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Structured Finance Glossary of Securitization Terms 2003

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Page 1: Structured Finance - isotranslations.com · Standard & Poor’s Structured Finance- Glossary of Securitization Terms 1 A A Notes A tranche of an ABS or MBS issue that is senior to

Structured FinanceGlossary of Securitization Terms

2003

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Introductory Note

This glossary aims to provide a comprehensive list of terms currently used in securitization, with short definitions, for the benefit of investors and professionals with an interest in structured finance. With the market across Europe growing, Standard & Poor's Ratings Services plans to publish translations in other major languages beginning with an Italian edition.

(Editor's note: Any structured finance acronyms not spelt out on first reference are defined in the glossary.)

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1Standard & Poor’s Structured Finance - Glossary of Securitization Terms

AA NotesA tranche of an ABS or MBS issue that is senior to othertranches, such as the class B notes, in credit terms, as wellas in priority of repayment of principal.

Adjustable Rate Mortgage (ARM) LoanA mortgage loan whose interest rate is adjustedperiodically based on a specified index rate.

AdministratorAn agent responsible for managing a CP conduit or anSPE. An administrator's responsibilities may includemaintaining the bank accounts into which paymentsreceived from securitized assets are deposited, makingpayments to the investors using this cash flow, andmonitoring the performance of the securitized assets.

Advance Rate The original principal balance of an auto loan divided byeither the retail or the wholesale value of the vehiclefinanced by the auto loan. The advance rate is the autoloan equivalent of the LTV ratio for a residentialmortgage loan and is a measure of how much equity the

borrower has in the asset that secures the loan. Thehigher the advance rate, the less equity the borrower hasat stake and the less protection is available to the lenderby virtue of the security arrangement.

Adverse SelectionThe process by which the risk profile of an asset pool isassumed to worsen over time because of the presumptionthat those borrowers who are more creditworthy are theones who are more likely to prepay their loans.

Agency SecuritiesSecurities issued by either Ginnie Mae, Fannie Mae, orFreddie Mac that are backed by mortgage loans andenjoy credit protection based on an explicit guaranteefrom the U.S. government in the case of Ginnie Maesecurities or an implicit guarantee from the U.S.government in the case of Fannie Mae and Freddie Macsecurities.

All-in CostThe total cost of a securitization to the issuer or sponsor(including the interest rate paid to investors' underwritingexpenses and other expenses such as legal anddocumentation fees) amortized over the expected averagelife of the issue.

Securitization Terms

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Allocated PercentageThe proportion of a mortgage loan, usually a commercialmortgage loan secured by more than one property, that is"allocated" to a particular property. The proportion isusually calculated by dividing the net operating incomeor net cash flow produced by the one property by thecumulative net operating income or net cash flowproduced by all of the properties that secure the loan; thesum of all of the "allocated percentages" should be100%.

Alternative A LoanA first-lien residential mortgage loan that generallyconforms to traditional "prime" credit guidelines,although the LTV ratio, loan documentation, occupancystatus, property type, or other factor causes the loan notto qualify under standard underwriting programs. Less-than-full documentation is typically the reason forclassifying a loan as "alternative A".

American Depositary Debenture (ADD)A debt instrument that is an obligation of a non-U.S.corporation but that is issued in the U.S. out of a depositfacility for debentures similar to that used for shares ofequity in non-U.S. corporations; ADDs representdebentures on deposit in the issuer's home market.

American Depositary Receipt (ADR)A certificate representing ownership of shares of equity ina non-U.S. corporation. ADRs are quoted and traded inU.S. dollars in the U.S. securities market; the associateddividends are paid to investors in U.S. dollars as well.ADRs were specifically designed to facilitate thepurchase, holding, and sale of non-U.S. securities by U.S.investors, as well as to provide a corporate financevehicle for non-U.S. issuers.

AmortizationThe process whereby the principal amount of a liability isreduced gradually over time. ABS that return principal toinvestors, along with interest, are said to amortize.Amortization is often contrasted with a bullet repaymentin which all principal is repaid at maturity. Scheduledamortization is distinct from prepayment, which isassociated with a repayment of principal made before thedate on which it was scheduled to be paid.

Amortization PeriodA period that may follow the revolving period of atransaction, during which the outstanding balance of therelated securities is partially repaid.

Annual Payment CapThe maximum percentage by which the periodic payment

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3Standard & Poor’s Structured Finance - Glossary of Securitization Terms

of interest and principal due with respect to an ARMloan can be increased in any one year.

Arbitrage CDOA CDO transaction based on assets whose aggregateyield is ãçêÉ than the aggregate yield for which thesecurities issued in connection with the transaction can besold or funded.

Asset-Backed Commercial Paper (ABCP) CP whose principal and interest payments are designed tobe derived from cash flows from an underlying pool ofassets. In the event that CP cannot be reissued in order torepay maturing CP, however, a backstop liquidity facilityis drawn upon to provide cash to repay investors.

Asset-Backed Securities (ABS)Bonds or notes backed by pools of financial assets,typically with predictable income flows, originated bybanks and other credit providers. Examples of such assetsinclude credit card receivables, trade receivables, andauto loans.

AssignmentThe transfer of an interest, right, claim, or property fromone party to another.

Asset-Independent ApproachAn approach to rating synthetic securities under whichthe credit rating depends on the creditworthiness of theswap counterparty, or its guarantor, and does not reflecta credit evaluation of the SPE's other assets.

Asset OriginatorThe party that has originated an asset or group of assetsby extending credit to one or more creditors.

Average LifeA measure of the duration of an investment, based on theaverage length of time required to get back the principalamount invested. The average life is calculated bymultiplying each repayment of principal by the timeelapsed between making the investment and receiving theprincipal repayment, summing the results, and dividingby the total amount invested. The actual average life ofan ABS is dependent on the rate at which the principal ofthe underlying assets is repaid because repayments on theunderlying assets are used to repay the principal balanceof the security. The expected average life of a security canbe calculated assuming a constant prepayment rate withrespect to the underlying assets or a variable prepaymentrate. The expected average life is a useful tool forcomparing an amortizing ABS with other securities.

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BB NotesA subordinated tranche in a senior/junior capital structure.

Backstop FacilityThe agreement of a highly rated entity to make paymentin the event that the entity with the primary obligation tomake the payment is unable to do so.

Balance-Sheet CDOA CDO transaction in which the sponsor securitizesassets that it already owns.

Balloon LoanA loan with respect to which a substantial portion of theoriginal principal balance is due upon the maturity of theloan.

Bank for International Settlements (BIS)An international bank headquartered in Basel,Switzerland, which serves as a forum for monetarycooperation between several European central banks, theBank of Japan, and the U.S. Federal Reserve System.Founded in 1930 to handle the German payment ofWorld War I reparations, it now monitors and collectsdata on international banking activity and promulgatesrules concerning international bank regulation.

