Dr.
Ian
Gid
dy
NY
U S
tern
Sch
ool o
f Bus
ines
s
New
Yor
k U
nive
rsity
/IDC
Ass
et-B
acke
d S
ecur
ities
I
3Copyright ©2005 Ian H Giddy
Ass
etA
sset
-- Bac
ked
Sec
uriti
es M
ade
Sim
ple
Bac
ked
Sec
uriti
es M
ade
Sim
ple
4Copyright ©2005 Ian H Giddy
Ass
etA
sset
-- Bac
ked
Sec
uriti
esB
acke
d S
ecur
ities
�A
sset
-bac
ked
secu
ritie
s (A
BS
) ar
e bo
nds
that
rep
rese
nt p
ools
of
loan
s.�
The
loan
s ar
e us
ually
of s
imila
r ty
pes,
dur
atio
n an
d in
tere
st r
ates
, so
that
thei
r ris
ks c
an b
e un
ders
tood
.�
By
selli
ng th
eir
loan
s to
AB
S p
acka
gers
, the
orig
inal
lend
ers
reco
ver
cash
qui
ckly
, ena
blin
g th
em to
mak
e m
ore
loan
s.
�T
he a
sset
-bac
ked
secu
ritie
s m
arke
t has
gro
wn
as d
iffer
ent t
ypes
of
loan
s ar
e se
curit
ized
and
sol
d to
inve
stor
s.
5Copyright ©2005 Ian H Giddy
Ass
etA
sset
-- Bac
ked
Sec
uriti
es: A
Big
Seg
men
t of t
he B
ond
Mar
ket
Bac
ked
Sec
uriti
es: A
Big
Seg
men
t of t
he B
ond
Mar
ket
So
urc
e: b
on
dm
ark
ets
.co
m, R
ese
arc
h Q
ua
rte
rly
6Copyright ©2005 Ian H Giddy
Ass
etA
sset
-- Bac
ked
Issu
ance
Gro
win
g F
aste
rB
acke
d Is
suan
ce G
row
ing
Fas
ter
So
urc
e: b
on
dm
ark
ets
.co
m, R
ese
arc
h Q
ua
rte
rly
7Copyright ©2005 Ian H Giddy
Con
sum
er F
inan
ce D
omin
ates
Con
sum
er F
inan
ce D
omin
ates
So
urc
e: b
on
dm
ark
ets
.co
m, R
ese
arc
h Q
ua
rte
rly
8Copyright ©2005 Ian H Giddy
The
Eur
opea
n M
arke
tT
he E
urop
ean
Mar
ket
Source: HSBC Market Update on absnet.net
9Copyright ©2005 Ian H Giddy
Typ
ical
Cre
dit C
ard
Sec
uriti
zatio
nT
ypic
al C
redi
t Car
d S
ecur
itiza
tion
10Copyright ©2005 Ian H Giddy
Use
d to
Fin
ance
Man
y T
hing
sU
sed
to F
inan
ce M
any
Thi
ngs
Aut
o Lo
ans
and
Leas
esC
omm
erci
al A
sset
sA
ircra
ftF
ranc
hise
Loa
nsE
quip
men
t Lea
ses
Tim
esha
re L
oans
Ent
erta
inm
ent/I
ntel
lect
ual P
rope
rty
SB
A L
oans
Tra
de R
ecei
vabl
esM
utua
l Fun
d F
ees
Hea
lthca
re R
ecei
vabl
esC
onsu
mer
Loa
nsC
redi
t Car
ds
Mor
tgag
esH
ome
Equ
ity L
oans
Man
ufac
ture
d H
ousi
ngS
ubpr
ime
Mor
tgag
esS
tude
nt L
oans
Insu
ranc
e R
elat
ed
Sec
uriti
zatio
nsLi
fe S
ettle
men
tsC
atas
trop
hic
Ris
kIn
sura
nce
Pre
miu
ms
Str
uctu
red
Set
tlem
ents
Spo
rts
Rec
eiva
bles
11Copyright ©2005 Ian H Giddy
Why
Sec
uriti
zatio
n?W
hy S
ecur
itiza
tion?
