New York University
Dr. Ian Giddy
Asset-Backed Securities
NIBC
Copyright ©2006 Ian H Giddy
Asset-Backed Securities Made Simple
5
Pooling of assets
Delinking of the credit risk of the collateral asset pool
from the credit risk of the originator, usually through the
transfer of the underlying assets from an originator to a
finite-lived, standalone special purpose vehicle (SPV)
Tranching of liabilities that are backed by the asset
pool. These liabilities are called “asset-backed
securities.”
Copyright ©2006 Ian H Giddy
Asset-Backed Securities: Three Key Features
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The Fundamental ABS Structure
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Copyright ©2006 Ian H Giddy
Source: bondmarkets.com, Research Quarterly
Asset-Backed Securities:
A Big Segment of the US Bond Market
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Copyright ©2006 Ian H Giddy
Source: bondmarkets.com, Research Quarterly
Consumer Finance Dominates
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Typical Credit Card Securitization
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A Global Phenomenon
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The European Market
Source: HSBC Market Update on absnet.net
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Mortgage Securitization: Example
Source: www.emac-investors.com
Source: europeansecuritisation.com
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Copyright ©2006 Ian H Giddy
Deals
Source: www.absnet.net
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Illiquid
Originator assesses risk, subjective, periodic
High operating cost
Limited investors base
Liquid/tradable
Independent third party evaluation
Global investors base and flexible structures
Security
Loans and other financial contracts
Copyright ©2006 Ian H Giddy
Why Securitization?
16
Mortgage Securitization
Non-Mortgage ABS
Intangibles
Infrastructure and Project Financing
Copyright ©2006 Ian H Giddy
Choose a Structure to Suit the Type of Assets to be
Securitized
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Finance company whose growth is constrained
Has pool of automobile receivables
Has track record
Plans to use this as an ongoing source of financing
Copyright ©2006 Ian H Giddy
Case Study: The Company
(Finance Company Limited)
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Copyright ©2006 Ian H Giddy
Form of transfer
of asset
Form of credit
enhancement
Decisions
Form of
Form of cash flow
transformation of
allocation
cash flows
Securitize the assets
Form of special
purpose vehicle
Key Decisions
20
Copyright ©2006 Ian H Giddy
SALE OR
ASSIGNMENT
LOANS.
LOANS.
Servicing Agreement
ISSUES
ASSET-BACKED
CERTIFICATES
SPECIAL
PURPOSE
VEHICLE
FORD (SPONSOR)
Asset-Backed Securities:
The Typical Structure
21
Copyright ©2006 Ian H Giddy
ISSUES
ASSET-BACKED
CERTIFICATES
SPECIAL
PURPOSE
VEHICLE
TOP QUALITY
INVESTMENTS
CREDIT SWAP
AGREEMENT
(Stay on
balance sheet)
REFERENCE
POOL OF LOANS
DB (Originator)
Asset-Backed Securities:
The Typical Structure
22
Copyright ©2006 Ian H Giddy
Trustee
Finance Co. Ltd
(Seller)
Hire-Purchase
Agreement
Finance Co.’s
Customers
Top Rating
FCL 1997-A
(Special Purpose Co.)
Trust
Agreement
Sale of Assets
Proceeds
Servicing Agreement
Rating Agency
Guarantee
Agreement
Asset-Backed
Securities
Proceeds
Credit Enhancement: Guarantee Method
Financial Guarantee
Provider
(if required)
Investors
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“MBIA has approximately $2.5 billion of net par exposure to the
manufactured housing sector, including $588 million of
Greentree/Conseco transactions. Although losses within most of the
Greentree/Conseco transactions have exceeded expectations, MBIA
does not expect to incur any insured losses because the high
original Triple-A and Double-A attachment points have provided a
substantial amount of first loss protection in front of MBIA.”
From an MBIA report:
Copyright ©2006 Ian H Giddy
Insurer Protection
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Copyright ©2006 Ian H Giddy
Finance Co. Ltd
(Seller)
Sale of Assets
Proceeds
Guarantee
Agreement
FCL 1997-A
(Special Purpose Co.)