Bankruptcy-RemoteThe term applied to an entity that is not likely to have anincentive to commence insolvency proceedings voluntarilyand that is not likely to have an involuntary insolvencyproceeding commenced against it by third-party creditors.

Base RateWith respect to a credit card receivables transaction, thebase rate is the sum of the certificate rate and theservicing fee rate.

Basis Point (bp)One-hundredth of one percentage point (i.e., 1 bp equals0.01%). One basis point is the smallest measure used toquote yields on bills, notes, and bonds.

Basis RiskThe risk arising from a mismatch between the index towhich assets are linked and the index to which therelated liabilities are linked. For example, an investorwhose liabilities are indexed to three-month U.S. dollarLIBOR incurs basis risk if he or she holds floating-ratenotes with interest rates indexed to three-month U.S.Treasury bills.

Billet de TresorieCP issued in the French market.

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5Standard & Poor’s Structured Finance - Glossary of Securitization Terms

Bullet Loan Loan principal is repaid in full with only one singlepayment at maturity.

Bullet MaturityThe date on which the single repayment of the fullprincipal balance of a debt obligation requiring nointerim repayments of principal is due.

CCallableA descriptive term applied to a loan or securities that canbe repaid ahead of schedule at the option of theborrower.

Capital AdequacyThe requirement for a regulated entity (such as a bank orbuilding society) to maintain a minimum level of capitalin proportion to the risk profile of its assets. Bysecuritizing its assets and removing them from its balancesheet without recourse, such an entity may be able toachieve regulatory capital relief because it is no longerrequired to maintain regulatory capital with respect tothe securitized assets.

Capped Floating-Rate NoteA floating-rate note with an upper limit on the coupon

rate. The investor forgoes the possibility of benefitingfrom interest rate movements that would take thecoupon above the cap.

Cash CollateralA form of credit enhancement involving the maintenanceof a reserve fund that can be tapped in the event of creditlosses and subsequent claims by investors.

Cash Collateral Account (CCA) A reserve fund that provides credit support to atransaction. Funds in a CCA are lent to the issuer by athird party, typically an LOC bank, pursuant to a loanagreement.

Cash Flow WaterfallThe rules by which the cash flow available to an issuer,after covering all expenses, is allocated to the debt serviceowed to holders of the various classes of securities issuedin connection with a transaction.

Cash-Out Refinance Mortgage LoanA mortgage loan taken in order to refinance an existingmortgage loan in a situation where the amount of thenew loan exceeds (by more than 1%) the amountrequired to cover repayment of the existing loan, closingcosts, points, and repayment of any outstandingsubordinate mortgage loans. The additional cash can beput to whatever use the borrower chooses.

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Cherry-PickingThe practice of selecting assets from a portfolio based onspecific criteria; the opposite of a sample selected atrandom.

Clean-Up CallAn optional redemption of securities at a point when theunderlying collateral pool has been paid down to 15% orless of its original principal balance and the cost ofservicing the remaining pool of assets has becomeuneconomic; the redemption is accomplished using theproceeds received by the issuing SPE from selling theremaining assets, usually at a price of par, to the serviceror the originator/sponsor of the assets. Such a redemptionalso benefits investors in that it provides assurance thatthey will not be left with a tiny, illiquid fraction of theiroriginal investment.

Clearstream InternationalA subsidiary of Deutsche Borse AG that providesclearing, settlement, and custody services for stocks andbonds traded in European domestic and cross-bordermarkets.

CollateralAssets that have value to both a borrower and a lenderand which the borrower pledges to the lender in

connection with the funds borrowed. The lender can usethe pledged assets to recover some or all of the fundsloaned if the borrower fails to live up to the terms of theloan agreement.

Collateral Interest ClassThe term applied to a subordinate class of securitiesissued in connection with a credit card receivablestransaction, which provides credit enhancement to moresenior classes of securities issued in connection with thesame transaction. The collateral interest is often retainedby the transaction sponsor.

Collateralized Bond Obligation (CBO)A security backed by a pool of corporate bonds.

Collateralized Debt Obligation (CDO)A security backed by a pool of various types of debt,which may include corporate bonds sold in the capitalmarkets, loans made to corporations by institutionallenders, and tranches of securitizations.

Collateralized Loan Obligation (CLO)A security backed by a pool of loans made tocorporations by institutional lenders, usually commercialbanks.

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7Standard & Poor’s Structured Finance - Glossary of Securitization Terms

Collateralized Mortgage Obligation (CMO)A security backed by a pool of mortgage loans or somecombination of residential mortgage loans and agencysecurities. A transaction in which CMOs are issuedusually involves multiple classes of securities havingvarying maturities and coupons.

Combined LTV RatioAn LTV ratio calculated in situations where a propertysecures more than one mortgage loan.

Commercial Mortgage-Backed Securities (CMBS)Securities that are backed by one or more pools ofmortgage loans. CMBS are backed by one or more loanssecured by commercial properties, which may includemultifamily housing complexes, shopping centers,industrial parks, office buildings, and hotels.

Commercial Paper (CP)Short-term promissory notes. The maturity of most CP isless than 270 days, with the most common maturitiesranging from 30 to 50 days or less.

Commingling RiskThe risk that cash belonging to an issuing SPE is mixedwith cash belonging to a third party (for example, theoriginator or servicer) or goes into an account in the

name of a third party in such a way that, in theinsolvency/bankruptcy of the third party, such cashcannot be separately identified or the cash is frozen in theaccounts of the third party.

ConduitA legal entity that purchases assets from several sellersand funds these purchases either through termsecuritizations or through the issuance of ABCP.

Controlled AmortizationA period that may follow the revolving period of atransaction, during which the outstanding balance of therelated securities is partially repaid. A controlledamortization period is usually 12 months in length.

CovenantIn terms of legal documents, a covenant is a promise todo or not to do something stipulated in the relatedagreement (for example, a covenant to supply periodicasset performance information to the trustee).

Credit Default SwapA credit default swap is a contract whereby theprotection seller agrees to pay to the protection buyerthe settlement amount upon the occurrence of certaincredit events. In exchange for this protection, the

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protection buyer will pay the protection seller apremium.

Credit Derivatives Capital market instruments designed to transfer creditrisk from one party to another; such instruments includecredit default swaps, total return swaps, and credit-linkednotes.

Credit EnhancementAn instrument or mechanism that elevates the creditquality of the cash flow stream that one or more assetsare expected to produce above the stream's inherentcredit quality; elements within the structure of asecuritization designed to protect investors from lossesincurred on the underlying assets.

Credit EnhancerA party that agrees to elevate the credit quality ofanother party or a pool of assets by making payments,usually up to a specified amount, in the event that theother party defaults on its payment obligations or thecash flow produced by the pool of assets is less than theamounts contractually required because of defaults by theunderlying obligors.

