“Securitization: Past, Present and Future”What It Is. Where It Came From. Where It’s Going.

Kellogg Graduate School of ManagementApril 28, 2003

SECURITIZATION COLLOQUIUM

Joseph M. DonovanManaging Director and Group Head

WHAT IS AN ASSET BACKED SECURITY? A fixed income instrument designed to capture the cash flow

and credit attributes of a specific pool of assets (loans, receivables)

Enhanced to achieve high ratings or target a particular buyer Examples of Assets

Yes Autos Credit Cards Home Equities Equipment Leases Student Loans CBO/CLOs

Maybe Future Export

Rec.’s Tax Liens Disney Film

Library Bowie Bonds

No Secured Debt Commodity

Backed

WHAT IS AN ASSET BACKED SECURITY?

Rights to future cash flows

Future cash flows

Purchase bonds (cash today)“Excess” future

cash flows

Credit enhancement

Cash proceeds today Trust or SPV Bond

Investors

CompanyIndividual Assets (Loans,

Receivables) on Company’s Balance Sheet

WHAT IS AN ASSET BACKED SECURITY?Sources of Credit Enhancement

Internal– The assets– Excess interest– Spread or reserve accounts– Subordinated classes

External– Seller’s limited guaranty– Third-party LOC/surety bond

The Early Years:1985-1994

I. THE EARLY YEARS: 1985-1994In 1985 the ABS Market was born, first with autos . . .

AutoSource: Thomson Financial Securities Data, Credit Suisse First Boston, Public/144A ABS Annual

Issuance

$9.8 $6.1 $5.7 $7.8 $12.6 $17.1$24.9 $25.4

$18.5$1.0

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

($ in Billions)

I. THE EARLY YEARS: 1985-1994…then with credit cards

Credit CardsAuto

$9.8 $6.1 $5.7 $7.8 $12.6 $17.1$24.9 $25.4

$18.5

$17.4 $19.6 $32.8

$1.0

$2.3$6.9

$11.0

$22.6$21.9

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Source: Thomson Financial Securities Data, Credit Suisse First Boston, Public/144A ABS Annual Issuance

($ in Billions)

I. THE EARLY YEARS: 1985-1994Auto & Credit Cards - The Fundamental Structures

$0

$50

$100

0 12 24 36 48 60

Average Life(20 months)

Expected Final

Callable

Legal Final

Months

Autos:Liquidating pool generally in existence at closing

I. THE EARLY YEARS: 1985-1994Auto & Credit Cards - The Fundamental Structures

Credit Cards:Designed to accommodate short-lived assets

Future originations must meet established parameters

PEPCO FUTURETERM SERIES 200X-1REVOLVING PERIOD

MONTH

MINIMUM SELLER'S INTEREST100

107

STEP DOWN PERIOD

6036

RECEIVABLES BALANCE

I. THE EARLY YEARS: 1985-1994Back to the Evolution of the Market

$9.8 $6.1 $5.7 $7.8 $12.6 $17.1$24.9 $25.4

$18.5

$17.4 $19.6 $32.8

$12.5$15.1 $13.8

$19.6

$30.4

$1.0

$21.9$22.6

$11.0$6.9

$2.3$1.8

$8.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Credit CardsAuto OtherSource: Thomson Financial Securities Data, Credit Suisse First Boston, Public/144A ABS Annual

Issuance

($ in Billions)

I. THE EARLY YEARS: 1985-19941985-1994: Top ABS Issuers

Source: Domestic Public and 144A Asset Backed Issues, Thomson Financial Securities Data, CSFB.