�Lo
ans
and
othe
r fin
anci
al c
ontr
acts
�Ill
iqui
d�
Orig
inat
or a
sses
ses
risk,
sub
ject
ive,
per
iodi
c
�H
igh
oper
atin
g co
st�
Lim
ited
inve
stor
s ba
se
�S
ecur
ity�
Liqu
id/tr
adab
le�
Inde
pend
ent t
hird
par
ty e
valu
atio
n
�G
loba
l inv
esto
rs b
ase
and
flexi
ble
stru
ctur
es
12Copyright ©2005 Ian H Giddy
Cho
ose
a S
truc
ture
to S
uit t
he T
ype
of A
sset
s to
be
Cho
ose
a S
truc
ture
to S
uit t
he T
ype
of A
sset
s to
be
Sec
uriti
zed
Sec
uriti
zed
�M
ortg
age
Sec
uriti
zatio
n�
Non
-Mor
tgag
e A
BS
�C
olla
tera
lized
Deb
t Obl
igat
ions
�S
ynth
etic
AB
S a
nd C
redi
t-Li
nked
Not
es�
Inta
ngib
les
�In
fras
truc
ture
and
Pro
ject
Fin
anci
ng
14Copyright ©2005 Ian H Giddy
Cas
e S
tudy
: The
Com
pany
Cas
e S
tudy
: The
Com
pany
(Fin
ance
Com
pany
Lim
ited)
(Fin
ance
Com
pany
Lim
ited)
�F
inan
ce c
ompa
ny w
hose
gro
wth
is c
onst
rain
ed�
Has
poo
l of a
utom
obile
rec
eiva
bles
�H
as tr
ack
reco
rd�
Pla
ns to
use
this
as
an o
ngoi
ng s
ourc
e of
fina
ncin
g
15Copyright ©2005 Ian H Giddy
Sec
urit
ize
the
asse
ts
Fo
rm o
f tra
nsf
er
of a
sset
Fo
rm o
f cre
dit
enh
ance
men
t
Fo
rm o
ftr
an
sfor
ma
tion
of
cash
flo
ws
Fo
rm o
f ca
sh fl
ow
allo
catio
n
Dec
isio
ns
Fo
rm o
f sp
ecia
lp
urp
ose
veh
icle
Key
Dec
isio
nsK
ey D
ecis
ions
16Copyright ©2005 Ian H Giddy
Ass
etA
sset
-- Bac
ked
Sec
uriti
es:
Bac
ked
Sec
uriti
es:
The
Typ
ical
Str
uctu
reT
he T
ypic
al S
truc
ture F
OR
D (
SP
ON
SO
R)
SP
EC
IAL
PU
RP
OS
EV
EH
ICLE
LOA
NS
.
ISS
UE
SA
SS
ET
-BA
CK
ED
CE
RT
IFIC
AT
ES
SA
LE
OR
AS
SIG
NM
EN
T
LOA
NS
.
Ser
vici
ng A
gree
men
t
17Copyright ©2005 Ian H Giddy
The
Alte
rnat
ive:
Syn
thet
ic A
BS
The
Alte
rnat
ive:
Syn
thet
ic A
BS
DB
(O
rigin
ator
) SP
EC
IAL
PU
RP
OS
EV
EH
ICLE
RE
FE
RE
NC
EP
OO
L O
F L
OA
NS
(Sta
y on
bala
nce
shee
t)
ISS
UE
SA
SS
ET
-BA
CK
ED
CE
RT
IFIC
AT
ES
CR
ED
IT S
WA
PA
GR
EE
ME
NT
TO
P Q
UA
LIT
YIN
VE
ST
ME
NT
S
18Copyright ©2005 Ian H Giddy
Fin
an
ce C
o. L
td(S
elle
r)
Fin
an
ce C
o.’s
Cu
stom
ers
Hire
-Pur
chas
eA
gree
me
nt
Cas
e S
tudy
: Ini
tial E
xcha
nges
Cas
e S
tudy
: Ini
tial E
xcha
nges
19Copyright ©2005 Ian H Giddy
Fin
an
ce C
o. L
td(S
elle
r)F
CL
199
7-A
(Spe
cial
Pur
pose
Co.
)In
vest
ors
Pro
ceed
sP
roce
eds
Fin
an
ce C
o.’s
Cu
stom
ers
Hire
-Pur
chas
eA
gree
me
nt
Cas
e S
tudy
: Ini
tial E
xcha
nges
Cas
e S
tudy
: Ini
tial E
xcha
nges
20Copyright ©2005 Ian H Giddy
Fin
an
ce C
o. L
td(S
elle
r)F
CL
19
97-A
(Sp
ecia
l Pu
rpos
e C
o.)
