the expanding frontiers of asset securitization

The Expanding The Expanding Frontiers of Asset Frontiers of Asset

SecuritizationSecuritization

Group I :

Institute of Statistics

914007 Chen, Yu-Huei

914008 Liu, Fang-Yi

OutlineOutline What is Securitization?

What is Asset-Backed Securitization?

The Collateral Types of ABS

The Development of the ABS Market

The Advantages of Securitization

The Process of Securitization

Taiwan’s Difficulties

Reference

What is Securitization?What is Securitization?

SecuritizationSecuritization A company raises money from capital market by issuing

securities that are backed by specific assets.

In most cases, the underlying assets are loans, such as mortgage loans or auto loans.

The cash flow from the underlying assets usually is the source of funds for the borrower/issuer to make payments on the securities.

Securitization products generally are viewed as including the following: asset-backed securities, mortgage-backed securities,corporate bond, commercial papers, etc.

SecuritizationSecuritization

Securitization

GeneralSecuritization

CorporateSecuritization

Financial AssetSecuritization

EstateSecuritization

MBS

Auto Loan

Credit Card

Stock

Corporate Bond

What is Asset-Backed What is Asset-Backed Securitization?Securitization?

Asset-Backed SecuritizationAsset-Backed Securitization

Asset-backed Securities (ABS) are essentially securities entitled to the cash flows from a specific pool of assets

These assets can be a variety of loans or receivables, such as: Credit Card receivables Auto loans Mortgages

In an ABS deal, the issuer, or loan originator: transfers assets into a SPV; the SPV issues securities and sells these securities to investors. investors are entitled to the cash flow from the assets.

ABS Typical Legal StructureABS Typical Legal Structure

The seller transfers assets (receivables/loans) to a special-purpose vehicle (SPV).

The SPV then issues securities to investors

The SPV transfers the assets to investors. The assets of the SPV will not be consolidated with the issuer’s in case of a bankruptcy.

Loan Originator

BankruptcyRemote SPV

Investors Investors are entitled to the cash

flows from the assets.

True Sale

True SaleTrue Sale

An actual sale, as distinct from a secured borrowing, which means that assets transferred to an SPV are not expected to be consolidated with those of the sponsor in the event of the sponsor’s bankruptcy.

Rating agencies usually require what is called a truesale opinion from a law firm before the securities can receive a rating higher than that of the sponsor.

.

ExampleExample

CardholdersAmerican

ExpressMonthly Principal & Interest

Cardholders pay monthly principal and interest to American Express for their monthly credit card payments, including principal, interests, annual charges and other penalty charges.

Original Flow

ExampleExample

Cardholders SPV Investors

Monthly Principal & Interest

Monthly Principal & Interest

Flow After Structuring

In an ABS deal, American Express transfers its rights to a specified pool of receivables into a SPV.

Proceeds from the specified pool of American Express cardholders will go to the SPV. The SPV in turn pays the investors.

American Express is no longer entitled to the receivables.

The Collateral Types The Collateral Types of ABSof ABS

Assets Types & ABS Issuers - IAssets Types & ABS Issuers - I

Credit Cards: Receivables from monthly payments by credit card holders.

Issuers include:– Banks which issue VISA or MasterCard– American Express and Discover– Saks, Neiman Marcus, Circuit City and similar retailers which issue retail cards

Auto Loans and Leases: Auto loans for car purchases or leases

Issuers include:– Financial Subsidiaries of GM, Ford, Honda, Nissan, Daimler Chrysler– Banks such as Banc One, Chase– Independent finance companies such as Arcardia, Union Acceptance

Corporation.

Asset types & ABS Issuers - IIAsset types & ABS Issuers - II

Home Equity Loans Liens on homes

Issuers include independent finance companies: Residential Funding Corp (RASC), Option One Mortgage Corp, Long Beach Mortgage Co, Country-Wide Home Loans.

Manufactured Housing Loans Loans on Manufactured Housing

Mainly issued by Ginnie Mae, a US-Government Sponsored Enterprise

Student Loans Loans to university and graduate students to finish degree

Main issuer is the Student Loan Marketing Association (Sallie Mae)

Asset types & ABS Issuers - IIIAsset types & ABS Issuers - III

Equipment Loans and Leases Loans and leases to finance medium/heavy equipment.

Issuers include AT&T, Caterpillar, Case, John Deere.

Aircraft leases Leases on commercial aircraft.

Mainly issued by GPA.

Insurance Premium Receivables Loans to commercial borrowers to finance insurance premiums.

Main issuer is A.I.Credit.