ISSUERPRINCIPAL (in millions) RANK MARKET SHARE

GMAC $37,928.7 1 10.7%

Chrysler $35,876.7 2 10.1%

Citibank $28,656.8 3 8.1%

Household International $18,571.5 4 5.2%

Ford Motor Credit $17,328.6 5 4.9%

MBNA $17,097.2 6 4.8%

Top 6 Totals $155,459.5 43.8%

Industry Totals $355,120.8 100.0%

I. THE EARLY YEARS: 1985-1994Why Securitize?

Cheaper source of capital

Improved leverage

Perfect matched funding

Fund growth

Access new investors

Origination discipline

I. THE EARLY YEARS: 1985-1994Why Invest in ABS?

Extremely high credit quality

Yield pick-up over corporates

Liquid market

Limited “event risk”

Asset diversification

Relatively predictable cashflow

The Middle Years:1995-1997a.k.a. “The Gain on Sale” Years

$285.8

$219.7

$169.4

$115.6$81.7

$64.7$56.1$54.1$47.8$27.7$14.4$9.1$10.0$1.2

$0

$50

$100

$150

$200

$250

$300

$350

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

35%

CAGR

I. THE GAIN ON SALE YEARSPublic/144A ABS Annual Issuance, 1985-1998($ in Billions)

Source: Thomson Financial Securities Data.

I. THE GAIN ON SALE YEARSPublic/144A ABS Annual Issuance, 1994-1998

Source: Thomson Financial Securities Data.

$40.2$32.8

$47.3 $49.4 $41.0 $43.1$16.5$22.3

$47.3 $79.0$99.5

$13.9

$17.0

$37.6

$63.1

$103.0

$18.5 $29.1 $35.0 $36.6$0

$50

$100

$150

$200

$250

$300

1994 1995 1996 1997 1998

Autos Credit Cards HEL/MH Other

($ in Billions)

I. THE GAIN ON SALE YEARS1995-1997: Selected ABS Issuers

Source: Domestic Public and 144A Asset Backed Issues, Thomson Financial Securities Data, Bloomberg.

ISSUERPRINCIPAL (in millions) RANK MARKET SHARE

Green Tree $24,306.7 1 5.5%

MBNA $18,365.8 4 4.1%

Chrysler $16,919.8 6 3.8%

SallieMae $16,713.4 7 3.8%

Money Store $16,254.7 8 3.7%

Advanta $11,470.2 9 2.6%

Ford Motor Credit $11,167.0 10 2.5%

ContiMortgage $10,550.6 11 2.4%

Olympic/Arcadia $7,683.4 13 1.7%

GMAC $7,520.4 14 1.7%

United Companies $6,817.5 15 1.5%

AMRESCO $4,101.5 21 0.9%

Industry Totals $445,135.4 100.0%

The Later Years:1998-2002Maturity/Stability

I. THE LATER YEARSPublic/144A ABS Annual Issuance, 1985-2002

Source: Thomson Financial Securities Data, Credit Suisse First Boston

($ in Billions)

I. THE LATER YEARSPublic/144A ABS Annual Issuance, 1998-2002

Source: Thomson Financial Securities Data, Credit Suisse First Boston

$78.3$43.0 $40.6$57.0 $68.0 $70.3$97.8 $86.0$86.0

$105.7$160.6

$10.2 $10.3$16.1

$12.5

$26.2

$40.4 $62.4

$64.1$51.0

$50.6

$47.2 $30.4

$41.2$52.5

$62.2

$29.6 $32.9 $61.5 $61.9$0

$50

$100

$150

$200$250

$300

$350

$400

$450

$500

1998 1999 2000 2001 2002

Autos Credit Cards HEL/MH Student Loans CDOs Other

($ in Billions)

I. THE LATER YEARS1998-2002: Top 10 ABS Issuers

Source: Domestic Public and 144A Asset Backed Issues (excluding CDO’s), Thomson Financial Securities Data.

ISSUERPRINCIPAL (in millions) RANK MARKET SHARE

GMAC $98,011.2 1 6.5%

Ford Motor Credit $56,804.1 2 3.8%

Citigroup $48,452.6 3 3.2%

JP Morgan Chase $44,230.4 4 2.9%

MSDW (Discover) $44,086.0 5 2.9%

MBNA $39,972.6 6 2.7%

Lehman $33,757.1 7 2.2%

Daimler/Chrysler $32,484.0 8 2.2%

Conseco (Green Tree) $32,070.7 9 2.1%

Capital One $26,974.9 10 1.8%

Top 10 Totals $456,843.6 30.4%

Industry Totals $1,504,848.7 100.0%

2002: Enron“SPE” is not a 4-Letter Word

II. The Present

II. THE PRESENTCumulative Public ABS Issuance

Source: Thomson Financial Securities Data.

