2005 Ian H Giddy
Cas
h F
low
Bac
ked
Cas
h F
low
Bac
ked
CB
Os
CB
Os
MA
NA
GE
R
SP
VB
ON
DS
Inve
stor
s
Col
late
ral c
ash
flow
s m
eet
AB
S in
tere
st &
pr
inci
pal n
eeds
Cas
hflo
ws
AB
Sflo
ws
Sel
ects
por
tfolio
14Copyright ©2005 Ian H Giddy
Mar
ket V
alue
Bac
ked
Mar
ket V
alue
Bac
ked
CB
Os
CB
Os
SP
EC
IAL
PU
RP
OS
EV
EH
ICLE
ISS
UE
SA
SS
ET
-BA
CK
ED
CE
RT
IFIC
AT
ES
SA
LE
BO
ND
PO
RT
FO
LIO
BO
ND
SM
AN
AG
ERM
otiv
atio
n:
�P
rice
arbi
trag
e (b
onds
are
un
derp
riced
, an
d tr
adea
ble)
Mot
ivat
ion:
�P
rice
arbi
trag
e (b
onds
are
un
derp
riced
, an
d tr
adea
ble)
16Copyright ©2005 Ian H Giddy
Mar
ket V
alue
Bac
ked
Mar
ket V
alue
Bac
ked
CB
Os
CB
Os
MA
NA
GE
R
SP
VB
ON
DS
Inve
stor
s
Tra
des
bond
s to
m
eet i
nter
est &
pr
inci
pal n
eeds
Cas
hflo
ws
AB
Sflo
ws
18Copyright ©2005 Ian H Giddy
Rat
ing
Age
ncie
s A
naly
ze P
rice
Vol
atili
ty
Rat
ing
Age
ncie
s A
naly
ze P
rice
Vol
atili
ty
to D
eter
min
e C
E R
equi
rem
ents
to D
eter
min
e C
E R
equi
rem
ents
19Copyright ©2005 Ian H Giddy
Adv
ance
rat
es d
eter
min
e ho
w m
uch
rate
d de
bt c
an b
e is
sued
aga
ins
Adv
ance
rat
es d
eter
min
e ho
w m
uch
rate
d de
bt c
an b
e is
sued
aga
ins t
the
t the
m
arke
t val
ue o
f an
asse
t. m
arke
t val
ue o
f an
asse
t.
20Copyright ©2005 Ian H Giddy
Am
ount
and
Cos
t of D
ebt L
inke
d to
Col
late
ral
Am
ount
and
Cos
t of D
ebt L
inke
d to
Col
late
ral
�M
etho
d: Id
entif
y va
lue
and
cred
it qu
ality
of a
sset
s�
Fin
d ho
w m
uch
of e
ach
debt
ra
ting
can
be is
sued
aga
inst
th
at p
ool o
f ass
ets
Ass
ets
Liab
ilitie
sR
atin
g of
co
mpa
ny's
as
sets
Am
ount
Rat
ing
of
com
pany
's
debt
Am
ount
(Ass
umed
de
faul
t rat
e fr
om F
itch)
BB
+10
0A
AA
52.5
47.5
AA
12.7
34.8
A9.
525
.3B
BB
6.9
18.4
Equ
ity18
.4T
otal
100
100
Sou
rce
s: f
itc
hra
tin
gs.
co
m, se
nio
r-su
b_d
eb
t_st
ruc
ture
.xls
21Copyright ©2005 Ian H Giddy
CLO
Exa
mpl
eC
LO E
xam
ple
Sou
rce
s: s
tan
da
rda
nd
po
ors
.co
m,
22Copyright ©2005 Ian H Giddy
CLO
Exa
mpl
eC
LO E
xam
ple
Sou
rce
s: s
tan
da
rda
nd
po
ors
.co
m,
23Copyright ©2005 Ian H Giddy
Cre
atin
g a
CB
OC
reat
ing
a C
BO
Ass
ets
Liab
ilitie
s
Ass
ign
me
nt:
cre
ate
a $
100 m
illio
n C
DO
th
at
co
nta
ins
the
fo
llow
ing
, e
qu
ally
we
igh
ted
:
2 in
ve
stm
en
t g
rad
e b
on
ds
1 h
igh
yie
ld b
on
d
1 e
me
rgin
g m
ark
et
bo
nd
The
CD
O s
ho
uld
be
fu
nd
ed
with
se
ve
ral t
ran
ch
es
of
ass
et-
ba
cke
d
sec
urit
ies.