Inve
stor
s
Ser
vici
ng A
gree
me
nt
Pro
ceed
s
Sa
le o
f Ass
ets
Pro
ceed
s
Ass
et-B
acke
dS
ecur
ities
Tru
ste
eT
rust
Agr
eem
ent
Fin
an
ce C
o.’s
Cu
stom
ers
Hire
-Pur
chas
eA
gree
me
nt
Cas
e S
tudy
: Ini
tial E
xcha
nges
Cas
e S
tudy
: Ini
tial E
xcha
nges
21Copyright ©2005 Ian H Giddy
Fin
an
ce C
o. L
td(S
elle
r)F
CL
19
97-A
(Sp
ecia
l Pu
rpos
e C
o.)
Inve
stor
s
Ser
vici
ng A
gree
me
nt
Pro
ceed
s
Sa
le o
f Ass
ets
Pro
ceed
s
Ass
et-B
acke
dS
ecur
ities
Ra
ting
Age
ncy
To
p R
atin
g
Tru
ste
eT
rust
Agr
eem
ent
Fin
an
ce C
o.’s
Cu
stom
ers
Hire
-Pur
chas
eA
gree
me
nt
Cas
e S
tudy
: Ini
tial E
xcha
nges
Cas
e S
tudy
: Ini
tial E
xcha
nges
22Copyright ©2005 Ian H Giddy
Fin
an
ce C
o. L
td(S
elle
r)F
CL
19
97-A
(Sp
ecia
l Pu
rpos
e C
o.)
Inve
stor
s
Fin
an
cia
l Gu
ara
nte
eP
rovi
der
(if r
equ
ired
)
Ser
vici
ng A
gree
me
nt
Pro
ceed
s
Sa
le o
f Ass
ets
Pro
ceed
s
Ass
et-B
acke
dS
ecur
ities
Gua
rant
eeA
gree
me
nt
Ra
ting
Age
ncy
To
p R
atin
g
Tru
ste
eT
rust
Agr
eem
ent
Fin
an
ce C
o.’s
Cu
stom
ers
Hire
-Pur
chas
eA
gree
me
nt
Cre
dit E
nhan
cem
ent:
Gua
rant
ee M
etho
dC
redi
t Enh
ance
men
t: G
uara
ntee
Met
hod
23Copyright ©2005 Ian H Giddy
Fin
an
ce C
o. L
td(S
elle
r)F
CL
19
97-A
(Sp
ecia
l Pu
rpos
e C
o.)
Sen
ior
Pro
ceed
s
Sa
le o
f Ass
ets
Rat
ing
Ag
ency
To
p R
atin
g
Cre
dit E
nhan
cem
ent:
Cre
dit E
nhan
cem
ent:
An
Alte
rnat
ive
App
roac
hA
n A
ltern
ativ
e A
ppro
ach
Su
bord
inat
ed
Mo
re S
ubo
rdin
ated
Low
er R
atin
g
No
Rat
ing
Fin
an
cia
l Gu
ara
nte
eP
rovi
der
(if r
equ
ired
)G
uara
ntee
Agr
eem
ent
24Copyright ©2005 Ian H GiddyAth
erto
n C
apita
l(S
elle
r)A
ther
ton
FLF
19
98
-A(S
pec
ial P
urp
ose
Co.
)In
vest
ors
Ser
vici
ng A
gree
me
nt
Pro
ceed
s
Sa
le o
f Ass
ets
Pro
ceed
s
Ass
et-B
acke
dS
ecur
ities
Mel
lon
Mor
tga
ge(S
ervi
cer)
Fra
nch
isee
s(B
orro
wer
s)
Loan
Agr
eem
ent
Exa
mpl
e:E
xam
ple:
Fra
nchi
se L
oan
Sec
uriti
zatio
nF
ranc
hise
Loa
n S
ecur
itiza
tion
Ser
vici
ng A
dvi
sor
Loan
Pa
yme
nts
Cla
ssR
atin
gS
ubor
dina
tion
A1,
A2,
A-x
AA
A28
%B
AA
22%
CA
16.5
%D
BB
B12
%E
BB
8.5%
FB
5.5%
Issu
er b
alan
ceN
R0%
25Copyright ©2005 Ian H Giddy
The
Pro
cess
The
Pro
cess
Is th
e co
mpa
nyre
ady?
Is th
e co
mpa
nyre
ady?