Credit-Linked NoteA note, payment of which depends on the occurrence orexistence of a credit event or credit measure with respectto a reference entity or pool of assets. For example,payment on a credit-linked note might be dependent onthe level of losses within a reference pool of mortgageloans remaining below a defined percentage of theoriginal pool balance. Because the assets in the referencepool remain on the balance sheet of the originator orowner of the assets, the originator or owner may see theissuance of credit-linked notes as a form of insuranceagainst credit losses related to the reference pool assets.

Credit RiskRisk that a lending party will not be repaid at all or willbe repaid less than the amount owed or will be repaidover a longer time period than was originally agreed.

Cross-CollateralizationA technique for enhancing the protection provided to alender by pledging each of the properties that secures anindividual loan as collateral security for all of the loansmade to the same borrowing entity. Usually seen inconnection with commercial mortgage loans.

Current Delinquency StatusThe delinquency status of a loan as of the current date.

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9Standard & Poor’s Structured Finance - Glossary of Securitization Terms

CUSIP NumberA unique identification number assigned to a stock orbond issuance to facilitate clearing operations; thenumbering system is administered by the Committee onUniform Security Identification Procedures (CUSIP).

DDebentureA certificate of indebtedness in which the terms andconditions under which one party agrees to lend funds toa second party are set forth and the second party agreesto repay the principal amount loaned to it, with orwithout interest; typically, these are used for long-termrather than short-term debt.

Debt Service Coverage Ratio (DSCR)The annual net cash flow produced by an income-generating property divided by the annual debt servicepayments required under the terms of the mortgage loanor loans entered into for the purpose of financing theproperty. The DSCR is usually expressed as a multiple,for example, 2.0 times (x).

Default A failure by one party to a contractual agreement to liveup to its obligations under the agreement; a breach of acontractual agreement.

Defaulted ReceivablesReceivables that, according to the related servicer'scriteria, are uncollectable.

DefeasanceThe setting aside of cash or a portfolio of high-qualityassets that will be used to cover the remaining interestand principal payments due with respect to a debt.

Delinquency Failure to make a payment on a debt obligation by thespecified due date.

Delinquent ReceivablesReceivables with respect to which the related obligors arebehind in making payments and which may, therefore,subsequently be written off as uncollectable.

Depository Trust Company (DTC)A national depository for book-entry securities in theU.S. that records, maintains, and transfers securities for

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participants. DTC participants include securitiesbrokers and dealers, banks, trust companies, andclearing corporations. Indirect access to the DTCsystem is also available to banks, brokers, dealers, andtrust companies that clear through, or maintaincustodial relationship with, a DTC participant.

Due DiligenceThe investigation that a prospective buyer undertakesbefore making a purchase or investment decision or, inthe U.S., that a broker/dealer is required to undertakebefore selling a securities issuance to investors.

EEarly Amortization EventIn certain ABS transactions - such as those backed by creditcard receivables - that operate on a revolving basis, anevent, as defined in the transaction documents, couldtrigger an immediate end to the revolving period and theearly repayment of investor principal. Qualifying eventsusually include (i) bankruptcy of the institution on whichthe transaction depends for newly generated assets orreceivables during the revolving period or (ii) a fall in theyield on the assets or receivables to specified trigger levels.

Early Amortization RiskWith respect to a securitization structured to protectinvestors from having the timing of the repayment oftheir principal investment dictated by the timing of therepayment of the underlying assets, the risk exists thatan early amortization event will occur thereby causingthe protection intended to be built into the structure tobe nullified.

Enforceability OpinionAn opinion of counsel with respect to an agreement tothe effect that the obligations set forth in the agreementwill be legal, valid, and binding on a party or all of theparties to the agreement and that the agreement will beenforceable against that party or parties in accordancewith its terms, subject to certain standard assumptionsand qualifications.

Equitable TransferThe process whereby the beneficial interest in, but notlegal ownership of, an asset is transferred. An equitabletransfer is common in European securitizations as it maybe significantly less expensive to arrange than a legaltransfer.

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Estate in BankruptcyAll of the assets of a debtor that has been adjudicatedbankrupt, less all of the debtor's outstanding obligationsto creditors, customers, and applicable taxing authorities.

Euro Interbank Offered Rate (EURIBOR)The interest rate at which interbank term depositsdenominated in euros are offered by one prime bank inthe euro zone to another prime bank in the euro zone.EURIBOR is established by a panel of about 60European banks. As with LIBOR, there are EURIBORrates for deposits of various maturities.

EuroclearOne of two principal clearing systems in the Eurobondmarket that functions much like the Depository TrustCompany in the U.S. market. Euroclear began operationsin 1968, is located in Brussels, and is managed byMorgan Guaranty Bank.

Event RiskThe risk that an issuer's ability to make debt servicepayments will change because of dramatic unanticipatedchanges in the market environment, such as a naturaldisaster, an industrial accident, a major shift inregulation, a takeover, or a corporate restructuring.

These events cannot be predicted using standard methodsof credit analysis.

Excess Servicing FeeWith respect to a securitization, a portion of the interestcharged to underlying obligors that is not required tocover the interest portion of debt service payments or theregular servicing fee; the difference between the grosscoupon and the sum of the net coupon paid to investorsand the servicing fee.

Expected MaturityThe date as of which securities are expected to be repaidin full based on a specified assumption regarding the rateat which the underlying assets will be repaid.

Extension RiskThe risk that the weighted-average life of a security willbe extended because the underlying collateral is prepaidmore slowly than expected.

External Credit EnhancementCredit support provided to a securitization by a highlyrated third-party.

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FFannie MaeColloquial name for the U.S. Federal National MortgageAssoc.

Fast Pay A descriptive term applied to a security or a transactionstructure that is designed to ensure repayment ofprincipal on an accelerated schedule.

Federal Home Loan Mortgage Corp. (FHLMC or "Freddie Mac") Freddie Mac was created by Congressional charter in1970. It was reconstituted in 1989 as a privatecorporation like Fannie Mae. Freddie Mac is a directcompetitor of Fannie Mae; its guidelines for purchasingloans are very similar to those of Fannie Mae. FreddieMac has two different loan-purchase programs: (i)guarantees provided in connection with the "Gold"program cover timely payment of interest and principaland (ii) guarantees backing standard Freddie Maccertificates cover timely payment of interest and"ultimate" payment of principal. The Freddie Macguarantee does not have the direct support of the U.S.government. Freddie Mac is, however, viewed as havingsuch a strong implicit call on the U.S. government that

Freddie Mac certificates are, like Fannie Mae certificates,treated as 'AAA' investments.