It
sho
uld
ha
ve
a f
ina
l ma
turit
y o
f a
bo
ut
5 y
ea
rs, a
nd
be
d
olla
r-d
en
om
ina
ted
24Copyright ©2005 Ian H Giddy
Bon
dsB
onds
Sou
rce
s: f
t.c
om
,
25Copyright ©2005 Ian H Giddy
Cre
atin
g a
CB
OC
reat
ing
a C
BO
Ass
ets
Liab
ilitie
s
Ass
ign
me
nt:
cre
ate
a $
100 m
illio
n C
DO
th
at
co
nta
ins
the
fo
llow
ing
, e
qu
ally
we
igh
ted
:
2 in
ve
stm
en
t g
rad
e b
on
ds
1 h
igh
yie
ld b
on
d
1 e
me
rgin
g m
ark
et
bo
nd
The
CD
O s
ho
uld
be
fu
nd
ed
with
se
ve
ral t
ran
ch
es
of
ass
et-
ba
cke
d
sec
urit
ies.
It
sho
uld
ha
ve
a f
ina
l ma
turit
y o
f a
bo
ut
5 y
ea
rs, a
nd
be
d
olla
r-d
en
om
ina
ted
26Copyright ©2005 Ian H Giddy
Bon
dsB
onds
Sou
rce
s: f
t.c
om
,
27Copyright ©2005 Ian H Giddy
Spr
eads
Spr
eads
Sou
rce
s: b
on
dso
nlin
e.c
om
,
28Copyright ©2005 Ian H Giddy
Mor
e B
onds
Mor
e B
onds So
urc
es:
ft.
co
m,
29Copyright ©2005 Ian H Giddy
Gov
ernm
ent B
onds
Gov
ernm
ent B
onds
Sou
rce
s: f
t.c
om
,
30Copyright ©2005 Ian H Giddy
Spr
eads
Spr
eads
Sou
rce
s: b
on
dso
nlin
e.c
om
,
31Copyright ©2005 Ian H Giddy
Syn
thet
ic A
BS
S
ynth
etic
AB
S
or C
olla
tera
lized
Loa
n N
otes
or C
olla
tera
lized
Loa
n N
otes
�C
LNs
are
SP
V d
ebt b
acke
d by
the
cred
it of
the
selli
ng
bank
(or
bet
ter)
�N
o lo
ans
are
sold
to th
e S
PV
�B
ut p
erfo
rman
ce is
bas
ed o
n th
e pe
rfor
man
ce o
f a
refe
renc
e po
ol o
f loa
ns�
If th
e re
fere
nce
cred
its p
erfo
rm, f
ull d
ebt s
ervi
ce is
mad
e on
th
e C
LN
�If
the
refe
renc
e cr
edits
def
ault,
the
CLN
is d
eem
ed
“def
aulte
d”an
d pa
ymen
t is
halte
d.