Are
the
asse
tssu
itabl
e?
Are
the
asse
tssu
itabl
e?
Wha
t poo
l?W
hat p
ool?
Wha
t leg
alst
ruct
ure?
Wha
t leg
alst
ruct
ure?
Wha
t cre
dit
enha
ncem
ent?
Wha
t cre
dit
enha
ncem
ent?
26Copyright ©2005 Ian H Giddy
Ass
etA
sset
-- Bac
ked
Sec
uriti
es:
Bac
ked
Sec
uriti
es:
Lega
l and
Reg
ulat
ory
Asp
ects
Lega
l and
Reg
ulat
ory
Asp
ects
�Le
gal
�T
he T
rans
fer
�T
he S
peci
al-P
urpo
se V
ehic
le
�T
axat
ion
�A
ccou
ntin
g T
reat
men
t�
Ban
k R
egul
ator
y T
reat
men
t
27Copyright ©2005 Ian H Giddy
Lega
l Asp
ects
Lega
l Asp
ects
�G
oal:
Cre
dit q
ualit
y m
ust b
e so
lely
bas
ed o
n th
e qu
ality
of t
he a
sset
s an
d th
e cr
edit
enha
ncem
ent
back
ing
the
oblig
atio
n, w
ithou
t any
reg
ard
to th
e or
igin
ator
's o
wn
cred
itwor
thin
ess
�O
ther
wis
e, q
ualit
y of
the
AB
S is
sue
wou
ld b
e de
pend
ent o
n th
e or
igin
ator
's c
redi
t, an
d th
e w
hole
ra
tiona
le o
f the
ass
et-b
acke
d se
curit
y w
ould
be
unde
rmin
ed.
LEG
AL
28Copyright ©2005 Ian H Giddy
Thr
ee c
ondi
tions
ena
ble
the
sepa
ratio
n of
the
asse
ts
Thr
ee c
ondi
tions
ena
ble
the
sepa
ratio
n of
the
asse
ts
and
the
orig
inat
oran
d th
e or
igin
ator
�T
he tr
ansf
er m
ust b
e a
true
sal
e, o
r its
lega
l eq
uiva
lent
. If o
rigin
ator
is o
nly
pled
ging
the
asse
ts to
se
cure
a d
ebt,
this
wou
ld b
e re
gard
ed a
s co
llate
rized
finan
cing
in w
hich
the
orig
inat
or w
ould
sta
y di
rect
ly
inde
bted
to th
e in
vest
or.
�T
he a
sset
s m
ust b
e ow
ned
by a
spe
cial
-pur
pose
co
rpor
atio
n, w
hose
ow
ners
hip
of th
e so
ld a
sset
s is
lik
ely
to s
urvi
ve b
ankr
uptc
y of
the
selle
r.�
The
spe
cial
-pur
pose
veh
icle
that
ow
ns th
e as
sets
m
ust b
e in
depe
nden
t
LEG
AL
29Copyright ©2005 Ian H Giddy
6 B
atte
ry R
oad
6 B
atte
ry R
oad
30Copyright ©2005 Ian H Giddy
6 B
atte
ry R
oad
6 B
atte
ry R
oad
�S
ecur
itiza
tion
of a
DB
S L
and
prop
erty
�D
BS
Lan
d se
lls 6
BR
to S
PV
, Clo
ver,
fo
r S
$835
m
�C
love
r is
sues
S$8
78m
of d
ebt:
66%
to
publ
ic, 3
4% to
DB
S L
and
�S
enio
r B
onds
: 10
year
, 6%
, plu
s “s
hare
of g
ain
if bu
ildin
g is
sol
d”C
ash
S$4
3m
Bui
ldin
g S
$835
m
Sen
ior
Bon
dsS
$550
m
Juni
orB
onds
S$3
28m
DB
SLa
nd
Sal
eP
urch
ase
31Copyright ©2005 Ian H Giddy
Wha
t Mak
es it
a S
ale?
Wha
t Mak
es it
a S
ale?
�T
he fo
rm a
nd tr
eatm
ent o
f the
tran
sact
ion
�T
he n
atur
e an
d ex
tent
of t
he b
enef
its
tran
sfer
red
�T
he ir
revo
cabi
lity
of th
e tr
ansf
er�
The
leve
l and
tim
ing
of th
e pu
rcha
se p
rice,
�
Who
pos
sess
es th
e do
cum
ents
�N
otifi
catio
n w
hen
the
asse
ts a
re s
old
LEG
AL
32Copyright ©2005 Ian H Giddy
Wha
t Mak
es it
Lik
ely
to b
e C
onso
lidat
ed?