Federal National Mortgage Assoc. (FNMA or "Fannie Mae")Fannie Mae was established in its current form in 1968.Fannie Mae is a quasi-governmental organization: it isowned and managed as a private corporation, and itsstock trades on the New York Stock Exchange, but it issubject to regulation by the U.S. Secretary of Housingand Urban Development and the U.S. Secretary of theTreasury. Fannie Mae buys "conventional" residentialmortgage loans that conform to specific guidelines.Although Fannie Mae pass-through certificates areguaranteed as to timely payment of interest and principal,that guarantee is also only implicitly supported by theU.S. government. Still, the level of commitment isconsidered strong enough that the credit quality ofFannie Mae certificates is regarded as equivalent to'AAA'.

Floating-Rate NotesA class of securities having an interest rate that is notfixed, but typically has a margin above a market index.

Fonds Commun de Créance (FCC)A type of closed-end mutual debt fund, used as a fundingvehicle in French securitizations.

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ForecloseTo take legal proceedings against a debtor that owns apiece of real property that has been mortgaged as securityfor a loan. In a foreclosure, the lender seeks the right tosell the property and to use the proceeds of the sale tosatisfy all amounts owed by the debtor with respect tothe loan.

ForeclosureA proceeding, in or out of court, on the part of a lenderholding a mortgage on real property. The purpose of theproceeding is to seek to enable the lender to sell theproperty and use the proceeds of the sale to satisfy allamounts owed by the owner with respect to the relatedloan.

Freddie MacColloquial name for the U.S. Federal Home LoanMortgage Corp.

GGAAPAcronym for "generally accepted accounting principles",the accounting standards applicable in the U.S.

GearingAn accounting term used to define the debt-to-equityratio of a company. SPEs are typically more highly gearedthan operating companies.

Ginnie MaeColloquial name for the U.S. Government NationalMortgage Assoc.

Government National Mortgage Assoc. (GNMA or "GinnieMae")Ginnie Mae was established in 1968 as a wholly ownedcorporate instrument of the U.S. government. Ginnie Maesecurities are backed by pools of loans that are insured bythe Federal Housing Administration or guaranteed by theVeterans Administration. Technically, Ginnie Mae securitiesare issued by the Ginnie Mae-approved mortgagees thatoriginated the pooled mortgage loans, but these securitiescarry an explicit Ginnie Mae guarantee, covering the timelypayment of interest and principal, which is backed by thefull faith and credit of the U.S. government. As a result,Ginnie Mae securities carry a 'AAA' rating.

Guaranteed Investment Contract (GIC)A deposit account provided by a financial institution thatguarantees a minimum rate of return. Such contractsmitigate interest rate risk.

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HHedge Fund A fund that employs a variety of hedging techniques,such as both buying and shorting stocks according to avaluation model, in order to enhance returns.

HedgingGeneral term used to refer to strategies adopted to offsetinvestment risks. Examples of hedging include the use ofderivative instruments to protect against interest rate orcurrency risks, and investment in assets whose value isexpected to rise faster than inflation to protect againstinflation.

HybridA term used to refer to a whole-business securitization.Such a transaction entails risks that are a hybrid of purecorporate risk and the risks associated with traditionalsecuritizations backed by financial assets or diversifiedpools of corporate credits.

IInterest Rate RiskThe risk that a security's value will change due to a

change in interest rates; for a deposit-taking institution,the risk that the interest earned on assets acquired in alower interest rate environment will not be sufficient toservice the payments required in connection withliabilities incurred in a higher interest rate environment.

Interest Rate SwapA binding agreement between two counterparties toexchange periodic interest payments on a predeterminedprincipal amount, which is referred to as the notionalamount. Typically, one counterparty will pay interest at afixed rate and receive interest at a variable rate, and theopposite will apply to the other counterparty.

Internal Credit EnhancementStructural mechanism or mechanisms built into asecuritization to improve the credit quality of the seniorclasses of securities issued in connection with thetransaction, usually based on channeling asset cash flowin ways that protect those securities from experiencingshortfalls.

Investment GradeWith respect to Standard & Poor's ratings, a long-termcredit rating of 'BBB-' or higher.

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15Standard & Poor’s Structured Finance - Glossary of Securitization Terms

Issue Credit RatingStandard & Poor's opinion of the creditworthiness of anobligor with respect to a specific financial obligation, aspecific class of financial obligations, or a specificfinancial program (including MTN programs and CPprograms). An issue credit rating takes into considerationthe creditworthiness of guarantors, insurers, or otherforms of credit enhancement and also the currency inwhich the obligation or obligations is denominated.

IssuerThe party that has authorized the creation and sale ofsecurities to investors. In the case of a securitization, theissuer is usually set up as an SPE in a jurisdiction thatoffers a favorable legal regime in terms of the ability toachieve bankruptcy-remote status for the issuer and thesecurity arrangements provided for the investors andwhich affords favorable the tax treatment. Commonjurisdictions used for establishing SPEs are England (forU.K. transactions), Italy (for Italian Law 130transactions), Ireland, The Netherlands, Luxemburg,Jersey, Cayman Islands, and the State of Delaware, U.S.(for CP issuing vehicles).

Issuer Credit Rating (ICR)An ICR is Standard & Poor's opinion of an obligor'soverall financial capacity to pay its financial

obligations; essentially, an opinion of an obligor'screditworthiness. An ICR focuses on the obligor'sgeneral capacity and willingness to meet its financialcommitments as they come due. It does not apply toany specific financial obligation, as it does not takeinto account the provisions of specific obligations, thestanding that specific obligations might have in a futurebankruptcy or liquidation of the obligor, statutorypreferences applicable to specific obligations, or thelegality and enforceability of specific obligations. Inaddition, an ICR does not take into account thecreditworthiness of the guarantors, insurers, or otherforms of credit enhancement that might be availablewith respect to a specific obligation.

JJumbo Mortgage LoanA first-lien residential mortgage loan that typicallyconforms to traditional "prime" credit guidelines butwith a balance that exceeds the maximum allowed underprograms sponsored by Ginnie Mae, Fannie Mae, andFreddie Mac.

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LLead ManagerAn investment bank or securities dealer that manages asyndicate of dealer banks and agrees to place a securitiesissuance. Because the lead manager is usually allocated alarger share of the issuance, it has more at stake in termsof the success of the effort to market and place thesecurities. As a result, the lead manager often takes onthe role of chief advisor to the issuer or, in the case of asecuritization, to the seller of the assets that are beingsecuritized. In the case of a securitization, such advisory work usuallyinvolves responsibility for structuring the securities to beissued and liaison with other parties such as ratingagencies, lawyers, and credit enhancers. The lead manager is also closely involved in thepreparation of the transaction's offering circular andadvises its client on the pricing of the related securities.The lead manager may have legal liability as to thecompliance of the issuance with relevant securities lawsand regulations.