32Copyright ©2005 Ian H Giddy
GE
RM
AN
BA
NK
(O
rigin
ator
)
SP
EC
IAL
PU
RP
OS
EV
EH
ICLE
ISS
UE
SA
SS
ET
-BA
CK
ED
CE
RT
IFIC
AT
ES
RE
FE
RE
NC
EP
OO
L O
F LO
AN
S(S
tay
onB
alan
ce S
heet
)
TO
P Q
UA
LITY
INV
ES
TME
NT
S
CR
ED
ITS
WA
PA
GR
EE
ME
NT
Syn
thet
ic A
BS
S
ynth
etic
AB
S
33Copyright ©2005 Ian H Giddy
GE
RM
AN
BA
NK
(O
rigin
ator
)
SP
EC
IAL
PU
RP
OS
EV
EH
ICLE
ISS
UE
SA
SS
ET
-BA
CK
ED
CE
RT
IFIC
AT
ES
RE
FE
RE
NC
EP
OO
L O
F LO
AN
S(S
tay
onB
alan
ce S
heet
)
TO
P Q
UA
LITY
INV
ES
TME
NT
S
EU
RIB
OR
plus
“PR
EM
IUM
”
PR
OT
EC
TIO
N a
gain
stP
OO
L D
EF
AU
LTS
Syn
thet
ic A
BS
S
ynth
etic
AB
S
34Copyright ©2005 Ian H Giddy
Cre
dit D
efau
lt S
wap
s C
redi
t Def
ault
Sw
aps
The
key
dis
tinct
ion
betw
een
a C
redi
t Def
ault
Sw
ap a
nd a
Tot
al R
etur
n S
wap
is th
at th
e fo
rmer
res
ults
in a
con
tinge
nt o
r flo
atin
g pa
ymen
t on
ly fo
llow
ing
a C
redi
t Eve
nt,
whi
le th
e la
tter
resu
lts in
pay
men
ts r
efle
ctin
g ch
ang
es in
the
mar
ket v
alua
tion
of a
sp
ecifi
ed a
sset
in th
e no
rmal
cou
rse
of b
usin
ess.
35Copyright ©2005 Ian H Giddy
Typ
ical
AB
S C
redi
t Def
ault
Sw
ap A
rran
gem
ent
Typ
ical
AB
S C
redi
t Def
ault
Sw
ap A
rran
gem
ent
The
gua
rant
ee:
�P
ledg
e of
a d
epos
it in
the
spon
sor
bank
�P
art o
r al
l of t
hat d
epos
it w
ill b
e fo
rfei
ted
if th
ere
are
pool
loss
es�
“Los
ses
in th
e tr
ansa
ctio
n ar
e de
fined
as
amou
nts
writ
ten
off i
n co
mpl
ianc
e w
ith th
e ba
nk’s
usu
al p
roce
dure
s”
BA
NK
SP
V AB
SR
EF
ER
EN
CE
PO
OL
OF
LOA
NS
Dep
osit
and
cred
it gu
aran
tee
36Copyright ©2005 Ian H Giddy
Cre
dit D
eriv
ativ
es: T
he M
arke
tC
redi
t Der
ivat
ives
: The
Mar
ket
�c
red
ittr
ad
e.c
om
�c
red
ite
x.c
om
37Copyright ©2005 Ian H Giddy
Cre
dit S
wap
s in
Syn
thet
ics:
Dou
bts
Cre
dit S
wap
s in
Syn
thet
ics:
Dou
bts
�P
robl
ems
with
the
colla
tera
l�
Deb
ates
abo
ut “
even
ts o
f def
ault”
�W
orko
uts
and
othe
r pr
e-de
faul
t los
ses
�P
robl
ems
with
the
spon
sor
bank
�O
btai
ning
title
to th
e co
llate
ral
�T
hose
“hi
gh q
ualit
y in
vest
men
ts”
�A
nd a
ll th
ose
swap
s
38Copyright ©2005 Ian H Giddy
Cha
se S
ecur
ed L
oan
Tru
st N
otes
C
hase
Sec
ured
Loa
n T
rust
Not
es
�C
hase
Sec
ured
Loa
n T
rust
(C
SLT
) no
tes
offe
r in
vest
ors
acce
ss to
the
high
-yie
ld b
ank
loan
m
arke
t. O
ne o
f the
attr
activ
e as
pect
s of
this
mar
ket t
o in
vest
ors
is th
at, w
hile
offe
ring
doub
le-d
igit
retu
rns
in m
any
case
s, th
e se
nior
-sec
ured
sta
tus
of b
ank
loan
s ha
s gi
ven
them
a v
ery
stab
le, a
nd
favo
rabl
e, d
efau
lt pe
rcen
tage
ove
r th
e ye
ars.