Wha
t Mak
es it
Lik
ely
to b
e C
onso
lidat
ed?
�T
he d
iffic
ulty
of s
egre
gatin
g an
d as
cert
aini
ng
indi
vidu
al a
sset
s an
d lia
bilit
ies
�T
he p
rese
nce
or a
bsen
ce o
f con
solid
ated
fina
ncia
l st
atem
ents
�T
he c
omin
glin
gof
ass
ets
and
busi
ness
func
tions
�T
he e
xist
ence
of p
aren
t and
inte
rcor
pora
tegu
aran
tees
and
loan
s�
The
tran
sfer
of a
sset
s w
ithou
t str
ict o
bser
vanc
e of
co
rpor
ate
form
aliti
es.
LEG
AL
33Copyright ©2005 Ian H Giddy
Tax
atio
n A
spec
tsT
axat
ion
Asp
ects
�If
the
SP
V o
r th
e tr
ansf
er is
sub
ject
to n
orm
al c
orpo
rate
, w
ithho
ldin
g, o
r in
divi
dual
tax
rate
s, in
vest
ors
or
borr
ower
s co
uld
in p
rinci
ple
be s
ubje
ct to
add
ition
al o
r do
uble
taxa
tion
Mus
t avo
id d
oubl
e ta
xatio
n of
�S
elle
r/se
rvic
er�
Tru
st o
r sp
ecia
l-pur
pose
cor
pora
tion
�In
vest
ors
TAX
34Copyright ©2005 Ian H Giddy
Tax
atio
n: B
efor
eT
axat
ion:
Bef
ore
Sel
ler
TA
X
TAX
35Copyright ©2005 Ian H Giddy
Tax
atio
n: B
efor
e an
d A
fter
Tax
atio
n: B
efor
e an
d A
fter T
rust
Sel
ler
TA
X
Sel
ler/
Se
rvic
er
Inve
sto
rT
AX
?
TA
X?
TA
X?
TA
X?
SA
LE
TAX
36Copyright ©2005 Ian H Giddy
Acc
ount
ing
Tre
atm
ent
Acc
ount
ing
Tre
atm
ent
�S
ale
vers
us fi
nanc
ing
�C
onso
lidat
ion
�A
ccou
ntin
g fo
r lo
an s
ervi
cing
ACCOUNTI
NG
37Copyright ©2005 Ian H Giddy
FA
SB
Sal
e T
reat
men
tF
AS
B S
ale
Tre
atm
ent
�T
he tr
ansf
eror
rel
inqu
ishe
s co
ntro
l of t
he fu
ture
ec
onom
ic b
enef
its e
mbo
died
in th
e as
sets
bei
ng
tran
sfer
red
�T
he S
PV
can
not r
equi
re th
e tr
ansf
eror
to r
epur
chas
e th
e as
sets
exc
ept p
usua
ntto
cer
tain
rec
ours
e pr
ovis
ions
�T
he tr
ansf
eror
's o
blig
atio
n un
der
any
reco
urse
pro
visi
on
are
conf
ined
and
can
be
reas
onab
ly e
stim
ated
ACCOUNTI
NG
38Copyright ©2005 Ian H Giddy
Con
solid
atio
n T
reat
men
tC
onso
lidat
ion
Tre
atm
ent
�In
tern
atio
nal a
ccou
ntin
g st
anda
rds
hold
that
co
nsol
idat
ed fi
nanc
ial s
tate
men
ts a
re m
ore
mea
ning
ful
than
sep
arat
e on
es�
"Non
hom
ogen
eous
oper
atio
n" e
xcep
tion
�F
inan
ce, i
nsur
ance
, rea
l est
ate
and
leas
ing
subs
idia
ries
can
gene
rally
be
left
apar
t
ACCOUNTI
NG
39Copyright ©2005 Ian H Giddy
Bas
el 2
and
AB
SB
asel
2 a
nd A
BS
�O
rigin
atin
g ba
nks
(“cl
ean
brea
k”)
�In
vest
ing
bank
s (u
se o
f rat
ings
)�
Spo
nsor
ban
ks (
for
AB
S c
ondu
its)
�S
ynth
etic
sec
uriti
zatio