Legal Final MaturityThe date by which the principal balance of securitiesmust be repaid. In performing its rating analysis for

securitizations, Standard & Poor's assumes thatrepayment by the legal final maturity must be met usingonly scheduled principal collections on the underlyingassets.

Letter of Credit (LOC)An agreement between a bank and another party underwhich the bank agrees to make funds available to orupon the order of the other party upon receivingnotification.

LienAn encumbrance against a property, which may bevoluntary (as in the case of a mortgage) or involuntary(as in the case of a lien for unpaid property taxes), whichacts as security for amounts owed to the holder of thelien.

Line-of-Credit Mortgage LoanA mortgage loan that is linked to a revolving line ofcredit upon which the borrower can draw at any timeduring the life of the loan. The interest rate charged onthe loan is usually variable, and interest accrues on thebasis of the outstanding balance only, while the undrawnprincipal limit grows at an annual rate.

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Liquidity FacilityA facility, such as an LOC, used to enhance the liquidity(but not the creditworthiness) of securitized assets.

Liquidity ProviderThe provider of a facility that ensures a source of cashwith which to make timely payments of interest andprincipal on securities if there is a temporary shortfall inthe cash flow being generated by the underlying assets. Unlike amounts drawn under a credit enhancementfacility, amounts drawn under a liquidity facility becomea senior obligation of the issuer ranking at least paripassu with the related securities.In the case of an ABCP program, a liquidity facility mustalso cover the risk of a disruption in the CP market orcurrency swap market (if there is a mismatch in currencybetween the assets and the ABCP itself).

Liquidity RiskThe risk that there will be a limited number of buyersinterested in buying an asset, usually a financial asset, ifand when the current owner of the asset wishes to sell it.

Listing AgentThe agent responsible for carrying out the proceduresrequired to have securities listed on the appropriatestock exchange.

Loan-to-Value (LTV) RatioThe balance of a mortgage loan divided by either thevalue of the property financed by the loan or the pricepaid by the borrower to acquire the property. The LTVratio is a measure of how much equity the borrower hasin the asset that secures the loan. The higher the LTVratio, the less equity the borrower has at stake and theless protection is available to the lender by virtue of thesecurity arrangement.

London Interbank Offered Rate (LIBOR)The rate of interest that major international banks inLondon charge each other for borrowings. There areLIBOR rates for deposits of various maturities.

Loss CurveWith respect to a sample of loans or receivables, the losscurve is a graphical representation of the pattern of lossesexperienced over time, based on plotting the defaults orlosses that occur over the life of all loans or receivables inthe sample.

Low-Rise CondominiumA multifamily property of no more than four stories,which is held under an ownership system in whichindividuals own the residential units and the commonareas are owned jointly.

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MMark to MarketTo re-state the value of an asset based on its currentmarket price.

Master ServicerIn a residential mortgage loan context, the masterservicer is the servicing organization responsible foroverseeing the activities of primary servicers. Oversightfunctions typically include: (i) tracking the movement offunds between the primary and master servicer accounts,(ii) monitoring the preparation and delivery of monthlyremittance and servicing reports by the primary servicers,(iii) monitoring the collections process, foreclosureactions, and real estate owned (REO) activities of theprimary servicers, (iv) preparing aggregate reports onservicing activities, (v) distributing funds to trustees ordirectly to investors, and (vi) having the authority toremove and replace a primary servicer. In a commercialmortgage loan context, the master servicer is responsiblefor servicing mortgage loans.

Master TrustAn SPE that issues multiple series of securities backed bya single pool of assets, with the cash flow generated by

the assets being allocated between the series according toa predetermined formula.

Medium-Term Note (MTN)A corporate debt instrument that is continuously offeredover a period of time by an agent of the issuer. Investorscan select from maturity bands of nine months to oneyear, more than one year to 18 months, more than 18months to two years, etc., up to 30 years.

Monoline InsurerAn insurance company that is restricted, by the terms ofits charter, to writing insurance policies related to a singletype of risk. In a financial context, the monoline insurerunconditionally guarantees the repayment of certainsecurities issued in connection with specified types oftransactions, usually a securitization and, in the U.S.,municipal bonds, in return for the payment of a fee orpremium. The financial guarantee provided by a monoline insurertypically allows the insured class or classes of asecuritization to be rated based on the financial guaranteerating on the insurer, with the result that the classes arerated in a much higher category than they would be if thefinancial guarantee were not in place. Monoline coverage may also be used to enhance the

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creditworthiness of certain assets financed via a CPconduit in cases where the unenhanced credit quality ofthe assets being securitized does not meet the minimumrequirements of the CP conduit.

MortgageA security interest in real property given as security forthe repayment of a loan.

Mortgage-Backed Securities (MBS)MBS include all securities whose security for repaymentconsists of a mortgage loan or a pool of mortgage loanssecured on real property. Investors receive payments ofinterest and principal that are derived from paymentsreceived on the underlying mortgage loans.

MortgageeThe lender with respect to a mortgage loan.

MortgagorThe borrower with respect to a mortgage loan.

Multi-Seller ConduitA CP conduit that finances the assets of multiple sellers.One advantage of such arrangements is that they enablesellers to access the CP market indirectly if they want tomaintain anonymity regarding the use of their receivables

as collateral. In addition, sellers maybe able to benefitfrom the lower cost of funds made possible bysecuritization even though the volume of assets that theyoriginate are insufficient to absorb the transaction costsinvolved in a stand-alone securitization.

NNegative AmortizationAn addition to the principal balance of a loan based onthe amount paid periodically by the borrower being lessthan the amount required to cover the amount of interestdue.

Negative Amortization LimitThe maximum amount by which the balance of anegatively amortizing loan can increase before the LTVratio exceeds a pre-defined limit; when this point isreached, the repayment schedule for the loan is recast toensure that the full balance will be repaid by maturity.

Net ReceivablesThe principal balance of receivables without the inclusionof any portion of the interest due with respect to thosereceivables.

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NonperformingTerm used to describe a loan or other receivable withrespect to which the obligor has failed to make at leastthree scheduled payments.

Notional AmountThe balance that is used as the basis for calculating theinterest due with respect to an obligation that either hasno principal balance or has a principal balance that is notthe balance used for calculating interest.

NovationThe substitution of a new legal obligation for an existing obligation.

OObligorThe party that has agreed to be responsible for takingcertain actions under the terms of a contractual agreementbetween that party and other parties; often, the actionsagreed to by the obligor include making payments to otherparties. In the context of a securitization, the term"obligors" is generally the term used in referring to theparties making payments on the assets being securitized;these payments are the source of cash flows from whichinvestors are repaid.