Thi
s is
a m
arke
t tha
t has
bee
n w
idel
y un
tapp
ed b
y in
stitu
tiona
l inv
esto
rs w
ith o
nly
20 -
25 p
erce
nt o
f the
$25
0 bi
llion
in s
yndi
cate
d le
vera
ged
loan
s ou
tsta
ndin
g he
ld b
y th
is s
ecto
r. T
he C
hase
str
uctu
re u
ses
cred
itde
rivat
ives
to o
ffer
thes
e in
vest
ors
acce
ss to
this
ass
et c
lass
.�
Tak
e, fo
r ex
ampl
e, a
n in
vest
or w
ho is
pro
hibi
ted
from
inve
stin
g in
any
thin
g lo
wer
than
inve
stm
ent
grad
e se
curit
ies.
In th
e C
hase
str
uctu
re, t
he u
nder
lyin
g cr
edit
deriv
ativ
e is
a T
otal
Ret
urn
Sw
ap
betw
een
Cha
se a
nd a
trus
t. C
hase
pay
s th
e tr
ust t
he to
tal r
etur
non
a lo
an p
ortfo
lio o
f $10
0 m
illio
n fo
r ex
ampl
e, w
hich
yie
lds
LIB
OR
plu
s 25
0 ba
sis
poin
ts. I
n ex
chan
ge, C
hase
rec
eive
s LI
BO
R p
lus
100
basi
s po
ints
from
the
trus
t. A
n in
vest
or w
ho p
urch
ases
a tr
anch
eof
the
CS
LT in
the
form
of a
no
te r
ecei
ves
the
sam
e re
turn
on
the
loan
por
tfolio
that
is r
ecei
ved
by th
e tr
ust
from
Cha
se o
n th
e T
RS
. For
this
ret
urn,
the
inve
stor
doe
s no
t put
up
the
tota
l $10
0 m
illio
n as
wou
ld b
e re
quire
d to
pa
rtic
ipat
e in
act
ual l
oan
synd
icat
ion.
Rat
her,
the
inve
stor
pay
s $2
0 m
illio
n fo
r th
e tr
anch
e, w
hich
is
use
d by
the
trus
t to
purc
hase
trea
surie
s to
pos
t as
colla
tera
l aga
inst
the
trus
t's p
aym
ent o
n th
e T
RS
. Whe
n al
l the
cas
h flo
ws
are
brok
en d
own
on th
e tr
ansa
ctio
n,in
clud
ing
the
five
times
le
vera
ge o
f the
$20
mill
ion
for
acce
ss to
the
$100
mill
ion
loan
por
tfolio
plu
s th
e yi
eld
on th
e tr
easu
ries
of 6
per
cent
, the
inve
stor
gen
erat
es a
tota
l yie
ld in
this
exa
mpl
e of
13.
5 pe
rcen
t.�
Dra
w a
dia
gram
to s
how
how
this
is a
chie
ved
39Copyright ©2005 Ian H Giddy
Cha
se S
ecur
ed L
oan
Tru
st N
otes
Cha
se S
ecur
ed L
oan
Tru
st N
otes
CH
AS
ES
PV A
BS
RE
FE
RE
NC
EP
OO
L O
F LO
AN
S$1
00m
T B
onds
$20m
Cre
dit g
uara
ntee
ba
cked
by
the
Tre
asur
y bo
nds
40Copyright ©2005 Ian H Giddy
The
CD
O/C
DS
Mar
ket:
Pric
ing
and
Tra
nsfe
r of
Cre
dit R
isk
The
CD
O/C
DS
Mar
ket:
Pric
ing
and
Tra
nsfe
r of
Cre
dit R
isk
Blo
ombe
rg.c
om
Bon
dson
line.
com
41Copyright ©2005 Ian H Giddy
Pric
ing
Cre
dit R
isk:
Pric
ing
Cre
dit R
isk:
Def
ault
Pro
babi
litie
s an
d R
ecov
ery
Rat
esD
efau
lt P
roba
bilit
ies
and
Rec
over
y R
ates
�E
xam
ple:
Pric
e a
risky
1-y
ear
loan
whe
re p
rob.
of d
efau
lt is
0.7
5%,
reco
very
rat
e is
50%
, and
inte
rest
rat
e is
5%
B
ond
valu
e is
(10
0*0.
