AssetBacked Financing Prof Ian Giddy New York University
![Asset-Backed Financing Prof. Ian Giddy New York University Asset-Backed Financing Prof. Ian Giddy New York University](https://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-1.jpg)
Asset-Backed Financing Prof. Ian Giddy New York University
![Asset-Backed Securities: The Typical Structure FORD (SPONSOR) LOANS. Servicing Agreement SALE OR ASSIGNMENT SPECIAL Asset-Backed Securities: The Typical Structure FORD (SPONSOR) LOANS. Servicing Agreement SALE OR ASSIGNMENT SPECIAL](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-2.jpg)
Asset-Backed Securities: The Typical Structure FORD (SPONSOR) LOANS. Servicing Agreement SALE OR ASSIGNMENT SPECIAL PURPOSE VEHICLE LOANS. Copyright © 2002 Ian H. Giddy ISSUES ASSET-BACKED CERTIFICATES Corporate Financial Restructuring 2
![Example: Ford Credit Owner Trust 1999 -A Copyright © 2002 Ian H. Giddy Corporate Example: Ford Credit Owner Trust 1999 -A Copyright © 2002 Ian H. Giddy Corporate](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-3.jpg)
Example: Ford Credit Owner Trust 1999 -A Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 3
![The Process Is the company ready? Are the assets suitable? What pool? What legal The Process Is the company ready? Are the assets suitable? What pool? What legal](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-4.jpg)
The Process Is the company ready? Are the assets suitable? What pool? What legal structure? What credit enhancement? Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 4
![Separation of Two Businesses: Origination and Lending Asset securitization makes sense when the assets Separation of Two Businesses: Origination and Lending Asset securitization makes sense when the assets](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-5.jpg)
Separation of Two Businesses: Origination and Lending 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 5
![Prerequisites to Successful Asset Securitization l Market imperfections are present Investor information about the Prerequisites to Successful Asset Securitization l Market imperfections are present Investor information about the](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-6.jpg)
Prerequisites to Successful Asset Securitization l Market imperfections are present Investor information about the originators' operations is costly u. Agency costs are high, or u. Issuers are constrained by capital or other regulations, or where u. Investors' choices are constrained u. Government provides explicit or implicit backing for the issuer's debt. u Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 6
![For Banks: Capital Requirements l l l In a perfect world, adding good assets For Banks: Capital Requirements l l l In a perfect world, adding good assets](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-7.jpg)
For Banks: Capital Requirements l l l 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: usecuritize the good assets uprofit 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 7
![A Bank’s Capital Savings Securitization Cost-Benefit Analysis (for a regulated financial institution) Funding cost A Bank’s Capital Savings Securitization Cost-Benefit Analysis (for a regulated financial institution) Funding cost](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-8.jpg)
A Bank’s Capital Savings Securitization Cost-Benefit Analysis (for a regulated financial institution) Funding cost savings Gain/cost ($ millions) Two-year bank notes vs pass- 1. 1 though rate 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 Copyright © 2002 Ian H. Giddy 5. 7 Corporate Financial Restructuring 8
![Calculation Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 9 Calculation Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 9](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-9.jpg)
Calculation Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 9
![For Corporations: “Pure Play” Argument Separate the credit of the assets from the credit For Corporations: “Pure Play” Argument Separate the credit of the assets from the credit](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-10.jpg)
For Corporations: “Pure Play” Argument Separate the credit of the assets from the credit of the originator: l Identify and isolate good assets from a company or financial institution l Use those assets as backing for high-quality securities to appeal to investors. l 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 10
![Sears: Asset-Backed Financing? SEARS Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 11 Sears: Asset-Backed Financing? SEARS Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 11](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-11.jpg)
Sears: Asset-Backed Financing? SEARS Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 11
![Legal Aspects L A G LE q Goal: Credit quality must be solely based Legal Aspects L A G LE q Goal: Credit quality must be solely based](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-12.jpg)
Legal Aspects L A G LE q 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 q 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. Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 12
![Three conditions enable the separation AL G E of the assets and the originator Three conditions enable the separation AL G E of the assets and the originator](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-13.jpg)