The Development of The Development of The ABS MarketThe ABS Market

Development of Asset SecuritizationDevelopment of Asset Securitization

Began from the Mortgage-Backed Securitization 1930s FNMA was launched for estate market.

1970s First Mortgage-Pass Through (MPT) security was issued.

1980s First Collateralized Mortgage Obligation (CMO) was issued by

FHLMC.

Applied this technology to other assets 1985 A computer lease-backed transaction was issued by Sperry.

First public auto loan-backed security was issued.

1987 First public credit card-backed security was issued.

1989 First public home equity loan-backed security was issued.

1993 First student loan-backed securitization.

1994 First insurance premium-backed transaction.

$1,237$10,041 $9,763

$15,456

$24,707

$42,347

$50,341$50,758

$59,673

$75,356

$112,041

$149,560

$184,589

$189,084

$197,294

$221,243

$259,600

0

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

225,000

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Year

1985 Through 2001

Amounts in millionsHighly Liquid MarketHighly Liquid Market

250,000

275,000

American Bond MarketAmerican Bond Market

CorporateBonds

18%

Mortgage-Backed

Securities27%

U.STreasuries

33%

AgencyDebentures

15%Asset-

BackedSecurities

7%

Development of ABS Outside the U.S.Development of ABS Outside the U.S. The U.K. is the leading country for securitization in Europe.

The first MBS has been issuing since 1987.

Favorable legal and regulatory environment

France is the second largest issuer of ABSs in Europe.

Other European countries that have issued ABSs include Spain, Sweden, and Italy.

Asset securitization in Canada has grown rapidly from 1992.

Securitization in Japan continues to move at a glacial pace.

“Divided receivables” cannot be traded in the secondary market

The reluctance of many non-bank finance companies

Securitization Outside the U.S.Securitization Outside the U.S.

Europe79%

Australia10%

Other5%

Asia6%

0

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

225,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Year

ABS Supply By Sector

Amounts in millions

CC Auto HEL MH Equip Student Other

$197,294

$189,084$184,589

$149,560

$112,041

$75,356

$59,673$50,758

Diverse Universe of CollateralsDiverse Universe of Collaterals

$221,242250,000

275,000

$259,600

Expansion of Collateral TypesExpansion of Collateral Types

Others33%

Credit Cards20%

Home EquityLoans22%

Auto Loans25%

Student Loans Manufactured Housing

Equipment Insurance Premium Re.

Marine Loans CBO / CLO

Zero to 1 Year13%

1 to 3 Years35%

3 to 5 Years27%

5 to 7 Years15%

10 Plus Years3%

7 to 10 Years7%

ABS Senior Classes ABS Senior Classes (by Weighted Average Life)(by Weighted Average Life)

The Advantages of The Advantages of Securitization Securitization

Advantages of SecuritizationAdvantages of Securitization

For Issuer

Capital Efficiency

Funding Diversification

Asset-Liability Management

Gain on Sale

Off-Balance-Sheet


For Investor

Attractive Nominal Yield

Risk Protection

Generally Low Prepayment risk relative to MBS

Excellent Liquidity


For Supervisor

Distribute Capital Efficiency

Manage Risk Efficiency

Lower the Management Cost

More Stable Financial system


For Macro-Economic

Informational Efficiency

Allocational and Operational Efficiency

Pricing Efficiency

Top 10 Issuers 2001Top 10 Issuers 2001

Auto Sector Credit Card Sector1 Ford $16,963.40 1 Citibank $11,400.002 AmeriCredit 7,576.80 2 Capital One 8,237.803 DaimlerChrysler 6,200.00 3 MBNA 8,168.904 Honda 4,881.80 4 Chase 6,038.105 Nissan 4,511.40 5 American Express 4,669.006 MMCA 3,853.30 6 Discover 4,052.607 WFS Financial 3,570.00 7 First USA 3,479.208 Toyota 3,294.00 8 Household 2,526.109 Capital Auto 2,700.50 9 Metris 2,434.90

10 Chase 2,499.10 10 Fleet 2,359.80

Buyers of ABSBuyers of ABS

Banks30%

Government11%

Others3%

Insurance10%

MoneyManagers

35%

Corporates11%

The process of The process of securitizationsecuritization

The Mechanics of SecuritizationThe Mechanics of Securitizationdebtor

Special purpose trust

investorsoriginators

Principals and interests

Cash flows

Cash flows

Credit enhancement

Credit rating

institutions

Investment

bank

ABS Cash Flow DiagramABS Cash Flow Diagram

LoanInterest

LoanPrincipal

LoanPrincipal

ABSInvestment

ABSCoupon

ServicingFee

Defaults

Excess

Assets ABSInvestor

AssetManager

LossCoverage

CreditEnhancementor Returned

to Seller

MPT – Mortgage Pass ThroughsMPT – Mortgage Pass ThroughsPass Through is the simplest principal repayment structure. Amortization and prepayment cashflows from the collateral are transferred directly to the security holders.