9925
+10
0*0.
0075
*0.5
)/(1
+0.0
5)=
94.8
8
Ris
k-fr
ee b
ond
wou
ld b
e w
orth
100
/(1+
0.05
)=95
.24
�W
e ca
n de
fine
and
solv
e fo
r th
e cr
edit
spre
ad, s
:P
=10
0/[(
1+r)
(1+
s)]
Sol
ving
for
s, w
e ge
t 94.
88=
100/
[(1+
.05)
(1+
s)]
s=37
.7bp
Bo
nd
su
rviv
es
(pro
ba
bili
ty=
p-1
)
Inve
sto
r g
ets
$100
Bo
nd
de
fau
lts
(pro
ba
bili
ty=
p)
Inve
sto
r g
ets
$100*R
Bo
nd
va
lue
[100(1
-p)+
100p
R]/
(1+
r)
(R is
th
e r
ec
ove
ry r
ate
)
Sou
rce
: Le
hm
an
, C
red
it D
eriv
ativ
es
Exp
lain
ed
42Copyright ©2005 Ian H Giddy
The
Cre
dit T
riang
leT
he C
redi
t Tria
ngle
The
cre
dit s
pre
ad
Sis
a f
un
ctio
n o
f th
e
pro
ba
bili
ty o
f d
efa
ult P
an
d t
he
re
co
ve
ry r
ate
RSo
urc
e: Le
hm
an
, C
red
it D
eriv
ativ
es
Exp
lain
ed
43Copyright ©2005 Ian H Giddy
Def
ault
Pro
babi
litie
s an
d R
ecov
ery
Rat
es: D
ata
Def
ault
Pro
babi
litie
s an
d R
ecov
ery
Rat
es: D
ata
Source: Moodys
44Copyright ©2005 Ian H Giddy
Leve
rage
d C
DO
(S
uper
Sen
ior
Leve
rage
d C
DO
(S
uper
Sen
ior
Tra
nche
Tra
nche
))
45Copyright ©2005 Ian H Giddy
Pro
mis
es, P
rom
ises
Pro
mis
es, P
rom
ises
46Copyright ©2005 Ian H Giddy
Sup
erS
uper
-- Sen
ior
Sen
ior
47Copyright ©2005 Ian H Giddy
Cas
e S
tudy
: C
ase
Stu
dy:
Ban
k of
Am
eric
a S
YLO
Ban
k of
Am
eric
a S
YLO
�W
hat i
s th
e le
gal s
truc
ture
of t
his
deal
?�
Wha
t are
the
asse
ts?
�W
hat a
re th
e di
ffere
nt c
lass
es o
f sec
uriti
es, a
nd th
eir
term
s?�
How
doe
s th
e un
fund
ed s
uper
-sen
ior
tran
che
wor
k?
(Dra
w a
dia
gram
)
48Copyright ©2005 Ian H Giddy
Syn
thet
ic S
ecur
itiza
tion
of L
ever
aged
Loa
nsS
ynth
etic
Sec
uriti
zatio
n of
Lev
erag
ed L
oans
49Copyright ©2005 Ian H Giddy
Syn
thet
ic S
ecur
itiza
tion
of L
ever
aged
Loa
nsS
ynth
etic
Sec
uriti
zatio
n of
Lev
erag
ed L
oans
50Copyright ©2005 Ian H Giddy
Syn
thet
ic S
ecur
itiza
tion
of L
ever
aged
Loa
nsS
ynth
etic
Sec
uriti
zatio
n of
Lev
erag
ed L
oans
51Copyright ©2005 Ian H Giddy
A B
ank’
s C
hoic
eA
Ban
k’s
Cho
ice
�H
old
the
loan
�S
ell t
he lo
an�
Cre
ate
an S
PV
and
se
curit
ize
the
loan
s�
Cre
ate
an S
PV
and
do
a sy
nthe
tic s
ecur
itiza
tion
�T
rans
fer
the
risk
usin
g cr
edit
defa
ult s
wap
sSo
urc
e:
Co
mm
erz
ba
nk
Str
uc
ture
d F
ina
nc
e B
iwe
ekly
on
ab
sne
t.n
et
52Copyright ©2005 Ian H Giddy
Str
uctu
red
Cre
dit R
isk
Str
uctu
red
Cre
dit R
isk
�Y
our
bank
has
ass
embl
ed a
po
rtfo
lio o
f $10
0 m
illio
n of
A+
, B
BB
+ a
nd B
B+
rat
ed lo
ans.