n (d
egre
e of
ris
k tr
ansf
eren
ce)
40Copyright ©2005 Ian H Giddy
Bas
el 2
for
Inve
stin
g B
anks
Bas
el 2
for
Inve
stin
g B
anks
AA
A to
AA
-20
%A
+ to
A-
50%
BB
B+
to B
BB
-10
0%B
B+
to B
B-
150%
B+
and
bel
owD
educ
ted
from
cap
ital
Sou
rce:
Bas
el C
omm
ittee
on
Ban
king
Sup
ervi
sion
, Jan
uary
200
1
41Copyright ©2005 Ian H Giddy
Exa
mpl
e:E
xam
ple:
For
d C
redi
t Ow
ner
Tru
st 1
999
For
d C
redi
t Ow
ner
Tru
st 1
999
-- AA
42Copyright ©2005 Ian H Giddy
For
d S
truc
ture
For
d S
truc
ture
For
dF
ord
Mot
or C
redi
t
For
d C
redi
t Aut
oR
ec. T
wo
LP
For
d C
redi
t Aut
oO
wne
r T
rust
Rec
eiva
bles
Cla
ss A
-1 to
A6
Cla
ss B
Cla
ss C
Cla
ss D
Cla
ss A
-5 a
nd A
-6
Cla
ss D
Sal
e
Sal
e
43Copyright ©2005 Ian H Giddy
For
d S
truc
ture
: Wat
erfa
llF
ord
Str
uctu
re: W
ater
fall
Rec
eiva
bles
Cla
ss A
-1 to
A6
Cla
ss B C
lass
C Cla
ss D
44Copyright ©2005 Ian H Giddy
For
d S
truc
ture
: Def
ault
or L
oss?
For
d S
truc
ture
: Def
ault
or L
oss?
Rec
eiva
bles
Cla
ss A
-1 to
A6
Cla
ss B C
lass
C Cla
ss D
45Copyright ©2005 Ian H Giddy
Pay
dow
nP
aydo
wn
: Sof
t Bul
let S
truc
ture
: Sof
t Bul
let S
truc
ture
46Copyright ©2005 Ian H Giddy
Rat
ing
Age
ncie
sR
atin
g A
genc
ies
Why
a r
atin
g?
�C
ompa
re a
ltern
ativ
es a
cros
s di
ffere
nt r
atin
gs c
ateg
orie
s;
�O
btai
n a
rela
tive
as w
ell a
s an
abs
olut
e m
easu
re o
f cre
dit r
isk
�B
e re
ason
ably
sur
e of
a m
arke
t to
sell
the
secu
rity.
�M
oody
s�
Sta
ndar
d &
Poo
rs�
Fitc
h
�M
oody
s�
Sta
ndar
d &
Poo
rs�
Fitc
h
47Copyright ©2005 Ian H Giddy
Rat
ing
Rep
orts
Rat
ing
Rep
orts
�G
ener
al r
epor
ts o
n a
sect
or, l
ike
CLO
s
�P
re-s
ale
repo
rt o
n an
indi
vidu
al C
LO, o
nce
risks
hav
e be
en
eval
uate
d bu
t fin
al te
rms
and
cred
it en
hanc
emen
t hav
e no
t yet
be
en fi
nani
zed
�F
inal
dea
l rep
ort
�P
erio
dic
upda
tes
48Copyright ©2005 Ian H Giddy
Typ
ical
Rat
ing
Rep
ort
Typ
ical
Rat
ing
Rep
ort
49Copyright ©2005 Ian H Giddy
Rat
ings
Rat
ings
50Copyright ©2005 Ian H Giddy
Dea
l doc
um
enta
tion
List
info
rma
tion
req
uire
men
tsD
ue
dili
gen
ce &
Mee
ting
with
man
age
men
t
Issu
er/B
anke
rR
eque
sts
rati
ng
Poo
l cre
dit
ana
lysi
sLe
gal a
na
lysi
sS
tres
s te
stin
g
Cre
dit
enh
ance
men
tn
egot
iatio
n
Rat
ing
com
mitt
eeP
resa
le r
epor
tF
inal
rep
ort
Rat
ing
Pro
cess
Rat
ing
Pro
cess
Su
rvei
llan
ce
“Rat
ing
CLO
s” (
Fitc
h)on
Wor
ksho
p W
ebsi
tegi
ddy.