Offering CircularA disclosure document used in marketing a newsecurities issuance to prospective investors. Theoffering circular describes the related transaction,including the characteristics of each class of securitiesto be issued (such as the basis for interest payments,credit rating, expected average life, and priority withrespect to other classes). In the case of a securitization,the offering circular also provides information aboutthe underlying assets, including the type of assets andtheir credit quality. The offering circular is usuallyprepared by the lead manager of the securities issuanceand its legal advisors.

One-Tier TransactionA securitization in which the transferor sells or pledgesassets directly to the issuing SPE and/or the bond trusteeor custodian, as applicable, and thus does not involveseveral transfers of the assets and one or moreintermediate SPEs.

Original LTV RatioThe original amount owed with respect to a mortgageloan divided by the value of the property securing theloan. In the case of residential mortgage loans, "value" isgenerally taken to mean the lesser of the currentappraised value of the property or the price at which the

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borrower purchased the property. In the case ofcommercial mortgage loans, "value" is generally taken tomean the current appraised value of the property.

OriginationThe process of making loans.

OriginatorAn entity that underwrites and makes loans; theobligations arising with respect to such loans areoriginally owed to this entity before the transfer to theSPE.

OvercollateralizationA capital structure in which assets exceed liabilities.Overcollateralization is used as a form of creditenhancement in certain asset-backed transactions. Forexample, an issuance of £75 million of senior securitiesmight be secured by a pool of assets valued at £100million, in which case the overcollateralization for thesenior securities would be 25%.

PPaying AgentA bank of international standing and reputation that has

agreed to be responsible for making payments onsecurities to investors. Payment is usually made via aclearing system. In Europe, this role is often assumed byan entity affiliated with the trustee or the administrator;by contrast, in the U.S., the trustee itself is generallyresponsible for making payments to investors. The mainclearing systems in Europe are Euroclear and ClearstreamInternational.

Payment HistoryA record of a borrower's payments, often with respect toa residential mortgage loan.

Payout EventAn early amortization event.

PerformingTerm used to describe a loan or other receivable withrespect to which the borrower has made all interest andprincipal payments required under the terms of the loanor receivable.

"Pfandbriefe"A debt instrument issued by German mortgage banks andcertain German financial institutions. There are two typesof Pfandbriefe: "Hypothekenpfandbriefe" that banks useto finance their lending activities and "Öffentliche

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Pfandbriefe" that they use to finance their lending topublic sector entities.

Pool FactorThe percentage of the original aggregate principal balanceof a pool of assets that remains outstanding as of aparticular date.

Pooling and Servicing AgreementA contract that documents a transaction in which adefined group of financial assets are aggregated and thatsets forth the agreement between the parties to thecontract as to how the future cash flows to be generatedby those assets will be divided.

Portfolio ManagerAn individual or institution that manages a portfolio ofinvestments; also called a money manager.

PremiumAn amount over and above the regular price paid for anasset, usually as an inducement or incentive; an amountin excess of the nominal or par value of a security.

Prepayment RateThe rate at which the mortgage loans or other receivablesin discrete pools are reported to have been repaid,

expressed as a percentage of the remaining principalbalance of the pool. Prepayment rates are often sensitiveto market rates of interest.

Prepayment Risk The risk that the yield on an investment will be adverselyaffected if some or all of the principal amount invested isrepaid ahead of schedule or more rapidly than expected;more generally, prepayment risk can also be taken toinclude extension risk, which is related to the repaymentof principal more slowly than expected.

PricingThe process of determining the coupon and the pricefor securities prior to their issuance. In general, theprice of any financial instrument should be equal to thepresent value of the cash flows that it is expected toproduce. In the context of a securitization, because thetiming of the cash flows will be affected by the rate atwhich the underlying assets are prepaid, the pricingprocess involves generating expected-case cash flowsusing a prepayment scenario.

Primary MarketA market in which assets are sold by the entity that hasmade those assets.

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Primary ServicerWith respect to a residential mortgage loan, the entitywith primary responsibility for collection of monthlypayments from the borrower, remittance of funds to theowner of the loan or a party acting on behalf of theowner of the loan, maintenance of tax and insuranceescrow accounts, following up on delinquent payments,engaging in loss-mitigation efforts, initiatingforeclosure proceedings when necessary, disposing ofthe mortgaged property following a foreclosure, andproviding periodic reports on the status of the loan tothe owner of the loan or a party acting on behalf of theowner of the loan.

Profit StrippingThe process whereby a company that has sold its assetsin a securitization continues to extract value from thoseassets by siphoning off the profits earned by thesecuritization vehicle, in effect retaining the economicbenefits of ownership of the securitized assets.

Protection BuyerIn a transaction such as a credit default swap, the partytransferring the credit risk associated with certain assetsto another party in return for the payment of what istypically an up-front premium.

Protection SellerIn a transaction such as a credit default swap, the partythat accepts the credit risk associated with certain assets.To the extent that losses are incurred on the assets inexcess of a specified amount, the protection seller makescredit protection payments to the protection buyer.

100% PSAThe benchmark mortgage prepayment scenario. Underthis scenario, the monthly prepayment rate is assumed tobe 0.2% per year in the first month after issuance and toincrease by 20 bps per year each month for the next 28months. Beginning in the 30th month after issuance, themonthly prepayment rate is assumed to level off at 6%per year and to remain at that level for the life of themortgage pool to which the scenario is being applied.

200% PSAA prepayment scenario in which prepayments areassumed to be made at speeds that are two times as fastas under the benchmark mortgage prepayment scenario.Under the 200% PSA scenario, the monthly prepaymentrate is assumed to be 0.4% per year in the first monthafter issuance and to increase by 40 bps per year eachmonth for the next 28 months. Beginning in the 30thmonth after issuance, the monthly prepayment rate isassumed to level off at 12% per year and to remain at

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that level for the life of the mortgage pool to which thescenario is being applied.

RRated SecuritiesSecurities to which an issue credit rating has beenassigned by a rating agency.

ReceivablesGeneral term referring to principal- and interest-relatedcash flows that are generated by an asset and are payableto (and hence receivable by) the owner of the asset.

Reinvestment RiskThe risk that the yield on an investment will be adverselyaffected if the interest rate at which interim cash flowscan be reinvested is lower than expected.

Representations and WarrantiesClauses in an agreement in which one or more parties tothe agreement confirm certain factual matters and agreethat, in the event that those statements of fact areincorrect, they will take steps to ensure that thestatements are correct or otherwise compensate the otherparties to the agreement because the statements are not

correct. In the context of a securitization, representationand warranty clauses usually cover the condition andquality of the assets at the time of their transfer from theoriginator to the SPE or an intermediate transferor; theclauses also specify the remedies available to the SPE orthe intermediate transferor in the event that any of therepresentations are subsequently found to have beenuntrue.