The
am
ount
s an
d av
erag
e sp
read
s on
th
ese
are
show
n in
the
tabl
e.
�S
how
with
a d
iagr
am h
ow y
ou
coul
d us
e cr
edit
defa
ult s
wap
s to
m
inim
ize
the
cred
it ris
k on
this
po
rtfo
lio, a
nd e
stim
ate
wha
t the
co
st w
ould
be.
�H
ow c
ould
the
bank
do
the
sam
e th
ing
with
syn
thet
ic C
DO
s?
�A
ssum
ing
you
can
fund
the
port
folio
at L
IBO
R, w
hat i
s yo
ur
risk
and
retu
rn?
3M L
+
175b
psA
T&
T lo
ans
Rat
ing
BB
+$5
0 m
illio
n
3M L
+
125b
psT
ime
War
ner
loan
sR
atin
g B
BB
+
$50
mill
ion
3M L
+ 4
5bps
IBM
loan
s
Rat
ing
A+
$100
mill
ion
$92m
fu
ndin
g at
Li
bor
flat
$8m
ca
pita
l
53Copyright ©2005 Ian H Giddy
CD
S S
prea
ds, M
ay 2
005
CD
S S
prea
ds, M
ay 2
005
Source: CDO/CDS Report on absnet.net
54Copyright ©2005 Ian H Giddy
New
Dev
elop
men
ts: C
DO
Rep
acks
New
Dev
elop
men
ts: C
DO
Rep
acks
Sou
rce
: m
oo
dys.
co
m,”
Ra
tin
gC
DO
Re
pa
cks”
55Copyright ©2005 Ian H Giddy
New
Dev
elop
men
ts: C
DO
New
Dev
elop
men
ts: C
DO
22
Sou
rce
: N
om
ura
,”C
DO
s-Sq
ua
red
De
myst
ifie
d”
56Copyright ©2005 Ian H Giddy
Cor
pora
te C
ash
Flo
w F
inan
cing
Cor
pora
te C
ash
Flo
w F
inan
cing
Sec
uriti
zed
Cor
pora
te D
ebt
Ass
et-B
acke
dS
ecur
ities
Seg
rega
ted
Sec
ured
Who
le B
usin
ess
Not
esC
redi
t-Li
nked
Not
es
57Copyright ©2005 Ian H Giddy
Cas
e S
tudy
: C
ase
Stu
dy:
Tra
ins
I PLC
Tra
ins
I PLC
�W
hat a
re th
e un
derly
ing
asse
ts, a
nd w
hy d
o th
ey
need
to b
e fin
ance
d in
this
man
ner?
�W
hat i
s th
e le
gal r
elat
ions
hip
betw
een
the
part
ies
to
the
deal
?�
Wha
t are
the
bene
fits
or r
isks
to th
e bo
rrow
er a
nd
inve
stor
s?
58Copyright ©2005 Ian H Giddy
Inve
stor
sS
elle
r
Tra
ins
Tra
ins
59Copyright ©2005 Ian H Giddy
UB
S
Por
terb
rook
Leas
ing
NIF
TI
Inve
stor
sIn
t& P
rinc.
Int
& P
rinc.