Credit Enhancement:
An Alternative Approach
Financial Guarantee
Provider
(if required)
More Subordinated
No Rating
Subordinated
30
Lower Rating
Senior
Top Rating
Rating Agency
Mellon Mortgage
(Servicer)
Rating
AAA
AA
A
BBB
BB
B
NR
Asset-Backed
Securities
Proceeds
Class
A1,A2,A-x
B
C
D
E
F
Issuer balance
Atherton FLF 1998-A
(Special Purpose Co.)
Servicing Agreement
Sale of Assets
Proceeds
Servicing Advisor
Atherton Capital
(Seller)
Copyright ©2006 Ian H Giddy
Loan
Payments
Loan
Agreement
Franchisees
(Borrowers)
Example:
Franchise Loan Securitization
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Subordination
28%
22%
16.5%
12%
8.5%
5.5%
0%
Investors
Copyright ©2006 Ian H Giddy
Other Forms of Credit Support?
Source: moodys.com
32
The Transfer
The Special-Purpose Vehicle
Taxation
Accounting Treatment
Bank Regulatory Treatment
Legal
Copyright ©2006 Ian H Giddy
Asset-Backed Securities:
Legal and Regulatory Aspects
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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.
Copyright ©2006 Ian H Giddy
Asset-Backed Securities:
Legal Aspects
LE
34
L
A
G
LE
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
Copyright ©2006 Ian H Giddy
Three Conditions Enable the Separation
of the Assets from the Originator
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L
A
G
Securitization of a DBS Land property
DBS Land sells 6BR to SPV, Clover,
for S$835m
Clover issues S$878m of debt: 66% to
public, 34% to DBS Land
Senior Bonds: 10 year, 6%, plus
“share of gain if building is sold”
Copyright ©2006 Ian H Giddy
6 Battery Road
Building
S$835m
Cash S$43m
Sale
DBS
Land
Junior
Bonds
S$328m
Senior
Bonds
S$550m
37
Purchase
X
A
T
Copyright ©2006 Ian H Giddy
If the SPV or the transfer is subject to normal corporate,
withholding, or individual tax rates, investors or
borrowers could in principle be subject to additional or
double taxation
Must avoid double taxation of
Seller/servicer
Trust or special-purpose corporation
Investors
Taxation Aspects
38
Seller
Copyright ©2006 Ian H Giddy
TAX?
SALE
TAX?
Seller/Servicer
TAX
Trust
TAX?
Taxation: Before and After
TAX?
Investor
X
A
T
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Copyright ©2006 Ian H Giddy
Example:
A-BEST (Fiat Auto Loan Securitization)
Source: Standard and Poors
41
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Example: Ford Credit Owner Trust 1999-A
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Copyright ©2006 Ian H Giddy
Ford
Class D
Class C
Class B
Class A-1 to A6
Ford Credit Auto
Owner Trust
Sale
Ford Credit Auto
Rec. Two LP
Sale
Ford Motor Credit
Receivables
Ford Structure
Class D
Class A-5 and A-6
43
Legal and Tax Structure
Cash Flows
Effective Cost
Copyright ©2006 Ian H Giddy
Ford Deal
44
Copyright ©2006 Ian H Giddy
45
Copyright ©2006 Ian H Giddy
Ford Structure: Waterfall
46
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 ©2006 Ian H Giddy
Implications of Waterfall Upgrades
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Copyright ©2006 Ian H Giddy
Receivables
Ford Structure: Waterfall
Class D
Class C
Class B
Class A-1 to A6
48
Copyright ©2006 Ian H Giddy
Receivables
Class D
Class C
Class B
Class A-1 to A6
Ford Structure: Default or Loss?