Reserve AccountA funded account available for use by an SPE for one ormore specified purposes. A reserve account is often usedas a form of credit enhancement. Some reserve accountsare also known as "spread accounts". Virtually allreserve accounts are at least partially funded at the startof the related transactions, but many are designed to bebuilt up over time using the excess cash flow that isavailable after making payments to investors.

Residential Mortgage-Backed Securities (RMBS)RMBS are the most fundamental form of securitization.These securities involve the issuance of debt, secured by ahomogenous pool of mortgage loans that have beensecured on residential properties.

Resolution Trust Corp. (RTC)An arm of the U.S. government established to liquidate

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the assets of thrift savings and loan institutions that failedin the late 1980s.

Reverse Mortgage LoanA nonrecourse residential mortgage loan that requires norepayment for as long as the borrower uses the propertysecuring the loan as his or her principal residence.

Revolving PeriodThe period during which newly originated loans or otherreceivables may be added to the asset pool of a revolvingtransaction.

Risk-Asset RatioThe ratio, as stipulated by the Bank for InternationalSettlements' (BIS) capital adequacy rules, that defines theminimum amount of capital that a regulated entity musthold against a unit of assets. The ratio varies accordingto the perceived risk of the asset - commercial mortgageloans have a ratio of 1.0 (i.e., the full amount of the BISminimum is required) whereas residential mortgages areof a lesser risk and therefore require 50% of theminimum stipulated capital (i.e., they have a risk-assetratio of 0.5).

Risk-WeightingThe practice of classifying assets on the basis of the

degree of risk that they entail.

Risk-Weighting BucketA risk-weighting category that is defined as includingassets that involve a similar degree of risk.

Rule 144AAn SEC rule providing an exemption to the SECregistration requirements of the U.S. Securities Act of 1933.Effectively, Rule 144A permits qualified institutional buyersto trade privately placed securities without satisfying certainholding period requirements, thereby substantiallyincreasing the liquidity of such securities.

SScheduled InterestThe amount of interest owed at the end of the currentperiod.

Scheduled PrincipalThe amount of principal scheduled to be repaid at theend of the current period.

"Schuldschein" or "Schuldscheindarlehen"Loans made in the domestic German market that areevidenced by a promissory note.

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SeasoningDescriptive term used to refer to the age of an asset beingsecuritized; useful as an indication of how long theobligor has been making payments and satisfying itsother obligations with respect to the asset prior to itssecuritization.

Secondary Market A market in which existing securities are re-traded (asopposed to a primary market in which assets areoriginally sold by the entity that made those assets);usually, these securities are traded among investorsthrough an intermediary, such as an organized exchangelike the NYSE, Amex, and Nasdaq.

Secondary Mortgage MarketMarket for the buying, selling, and trading of individualmortgage loans and MBS.

Second-Lien Mortgage LoanA loan secured by a mortgage or trust deed, the lien ofwhich is junior to the lien of another mortgage or trustdeed.

Secured DebtBorrowing that is made, in part, on the basis of securitypledged by the borrower to the lender.

Secured LoanA type of secured debt in the form of a loan.

Securities and Exchange Commission (SEC)An agency of the U.S. government which is empoweredto issue regulations and to enforce provisions of federalsecurities laws and its own regulations, includingregulations governing the disclosure of informationprovided in connection with offering securities for sale tothe public; also responsible for regulating the trading ofthese securities.

SecuritizationAn issuance of securities backed by specific assets.

SecurityAssets that have value to both a borrower and a lenderand that the borrower pledges to the lender to ensurethat the borrower will live up to its obligations under aloan agreement between the two; the lender can use theassets to recover some or all of the funds owed by theborrower if the borrower defaults.

Senior/JuniorCommon structure of securitizations that provides creditenhancement to one or more classes of securities byranking them ahead of (senior to) other (junior) classes of

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securities. In such a relationship, the senior classes areoften called the class A notes and the junior (orsubordinated) classes are called the class B notes.

ServicerThe organization that is responsible for collecting loanpayments from individual borrowers and for remittingthe aggregate amounts received to the owner or ownersof the loans.

Special-Purpose Entity (SPE)A bankruptcy-remote SPE (whether in the form of acorporation, partnership, trust, limited liability company,or other form) that satisfies Standard & Poor's special-purpose criteria.

SponsorThe entity that sponsors a securitization, either because itwas the originator of the assets that are being securitizedor because it owned those assets immediately prior totheir securitization.

Stated MaturityThe final date on which a security must be repaid toavoid an event of default. In the context of asecuritization, the stated maturity is calculated assumingthat there are no prepayments and that the remaining

term to maturity of the underlying assets is as long aspossible. The stated maturity of securities issued inconnection with securitizations is stipulated for legal andregulatory reasons and has little relevance for investmentanalysis (see also Expected Maturity and Average Life).

Static PoolA pool of assets made up of assets originated only duringa finite period of time, usually a month or a quarter.

Stress TestingThe process used by Standard & Poor's to evaluatewhether the assets that will form the collateral for asecuritization are likely to produce sufficient cash flowsunder varying stressful economic scenarios to makeprincipal and interest payments due on the relatedsecurities. The scenarios generally include a "worst case"and provide an indication of whether the proposedstructure and level of credit enhancement is sufficient toachieve a particular credit rating for some or all of thevarious tranches issued in connection with thetransaction. (See also WAFF and WALS.)

Structured FinanceA type of financing in which the credit quality of the debtis assumed to be based on a direct guarantee from acreditworthy entity or on the credit quality of the

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debtor's assets, with or without credit enhancement,rather than on the financial strength of the debtor itself.

Structured Investment Vehicle (SIV)A type of SPE that funds the purchase of its assets, whichconsist primarily of highly rated securities, through theissuance of both CP and MTNs. In the event of a defaultby a SIV, its pool of assets may need to be liquidated;therefore, Standard & Poor's rating on a SIV reflects therisks associated with potential credit deterioration in theportfolio and market value risks associated with sellingthe assets.

Structuring BankThe investment bank responsible for co-ordinating theexecution of a securitization with respect to theoriginator/client, various law firms, rating agencies, andother third parties. Typically, the structuring bankperforms a due diligence exercise with respect to theassets to be securitized and the capacity of the servicer.This exercise includes the identification of historicalinformation and often an asset audit. The structuringbank is also responsible for developing the legal structureof the transaction, which must be documented, and foridentifying and resolving accounting and tax issues. In the case of a public issue, the structuring bank

oversees the preparation of an information memorandumor offering circular to be used for the offering and listingof the related securities. The structuring bank ensuresthat the transaction complies with local regulatoryrequirements, if any (such as approvals by any relevantbank commission or listing authority).