Sw
ap
Tra
inO
pera
ting
Com
pani
es
Ren
tal
paym
ents
Tra
inm
anuf
.co
mpa
nies
Tra
ins
Tra
ins
60Copyright ©2005 Ian H Giddy
Who
le B
usin
ess
Sec
uriti
zatio
nW
hole
Bus
ines
s S
ecur
itiza
tion
�A
sec
uriti
zatio
n w
here
the
cash
flow
s de
rive
not f
rom
th
e re
paym
ent o
f deb
t or
othe
r pr
e-co
ntra
cted
cas
h flo
ws
or r
ecei
vabl
es, b
ut fr
om th
e en
tire
rang
e of
op
erat
ing
reve
nues
gen
erat
ed b
y a
who
le b
usin
ess
(or
a se
greg
ated
par
t of a
larg
er b
usin
ess)
.
61Copyright ©2005 Ian H Giddy
WB
S “
Sec
ured
Loa
n” S
truc
ture
WB
S “
Sec
ured
Loa
n” S
truc
ture
Bus
ines
sG
roup
New
inte
rmed
iate
hold
ing
com
pany
Bor
row
er(o
pera
ting
com
pany
)
Und
erly
ing
busi
ness
ass
ets
Bon
d Is
suer
(SP
V)
Inve
stor
s
Sw
ap p
rovi
der
(if r
equi
red)
Sec
ured
loan
Bon
d
Liqu
idity
faci
lity
prov
ider
s
Sec
urity
trus
tee
62Copyright ©2005 Ian H Giddy
AB
S o
r C
orpo
rate
Deb
t?A
BS
or
Cor
pora
te D
ebt?
SP
ON
SO
R
SP
V
AS
SE
TS
OR
RIG
HT
S
AB
S
CLA
IMS
AS
SE
TS
OR
RIG
HT
S
KE
Y IS
SU
ES
:�
WH
AT
AR
E T
HE
AS
SE
TS
B
EIN
G T
RA
NS
FE
RR
ED
?�
AR
E T
HE
Y ID
EN
TIF
IAB
LE
FIN
AN
CIA
L C
LAIM
S O
N
SP
EC
IFIC
BO
RR
OW
ER
S?
�IS
TH
E P
OO
L A
ME
NA
BLE
T
O S
TA
TIS
TIC
AL
AN
D
HIS
TO
RIC
AL
AN
ALY
SIS
?�
IS IT
S V
ALU
E D
EP
EN
DE
NT
O
N T
HE
SU
CC
ES
S O
F T
HE
S
PO
NS
OR
’S B
US
INE
SS
?
KE
Y IS
SU
ES
:�
WH
AT
AR
E T
HE
AS
SE
TS
B
EIN
G T
RA
NS
FE
RR
ED
?�
AR
E T
HE
Y ID
EN
TIF
IAB
LE
FIN
AN
CIA
L C
LAIM
S O
N
SP
EC
IFIC
BO
RR
OW
ER
S?
�IS
TH
E P
OO
L A
ME
NA
BLE
T
O S
TA
TIS
TIC
AL
AN
D
HIS
TO
RIC
AL
AN
ALY
SIS
?�
IS IT
S V
ALU
E D
EP
EN
DE
NT
O
N T
HE
SU
CC
ES
S O
F T
HE
S
PO
NS
OR
’S B
US
INE
SS
?
63Copyright ©2005 Ian H Giddy
Val
uatio
nV
alua
tion
�E
valu
atio
n of
cre
dit f
acto
rs�
Dis
crim
inan
tana
lysi
s an
d cr
edit-
scor
ing
mod
els
like
Altm
an’s
z-s
core
�O
ptio
n pr
icin
g m
odel
s
67Copyright ©2005 Ian H Giddy
Ian
H. G
iddy
NY
U S
tern
Sch
ool o
f Bus
ines
s
Tel
+1.
646.
808.
0746
; Fax
+1.
206.
984.
4865
ian.
gidd
y@ny
u.ed
u
http
://gi
ddy.
org
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