org/
abs-
hypo
.htm
“Rat
ing
CLO
s” (
Fitc
h)on
Wor
ksho
p W
ebsi
tegi
ddy.
org/
abs-
hypo
.htm
51Copyright ©2005 Ian H Giddy
Str
ess
Tes
ting
Str
ess
Tes
ting
52Copyright ©2005 Ian H Giddy
Cos
tC
ost --
Ben
efit
Ana
lysi
s B
enef
it A
naly
sis
�B
anks
�C
orpo
ratio
ns�
Inve
stor
s
53Copyright ©2005 Ian H Giddy
Sep
arat
ion
of T
wo
Bus
ines
ses:
Orig
inat
ion
and
Lend
ing
Sep
arat
ion
of T
wo
Bus
ines
ses:
Orig
inat
ion
and
Lend
ing
SP
ON
SO
RIN
GC
OM
PA
NY
SP
EC
IAL
PU
RP
OS
EV
EH
ICLE
AC
CO
UN
TS
RE
CE
IVA
BLE A
CC
OU
NT
SR
EC
EIV
AB
LE
ISS
UE
SA
SS
ET
-BA
CK
ED
CE
RT
IFIC
AT
ES
SA
LE O
RA
SS
IGN
ME
NT
54Copyright ©2005 Ian H Giddy
For
Cor
pora
tions
: “P
ure
Pla
y” A
rgum
ent
For
Cor
pora
tions
: “P
ure
Pla
y” A
rgum
ent
Sep
arat
e th
e cr
edit
of th
e as
sets
from
the
cred
it of
the
orig
inat
or:
�Id
entif
y an
d is
olat
e go
od a
sset
s fr
om a
com
pany
or
finan
cial
in
stitu
tion
�U
se th
ose
asse
ts a
s ba
ckin
g fo
r hi
gh-q
ualit
y se
curit
ies
to a
ppea
l to
inve
stor
s.
�S
uch
sepa
ratio
n m
akes
the
qual
ity o
f the
ass
et-b
acke
d se
curit
y in
depe
nden
t of t
he c
redi
twor
thin
ess
of th
e or
igin
ator
.
55Copyright ©2005 Ian H Giddy
For
Ban
ks: C
apita
l Req
uire
men
tsF
or B
anks
: Cap
ital R
equi
rem
ents
�In
a p
erfe
ct w
orld
, add
ing
good
ass
ets
wou
ld r
equi
re li
ttle
addi
tiona
l cap
ital,
sinc
e cr
edito
rs w
ould
not
see
an
y in
crea
se in
th
e ba
nk's
ris
k�
But
if r
egul
ator
y ca
pita
l req
uire
men
ts p
enal
ize
bank
s fo
r ho
ldin
g su
ch a
sset
s, th
ey s
houl
d:
�se
curit
ize
the
good
ass
ets
�pr
ofit
from
orig
inat
ion
and
serv
icin
g
�In
gen
eral
, reg
ulat
ory
cost
s or
rig
iditi
es c
reat
e an
ince
ntiv
e fo
r ba
nks
to s
hrin
k th
eir
bala
nce
shee
ts b
y se
curit
izin
g lo
ans
56Copyright ©2005 Ian H Giddy
Ban
ks
Ban
ks ––
Cap
ital S
avin
gsC
apita
l Sav
ings
Fo
r ban
ks:
Cre
dit
Enh
ance
men
t Cal
cula
tion
Ass
ets
Lia
bili
ties
Loa
n P
ortf
olio
Se
curit
ies
Cla
sse
sF
rom
AF
rom
BB
+Fro
m B
A5
0A
AA
47.
55
2.5
32.
81
32.
8B
B+
100
AA
0B
100
NR
11
7.2
250
25
0
Cap
ital:
20
Cap
ital:
9.3
76
Cos
tC
ost
Deb
t7%
AB
S5%
Equ
ity15
%D
ebt
8%E
quity
16%
Tota
l7.
64%
Tota
l6.
71%
57Copyright ©2005 Ian H Giddy
For
d C
redi
t Aut
o O
wne
r T
rust
For
d C
redi
t Aut
o O
wne
r T
rust
�W
hat a
re th
e ec
onom
ic b
enef
its a
nd c
osts
to F
ord
in
this
AB
S d
eal?
�W
hat d
o th
e un
derly
ing
asse
ts e
arn?