Three conditions enable the separation AL G E of the assets and the originator L 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. q The assets must be owned by a specialpurpose corporation, whose ownership of the sold assets is likely to survive bankruptcy of the seller. q The special-purpose vehicle that owns the assets must be independent q Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 13
![The Alternative: Synthetic ABS DB (Originator) REFERENCE POOL OF LOANS (Stay on balance sheet) The Alternative: Synthetic ABS DB (Originator) REFERENCE POOL OF LOANS (Stay on balance sheet)](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-14.jpg)
The Alternative: Synthetic ABS DB (Originator) REFERENCE POOL OF LOANS (Stay on balance sheet) CREDIT SWAP AGREEMENT SPECIAL PURPOSE VEHICLE TOP QUALITY INVESTMENTS Copyright © 2002 Ian H. Giddy ISSUES ASSET-BACKED CERTIFICATES Corporate Financial Restructuring 14
![Credit Enhancement: Guarantee Method Finance Co. ’s Customers Hire-Purchase Agreement Finance Co. Ltd (Seller) Credit Enhancement: Guarantee Method Finance Co. ’s Customers Hire-Purchase Agreement Finance Co. Ltd (Seller)](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-15.jpg)
Credit Enhancement: Guarantee Method Finance Co. ’s Customers Hire-Purchase Agreement Finance Co. Ltd (Seller) Rating Agency Top Rating Servicing Agreement Proceeds FCL 1997 -A (Special Purpose Co. ) Sale of Assets Trustee Copyright © 2002 Ian H. Giddy Trust Agreement Proceeds Investors Asset-Backed Securities Guarantee Agreement Financial Guarantee Provider (if required) Corporate Financial Restructuring 15
![Credit Enhancement: An Alternative Approach Rating Agency Top Rating Senior Lower Rating Finance Co. Credit Enhancement: An Alternative Approach Rating Agency Top Rating Senior Lower Rating Finance Co.](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-16.jpg)
Credit Enhancement: An Alternative Approach Rating Agency Top Rating Senior Lower Rating Finance Co. Ltd (Seller) Proceeds FCL 1997 -A (Special Purpose Co. ) Subordinated Sale of Assets No Rating More Subordinated Guarantee Agreement Copyright © 2002 Ian H. Giddy Financial Guarantee Provider (if required) Corporate Financial Restructuring 16
![Example: Franchise Loan Securitization Franchisees (Borrowers) Loan Agreement Loan Payments Atherton Capital (Seller) Proceeds Example: Franchise Loan Securitization Franchisees (Borrowers) Loan Agreement Loan Payments Atherton Capital (Seller) Proceeds](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-17.jpg)
Example: Franchise Loan Securitization Franchisees (Borrowers) Loan Agreement Loan Payments Atherton Capital (Seller) Proceeds Atherton FLF 1998 -A (Special Purpose Co. ) Sale of Assets Servicing Advisor Mellon Mortgage (Servicer) Copyright © 2002 Ian H. Giddy Proceeds Investors Asset-Backed Securities Servicing Agreement Corporate Financial Restructuring 17
![Rating Process Issuer/Banker Requests rating List information requirements Due diligence & Meeting with management Rating Process Issuer/Banker Requests rating List information requirements Due diligence & Meeting with management](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-18.jpg)
Rating Process Issuer/Banker Requests rating List information requirements Due diligence & Meeting with management Pool credit analysis Legal analysis Stress testing Credit enhancement negotiation Deal documentation “Rating CLOs” (Fitch) on Workshop Website giddy. org/abs-hypo. htm Copyright © 2002 Ian H. Giddy Rating committee Presale report Final report Surveillance Corporate Financial Restructuring 18
![Trade Receivable Backed CP Over $500 billion outstanding in US alone l Key feature Trade Receivable Backed CP Over $500 billion outstanding in US alone l Key feature](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-19.jpg)
Trade Receivable Backed CP Over $500 billion outstanding in US alone l Key feature is pooling of different companies’ trade receivables, allowing smaller companies to take advantage of ABS market l Need two-tier legal structure – SPV at level of each company’s receivables pool, and at multi-company program (the “conduit”) l Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 19
![Trade Receivable-Backed Commercial Paper (ABCP) Corporation A Trade receivables Pool A Credit enhancement facility Trade Receivable-Backed Commercial Paper (ABCP) Corporation A Trade receivables Pool A Credit enhancement facility](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-20.jpg)
Trade Receivable-Backed Commercial Paper (ABCP) Corporation A Trade receivables Pool A Credit enhancement facility provider Fees Corporation C Trade receivables Pool B SPECIAL PURPOSE VEHICLE “CONDUIT” Fees Sponsor/ administrator Copyright © 2002 Ian H. Giddy Corporation B Payments on maturing ABCP INVESTORS Pool C Fees Liquidity facility provider Nominal dividends Legal owner Corporate Financial Restructuring 20
![Example: Ford Credit Owner Trust 1999 -A Copyright © 2002 Ian H. Giddy Corporate Example: Ford Credit Owner Trust 1999 -A Copyright © 2002 Ian H. Giddy Corporate](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-21.jpg)
Example: Ford Credit Owner Trust 1999 -A Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 21
![Ford What is the nature and value of the assets? l How strong is Ford What is the nature and value of the assets? l How strong is](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-22.jpg)
Ford What is the nature and value of the assets? l How strong is the legal structure? l Is the collateral sufficient? Would you recommend purchasing the subordinated tranche? l What could go wrong with this deal? What could go right? l Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 22
