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Prof. Ian GiddyNew York University

Structured Finance:Asset-Backed Securities

Copyright ©2002 Ian H. Giddy Structured Finance 2

Structured Finance

Asset-backed securitization Corporate financial

restructuring Structured financing

techniques


Asset-Backed Securities:The Typical Structure

FORD (SPONSOR)

SPECIALPURPOSEVEHICLE

LOANS.

ISSUESASSET-BACKEDCERTIFICATES

SALE ORASSIGNMENT

LOANS.

Servicing Agreement


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


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


The Alternative: Synthetic ABS

DB (Originator)

SPECIALPURPOSEVEHICLE

REFERENCE

POOL OF LOANS

(Stay on

balance sheet)

ISSUESASSET-BACKEDCERTIFICATES

CREDIT SWAPAGREEMENT

TOP QUALITYINVESTMENTS


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


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


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%


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


Example:Ford Credit Owner Trust 1999-A


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


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”)


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


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?


Case Studies

Evaluate the pool and legal structure in: Belenus Ford


Belenus

What is the nature and value of the assets?

How strong is the legal structure? Is the collateral sufficient? Would you

recommend purchasing the second (B) tranche?

What could go wrong with this deal? What could go right?


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


Ford Structure: Default or Loss?

ReceivablesClass A-1 to A6

Class B

Class C

Class D


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.


Ford Structure: Waterfall

Receivables Class A-1 to A6

Class B

Class C

Class D

Ford Structure: Waterfall


Other Deals – Check the Paydown Structure

DVI Receivables Stratford

ABSresearch.com


Paydown: Waterfall vs Soft Bullet Structure


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.

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