0

50

100

150

200

250

300

350

400

450

500

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45

Time

Ou

tsta

nd

ing

Bal

ance

, $M

M .

Interest

Principal

CMO CMO ( Collaterized Mortgage Obligations)( Collaterized Mortgage Obligations)In a sequential, principal cashflows from the underlying collateral are allocated to one tranche at a time. When one tranche is paid off, the next tranche receives all the principal and so on. In other words, the tranches are

sequentially allocated principal payments.

Advantages of CMOAdvantages of CMO(contrast to MPT)(contrast to MPT)

The portfolio of CMO is bigger that has more

stable statistical properties.

Stable investment period.

Consistency to investor’s demand.

PAC(Planned Amortization Class)PAC(Planned Amortization Class) Provide the bonds with highly stable cashflows.

0-2 bond(PAC)

0-3 bond

(Companion Securities)

0-1 bond

(CS)

0-4 bond

(CS)

principal

repayment

time

Advantages of PACAdvantages of PAC

Stable cash-flows

High credit qualities

High yield

Floating-rate CMO(FRCMO)Floating-rate CMO(FRCMO)

Attract the Euro dollars and floating-rate bonds investors

Generally issue with Reverse Floaters.

Caps and floors.

Floater Reverse

Coupon rate LIBOR+0.0065 0.424-4*LIBOR

Value $40m $10m

The average weighted interest always equal:

40/50(LIBOR+0.0065)+10/50(0.424-4*LIBOR)

ExampleExample

Advantages of FRCMOAdvantages of FRCMO

The price volatility is smaller than fixed interest rate bond.

Balance the assets and liabilities.

Stripped MBSStripped MBS

Objectives:hedge and speculation

Example:

A1(principal):coupon rate=5%,below par

A2(interest):coupon rate=605%,over par

Cost of funding=5%*0.99+605%*0.01=11%

PO(principal only)

IO(interest only)

The influence of interest on PO & IOThe influence of interest on PO & IO

PO

Market

rate

prepayment Bond priceNet

effect Discount rate Bond price

Market

rate

prepayment Bond price Net


IO

Market

rate

prepayment Bond priceNet


Market

rate

Prepayment Bond price Net


Concerns raised by securitizationConcerns raised by securitization Adverse selection

Securitize lower risk loans to reduce credit enhancement costs and lower due diligence expenses.

Risk shifting

Sell only the weakest assets through securitized structure.

Moral hazard

“Window Dressing” of financial statements

Legal uncertainties

Taiwan’s Difficulties Taiwan’s Difficulties

Problems of securitization in TaiwanProblems of securitization in Taiwan

Lack of motivations to sell CMO.

Lack of sufficient data and analysis.

Lack of sound and economic scale bond market.

Lack of standard and suitable laws.

References - IReferences - I

Books

1. 陳文達、李阿乙、廖咸興，「資產證券化理論與實務」，智勝出版社， 2002年 8 月

2. 李儀坤，「金融證券化之可行性研究」，台北銀行經濟研究室， 1995 年 6 月

3. Mason 、 Merton 、 Perol 、 Tufano ，「 Cases in Financial Engineering 」， Prentice Hall ， 1995

Journals & Reports

1. 廖咸興、李阿乙，「推動抵押債權證券與金融機構流動性」，新世紀智庫論壇第 15 期， 2001 年 9 月

2. 儲蓉，「金融資產證券化之探討 ( 上 )( 下 ) 」，台灣金融財務季刊第二輯第三、四期

3. 吳家昌、游迺文，「金融資產證券化及其對金融業影響之探討」，金融財務第 4 期

4. 「資產證券化」，國泰人壽綜合企劃室， 1997 年 2 月

5. 李阿乙，「資產證券化專題研討」，台北金融研究發展基金會教育訓練中心， 2001 年 3 月

6. 「投資資產抵押債券 (ABS) 」， Deutsche Bank ， 2002 年 11 月

7. 「 Asset-Backed Securities: Introduction to the Market and its Structures 」， Goldman Sachs ABS Research ， May 1998

8. 「 The U.S. Asset-Backed Securities Market 」， Banc of America Securities LLC ， 2002

References - IIReferences - II

THE END ^__^THE END ^__^

the expanding frontiers of asset securitization

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