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The Expanding The Expanding Frontiers of Asset Frontiers of Asset
SecuritizationSecuritization
Group I :
Institute of Statistics
914007 Chen, Yu-Huei
914008 Liu, Fang-Yi
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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
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What is Securitization?What is Securitization?
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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.
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SecuritizationSecuritization
Securitization
GeneralSecuritization
CorporateSecuritization
Financial AssetSecuritization
EstateSecuritization
MBS
Auto Loan
Credit Card
Stock
Corporate Bond
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What is Asset-Backed What is Asset-Backed Securitization?Securitization?
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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.
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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
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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.
.
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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
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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.
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The Collateral Types The Collateral Types of ABSof ABS
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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.
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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)
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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.
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The Development of The Development of The ABS MarketThe ABS Market
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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.
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$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
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American Bond MarketAmerican Bond Market
CorporateBonds
18%
Mortgage-Backed
Securities27%
U.STreasuries
33%
AgencyDebentures
15%Asset-
BackedSecurities
7%
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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
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Securitization Outside the U.S.Securitization Outside the U.S.
Europe79%
Australia10%
Other5%
Asia6%
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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
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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
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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)
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The Advantages of The Advantages of Securitization Securitization
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Advantages of SecuritizationAdvantages of Securitization
For Issuer
Capital Efficiency
Funding Diversification
Asset-Liability Management
Gain on Sale
Off-Balance-Sheet
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Advantages of SecuritizationAdvantages of Securitization
For Investor
Attractive Nominal Yield
Risk Protection
Generally Low Prepayment risk relative to MBS
Excellent Liquidity
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Advantages of SecuritizationAdvantages of Securitization
For Supervisor
Distribute Capital Efficiency
Manage Risk Efficiency
Lower the Management Cost
More Stable Financial system
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Advantages of SecuritizationAdvantages of Securitization
For Macro-Economic
Informational Efficiency
Allocational and Operational Efficiency
Pricing Efficiency
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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
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Buyers of ABSBuyers of ABS
Banks30%
Government11%
Others3%
Insurance10%
MoneyManagers
35%
Corporates11%
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The process of The process of securitizationsecuritization
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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
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ABS Cash Flow DiagramABS Cash Flow Diagram
LoanInterest
LoanPrincipal
LoanPrincipal
ABSInvestment
ABSCoupon
ServicingFee
Defaults
Excess
Assets ABSInvestor
AssetManager
LossCoverage
CreditEnhancementor Returned
to Seller
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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
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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.
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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.
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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
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Advantages of PACAdvantages of PAC
Stable cash-flows
High credit qualities
High yield
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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.
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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
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Advantages of FRCMOAdvantages of FRCMO
The price volatility is smaller than fixed interest rate bond.
Balance the assets and liabilities.
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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)
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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
effect Discount rate Bond price
IO
Market
rate
prepayment Bond priceNet
effect Discount rate Bond price
Market
rate
Prepayment Bond price Net
effect Discount rate Bond price
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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
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Taiwan’s Difficulties Taiwan’s Difficulties
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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.
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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
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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
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THE END ^__^THE END ^__^