![Ford Structure Ford Motor Credit Sale Class A-5 and A-6 Ford Credit Auto Rec. Ford Structure Ford Motor Credit Sale Class A-5 and A-6 Ford Credit Auto Rec.](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-23.jpg)
Ford Structure Ford Motor Credit Sale Class A-5 and A-6 Ford Credit Auto Rec. Two LP Sale Ford Credit Auto Owner Trust Class A-1 to A 6 Receivables Class B Class D Class C Class D Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 23
![Ford Credit Auto Owner Trust What are the economic benefits and costs to Ford Ford Credit Auto Owner Trust What are the economic benefits and costs to Ford](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-24.jpg)
Ford Credit Auto Owner Trust What are the economic benefits and costs to Ford in this ABS deal? l What do the underlying assets earn? l What rates do the securities pay? l Other costs? l Who gets the excess spread? l Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 24
![Ford Credit Auto Owner Trust Interest cost l Underwriting fees l Rating agency and Ford Credit Auto Owner Trust Interest cost l Underwriting fees l Rating agency and](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-25.jpg)
Ford Credit Auto Owner Trust Interest cost l Underwriting fees l Rating agency and other securitization costs l Servicing fees l Other costs l Default losses …. compare with Ford Credit’s alternative l Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 25
![The Decision Process Corporation or Financial Institution requires additional funds to give customers financing The Decision Process Corporation or Financial Institution requires additional funds to give customers financing](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-26.jpg)
The Decision Process Corporation or Financial Institution requires additional funds to give customers financing or to finance a future revenue stream. Are funds freely available from banks ? Yes Borrow from banks No Does the firm/FI have good, self-liquidating assets ? No Issue equity or mezzanine capital Yes Do the assets have a sufficiently high yield to cover servicing and other costs ? Yes Would the assets be worth more (have a cheaper all-in funding cost) if they were isolated from the company/FI ? Yes Copyright © 2002 Ian H. Giddy No No Get out of the financing business Use assets as collateral for on-balance sheet debt Securitize the assets Corporate Financial Restructuring 26
![Ford Structure: Default or Loss? Receivables Class A-1 to A 6 Class B Class Ford Structure: Default or Loss? Receivables Class A-1 to A 6 Class B Class](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-27.jpg)
Ford Structure: Default or Loss? Receivables Class A-1 to A 6 Class B Class C Class D Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 27
![Can an ABS SPV Declare Bankruptcy? Only assets in SPV available to protect investors Can an ABS SPV Declare Bankruptcy? Only assets in SPV available to protect investors](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-28.jpg)
Can an ABS SPV Declare Bankruptcy? Only assets in SPV available to protect investors q No need for protection from creditors q Obligations are defined as limited to those available from the assets q No recourse to originator q So default and bankruptcy have different meaning than for normal corporation. q Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 28
![Ford Structure: Waterfall Receivables Class A-1 to A 6 Class B Class C Class Ford Structure: Waterfall Receivables Class A-1 to A 6 Class B Class C Class](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-29.jpg)
Ford Structure: Waterfall Receivables Class A-1 to A 6 Class B Class C Class D Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 29
![](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-30.jpg)
![Ford Structure: Waterfall Ford Structure: Waterfall](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-31.jpg)
Ford Structure: Waterfall
![Other Deals – Check the Paydown Structure DVI Receivables l Stratford l h c Other Deals – Check the Paydown Structure DVI Receivables l Stratford l h c](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-32.jpg)
Other Deals – Check the Paydown Structure DVI Receivables l Stratford l h c r a m o. c e s re S B A Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 32
![Paydown: Waterfall vs Soft Bullet Structure Copyright © 2002 Ian H. Giddy Corporate Financial Paydown: Waterfall vs Soft Bullet Structure Copyright © 2002 Ian H. Giddy Corporate Financial](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-33.jpg)
Paydown: Waterfall vs Soft Bullet Structure Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 33
![Implications of Waterfall Upgrades l l l The capital allocated to a well-balanced ABS Implications of Waterfall Upgrades l l l The capital allocated to a well-balanced ABS](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-34.jpg)
Implications of Waterfall Upgrades l l l 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 34
![Contact Info Ian H. Giddy NYU Stern School of Business Tel 212 -998 -0426; Contact Info Ian H. Giddy NYU Stern School of Business Tel 212 -998 -0426;](http://slidetodoc.com/presentation_image_h/204fff390d1723cc20bfc8e8aed5755b/image-35.jpg)
Contact Info Ian H. Giddy NYU Stern School of Business Tel 212 -998 -0426; Fax 212 -995 -4233 Ian. giddy@nyu. edu http: //giddy. org Copyright © 2002 Ian H. Giddy Corporate Financial Restructuring 38
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