Subordinated Class A class of securities with rights that are subordinate tothe rights of other classes of securities issued inconnection with the same transaction; subordinationusually relates to the rights of holders of the securitiesto receive promised debt service payments, particularlyin situations in which there is not sufficient cash flowto pay promised amounts to the holders of all classes ofsecurities, but may it also be related to the noteholder'sright to vote on issues related to the operation of thetransaction.

Subordinated DebtDebt that is ranked junior to other debt. Subordinateddebt is usually paid after amounts currently due (or pastdue) to holders of senior debt before paying amountscurrently due (or past due) to holders of the subordinateddebt.

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Subprime Mortgage LoanA first- or second-lien residential mortgage loan made toa borrower who has a history of delinquency or othercredit problems.

SubrogationThe succession by one party, often an insurer, to anotherparty's legal right to collect a debt from or enforce aclaim against a third party.

SwapAn agreement pursuant to which two counterpartiesagree to exchange one cash flow stream for another.These can include interest-rate swaps, currency swaps, orswaps to change the maturities or yields of a bondportfolio.

Swap ProviderThe party that writes a swap contract. Swaps are oftenused in securitizations to hedge mismatches between theassets and the securities. Such mismatches may relate tointerest type (fixed vs. floating), interest index, currency,tenor, or a combination thereof. Since the swap counterparty is entering into a transactionwith an SPE, it has no recourse of any value beyond theassets securing the transaction to cover potentialbreakage costs or unexpected expenses resulting from

noncommercial risks (for example, the imposition ofwithholding tax). Standard & Poor's will not allow lossessuffered due to these events to be made good ahead ofpayments to investors. Complex rules are required to beobserved to produce rating-compliant swaps both as todocumentation issues and also the swap provider's rating. It is not unusual for the swap provider to enter into aback-to-back arrangement with the originator so that theswap provider "hedges out" its exposure. This involvesthe swap provider entering into an agreement with theoriginator who previously hedged the assets on its ownbalance sheet (subject to prior acceptance of auditors). Ifno back-to-back arrangement is obtained, then anadditional risk premium may be charged by the swapprovider to take into account the cost of hedging itsposition under the swap.

Synthetic SecuritiesSecurities that are designed to modify the cash flowsgenerated by underlying asset securities and that are ratedbased primarily on the creditworthiness of the assetsecurities and currency or interest rate swaps, or othersimilar agreements.

Synthetic CDOA CDO transaction in which the transfer of risk is

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effected through the use of a credit derivative as opposedto a true sale of the assets.

TThriftA U.S. financial institution, of which the most commonare savings and loan associations and savings banks.Traditionally, these regulated bodies provide residentialmortgage loans and consumer loans, operating in asimilar way to building societies in the U.K.

Trigger EventWith respect to a securitization, the occurrence of anevent which indicates that the financial condition of theissuer or some other party associated with the transactionis deteriorating; typically, such events are defined in thetransaction documents, as are the changes to thetransaction structure and/or priority of payments that aremandated following the occurrence of such an event.

Trophy AssetA large commercial property that enjoys a high profile asa result of some combination of prestigious location,highly visible owners, prominent tenants, and oftenstriking design.

True Sale OpinionWith respect to a securitization, an opinion of counsel tothe effect that the assets that are being securitized havebeen transferred from the originator to the issuing SPE ina manner that is opposable against the originator, anycreditors of the originator, and any bankruptcy officer ofthe originator, and that the assets that have beentransferred will not form part of the bankruptcy estate ofthe originator or be subject to any applicable automaticstay or moratorium provisions.

TrusteeA third party, often a specialist trust corporation or partof a bank, appointed to act on behalf of investors. In thecase of a securitization, the trustee is entrusted withresponsibility for reaching certain key decisions that mayarise during the life of the transaction. The role of the trustee may also include holding securityover the securitized assets and control over cash flows.It is often a requirement of listing ABS that anindependent trustee be appointed.Trustees receive regular reports on the performance of theunderlying assets in order to check whether, for instance,cash flow procedures are being followed.Subject to appropriate indemnity and other protections,the trustee is also typically responsible for finding a

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replacement servicer when necessary, taking up legalproceedings on behalf of the investors, and, as the casemay be, for selling the assets in order to repay investors.To enable the trustee to perform its duties and to provideadequate remuneration, it receives a fee paid senior to allother expenses and a senior ranking indemnity to coverall unexpected costs and expenses.

UUnderwriterAny party that takes on risk. In the context of the capitalmarkets, a securities dealer that commits to purchasingall or part of a securities issuance at a specified price. Theexistence of such a commitment gives the issuer certaintythat the securities will be placed and at what price. Thus,the underwriter assumes the market risk of placing thenewly issued securities with investors, in return for whichit charges an underwriting fee.

WWeighted-Average Cost of Funds The weighted-average rate of return that an issuer mustoffer to investors for a combination of borrowed funds

and equity investments. Also referred to as the"weighted-average cost of capital".

Weighted-Average Coupon (WAC)The "average" interest rate for a group of loans orsecurities, calculated by multiplying the couponapplicable to each loan or security in the group by afraction, the numerator of which is the outstandingprincipal balance of the related loan or security and thedenominator of which is the outstanding principalbalance of the entire group of loans or securities.

Weighted-Average Foreclosure Frequency (WAFF)The estimated percentage of assets in a securitizationpool that will go into default under an economic scenariodesigned to test whether the cash flow that is expected tobe generated by the pool plus available creditenhancement will be sufficient to repay all securities ratedat a certain rating category and higher. The WAFF is usedin conjunction with the WALS to determine the expectedlevel of losses at different rating categories.

Weighted-Average Loss Severity (WALS)The average loss that is expected to be incurred in theevent that any one asset in a securitization pool goes intodefault, expressed as a percentage of outstandingprincipal balance of the asset as of the date of the default.

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The expected loss is predicated on assumptions about thepotential decline in the market value of collateral thatmay secure the asset. The WALS is used in conjunctionwith the WAFF to determine the expected level of lossesat different rating categories.

Weighted-Average Maturity (WAM)A measure of the remaining term to maturity of a groupof loans, calculated by multiplying the remaining monthsto maturity of each loan in the group by a fraction, thenumerator of which is the outstanding principal balanceof the related loan and the denominator of which is theoutstanding principal balance of the entire group ofloans.

Whole Business SecuritizationA whole-business securitization or corporatesecuritization refers to the issuance of bonds backed by acompany's cash flow generating assets and/or itsinventory. In the event of bankruptcy proceedings or thecompany's insolvency, the security may have been legallyisolated in favor of the holders of the notes and might bemanaged by a backup operator, thereby prolonging thesecurity's cash flow generating capacity in favor of thenoteholders. When adequate enhancements to thesecuritized debt structure have been put in place,

securitization can achieve a higher rating on and longerterm of the securitized debt than a company's secured orunsecured corporate debt.

32 Standard & Poor’s Structured Finance - Glossary of Securitization Terms

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