�W
hat r
ates
do
the
secu
ritie
s pa
y?�
Oth
er c
osts
?�
Who
get
s th
e ex
cess
spr
ead?
58Copyright ©2005 Ian H Giddy
For
d C
redi
t Aut
o O
wne
r T
rust
F
ord
Cre
dit A
uto
Ow
ner
Tru
st
�In
tere
st c
ost
�U
nder
writ
ing
fees
�R
atin
g ag
ency
and
oth
er s
ecur
itiza
tion
cost
s
�S
ervi
cing
fees
�O
ther
cos
ts
�D
efau
lt lo
sses
….c
ompa
re w
ith F
ord
Cre
dit’s
alte
rnat
ive
59Copyright ©2005 Ian H Giddy
For
d C
redi
t Aut
o O
wne
r T
rust
F
ord
Cre
dit A
uto
Ow
ner
Tru
st
Siz
e1,
462,
716
$
FO
RD
199
9-A
Und
erw
ritin
g fe
es2,
311,
593
$
0.08
%O
ther
cos
ts1,
000,
000
$
0.03
%To
tal u
pfro
nt c
osts
0.11
%W
AM
3.94
1667
year
sP
ortfo
lio y
ield
9.80
%F
undi
ng c
ost
5.30
%D
efau
lt ra
te1.
50%
Ser
vici
ng fe
e1%
Tota
l upf
ront
cos
ts0.
03%
Exc
ess
serv
icin
g fe
e1.
97%
A18
5593
%5.
20%
4.82
%B
693%
5.79
%0.
20%
C39
2%6.
52%
0.13
%D
39
2%8.
00%
0.16
%20
025.
30%
For
d C
redi
t
For
d C
redi
t A
uto
Rec
2 L
PTr
ust
1998
-B
Rec
eiva
bles
Rec
eiva
bles
Rec
eiva
bles
Cla
ss A
- A
AA
93%
Cla
ss B
- A
A3%
Cla
ss C
- B
BB
2%
Cla
ss D
- N
R2%
60Copyright ©2005 Ian H Giddy
For
Inve
stor
s, S
prea
d A
naly
sis
For
Inve
stor
s, S
prea
d A
naly
sis
61Copyright ©2005 Ian H Giddy
Eur
opea
n S
prea
dsE
urop
ean
Spr
eads
Source: HSBC Spread Matrix on absnet.net
62Copyright ©2005 Ian H Giddy
All
AA
A A
re N
ot E
qual
All
AA
A A
re N
ot E
qual
So
urc
e: b
on
dm
ark
ets
.co
m, R
ese
arc
h Q
ua
rte
rly
63Copyright ©2005 Ian H Giddy
64Copyright ©2005 Ian H Giddy
For
d S
truc
ture
: Wat
erfa
llF
ord
Str
uctu
re: W
ater
fall
65Copyright ©2005 Ian H Giddy
Impl
icat
ions
of W
ater
fall
Upg
rade
sIm
plic
atio
ns o
f Wat
erfa
ll U
pgra
des
�T
he c
apita
l allo
cate
d to
a w
ell-b
alan
ced
AB
S p
ortfo
lio s
houl
d sl
owly
dec
reas
e ov
er ti
me,
whe
reas
the
sam
e ca
nnot
be
said
of
a si
mila
r co
rpor
ate
loan
por
tfolio
.�
Rat
ing
upgr
ades
sho
uld
be th
e no
rm in
the
AB
S w
orld
, and
do
wng
rade
s th
e ex
cept
ion
(cur
rent
ly, t
he s
ituat
ion
is e
xact
ly th
e op
posi
te).
In th
e co
rpor
ate
wor
ld, w
e sh
ould
rat
her
expe
ct
dow
ngra
des
to e
qual
upg
rade
s ov
er lo
ng ti
me
inte
rval
s.�
An
AB
S p
ortfo
lio s
houl
d be
trad
ed m
uch
mor
e ac
tivel
y th
an a
co
rpor
ate
loan
por
tfolio
to ta
ke a
dvan
tage
of i
ts in
here
nt r
atin
g vo
latil
ity.
69Copyright ©2005 Ian H Giddy
Ian
H. G
iddy
NY
U S
tern
Sch
ool o
f Bus
ines
s
Tel
+1.
646.
808.
0746
; Fax
+1.
206.
984.
4865
ian.
gidd
y@ny
u.ed
u
http
://gi
ddy.
org
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tact
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