49
Copyright ©2006 Ian H Giddy
Paydown: Soft Bullet Structure
50
Corporations, like Ford
Banks
Investors
Copyright ©2006 Ian H Giddy
Cost-Benefit Analysis
51
Copyright ©2006 Ian H Giddy
SALE OR
ASSIGNMENT
ISSUES
ASSET-BACKED
CERTIFICATES
SPECIAL
PURPOSE
VEHICLE
ACCOUNTS
RECEIVABLE
ACCOUNTS
RECEIVABLE
SPONSORING
COMPANY
Separation of Two Businesses: Origination and Lending
52
Copyright ©2006 Ian H Giddy
Source: abs-cost-benefit.xls
Receivables
Ford Credit Auto Rec 2 LP
Receivables
Ford Credit
FORD 1999-A
Receivables
Class D - NR
2%
Class C - BBB
2%
Class B - AA
3%
A
B
C
D
0.08%
0.03%
0.11%
3.941667 years
Class A - AAA
93%
9.80%
5.30%
1.50%
1%
0.03%
1.97%
1,462,716
2,311,593
1,000,000
Trust 1998-B
Size
$
Underwriting fees
$
Other costs
$
Total upfront costs
WAM
Portfolio yield
Funding cost
Default rate
Servicing fee
Total upfront costs
Excess servicing fee
Ford Credit Auto Owner Trust
1855 93% 5.20%
69 3% 5.79%
39 2% 6.52%
39
2% 8.00%
2002
56
4.82%
0.20%
0.13%
0.16%
5.30%
What protections do
investors have in this ABS?
What was the weightedaverage cost of funds to
Chase of this
securitization? (Assume
the cost of equity at 100%
capital requirement.)
Copyright ©2006 Ian H Giddy
Chase – Credit Cards
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Copyright ©2006 Ian H Giddy
20
7%
15%
7.64%
Cost
Debt
Equity
Total
50
100
100
250
Capital:
A
BB+
B
Assets
Loan Portfolio
AAA
AA
NR
47.5
From A
52.5
Cost
ABS
Debt
Equity
Total
Capital:
32.8
From BB+From B
Liabilities
Securities Classes
Credit Enhancement Calculation
For banks:
Banks – Capital Savings
5%
8%
16%
6.71%
9.376
132.8
0
117.2
250
60
Copyright ©2006 Ian H Giddy
For Investors, Spread Analysis
61
Copyright ©2006 Ian H Giddy
Source: Moodys, “Default & Loss Rates of Structured Finance Securities: 1993-2004”
Ratings Mix in USD ABS
64
The goal: Get default rates down to a level suited
to the Rating, by using Credit Enhancement.
Overcollateralization
Senior/Sub or
Reserve and liquidity accounts and lines
Excess cash flow
Third-party guarantees
Copyright ©2006 Ian H Giddy
Credit Enhancement
69
Copyright ©2006 Ian H Giddy
SENIOR
ASSET-BACKED
SECURITIES
“EQUITY” ABS
(owned by seller)
COLLATERAL POOL
OVER-COLLATERAL
SPECIAL-PURPOSE VEHICLE
Over-Collateralization Method
70
Copyright ©2006 Ian H Giddy
Receivables
Class D
Class C
Class B
Class A-1 to A6
Ford Credit Auto
Owner Trust
Senior-Subordination Method: The Logic?
71
Copyright ©2006 Ian H Giddy
Example: Atrium
72
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Stress Testing
73
Copyright ©2006 Ian H Giddy
What Do Ratings Tell Us About Default Rates?
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Copyright ©2006 Ian H Giddy
Losses are a function of:
Default rate (over the
period of the
investment)
Recovery rate
Loss rate is PD(1-R)
Default Probabilities and Recovery Rates
Source: Moodys
75
Copyright ©2006 Ian H Giddy
Source: Moodys, “Default & Loss Rates of Structured Finance Securities: 1993-2004”
ABS Loss Rates Are Low
76
Copyright ©2006 Ian H Giddy
Amsterdam Institute of Finance
Tel +31 20 5200160; Fax +31 20 5200161
[email protected]
Web: aif.nl
Prof. Ian Giddy
NYU Stern School of Business
Tel +1.646.8080.746; Fax 212.995.4233
[email protected]
Web: giddy.org
Contacts
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