$0

$500

$1,000

$1,500

$2,000

$2,500

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Public/144A/CDOs

$1 Trillion

$500 Billion

$100 Billion

$2 Trillion

($ in Billions)

PAST

10 YE

ARS: 2

3%

CAGR

$0

$500

$1,000

$1,500

$2,000

$2,500

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Public/144A/CDOs Europe

II. THE PRESENTCumulative Public ABS Issuance

Source: Thomson Financial Securities Data.

Europe

($ in Billions)

$1 Trillion

$500 Billion

$100 Billion

$2 Trillion

II. THE PRESENTRelative Market Size($ in Billions)

Source: Thomson Financial Securities Data.

$268 $263

$326$352

$448

$330

$258

$137

$529

$755

$62 $50 $43 $63 $55

$311$341

$408

$609

$551

$131$86

$35$76 $58

$143$196

$221 $235$197

$0

$100

$200

$300

$400

$500

$600

$700

$800

1998 1999 2000 2001 2002

ABS MBS CMBS Investment Grade Corporate High Yield Equity

II. THE PRESENTRelative Market Size($ in Billions)

Source: Thomson Financial Securities Data.

$268

$330

$62

$311

$131

$263 $258

$50

$341

$86

$326

$137

$43

$408

$35

$352

$529

$63

$609

$76

$448

$755

$55

$551

$58

$0

$100

$200

$300

$400

$500

$600

$700

$800

ABS MBS CMBS Investment GradeCorporate

High Yield

1998 1999 2000 2001 2002

II. THE PRESENTABCP Overview

$101$147

$256

$642

$745 $726

$517

$382

$38 $49 $59 $60 $71

$0

$100

$200

$300

$400

$500

$600

$700

$800

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 20020%

7%

14%

21%

28%

35%

42%

49%

56%

Asset Backed CP Outstandings ABCP as a % of Total Outstandings

($ in Billions)

Source: Federal Reserve.

II. THE PRESENTABCP Overview($ in Billions)

Source: Federal Reserve.

0

200

400

600

800

1,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

ABCP Total Unsecured

Total Unsecured CP

ABCP

III. The Future

III. THE FUTURECSFB’s 2003 Projected ABS Issuance

ASSET CLASS 2002 ACTUAL 2003 PROJECTED % CHANGE

Credit Card $70.3 $75.0 6.7%

Auto 78.3 80.0 2.2%

Home Equity and Related 156.0 160.0 2.6%

Manufactured Housing 4.6 3.0 -34.8%

Student Loan 26.2 30.0 14.5%

Equipment 5.3 7.0 32.1%

CDOs 50.6 50.0 -1.2%

Other 56.9 55.0 -3.3%

Total Public/144A $448 $460 2.7%

Source: Credit Suisse First Boston.

III. THE FUTUREObservation # 1:Securitization has permanently changed the dynamics of consumer and commercial lending…

Lowered/eliminated barriers to entry– Access to capital/cost of capital– Ratings– Size/balance sheet– Experience

Resulted in increased competition– Price – Credit

Two value added components remain – Origination– Servicing

III. THE FUTUREObservation # 1:But not without problems…

Access Amresco Autobond Acceptance CFS Cityscape Conseco ContiFinancial FirstPlus

First Alliance IMC Mortgage Jayhawk Acceptance NAL Financial Group National Century NextCard Southern Pacific UCFC

To name a few

III. THE FUTURE

1987 2001

Credit card industry $80 bil $490 bil

Top 10 market share 40% 85%

% securitized <1% 50%

Observation # 2:Everybody’s doing “it”!

III. THE FUTUREObservation # 2:Everybody’s doing “it”!

Source: Thomson Financial Securities Data, Credit Suisse First Boston. Includes retail and wholesale issuance.

($ in Billions)

TOP 5 AUTO ISSUERS 2002 ISSUANCE

Ford $12.5

GMAC 11.7

DaimlerChrysler 7.9

AmeriCredit 6.0

WFS 5.0

III. THE FUTURE

TOP 5 HOME EQUITY ISSUERS 2002 ISSUANCE PARENT COMPANY

GMAC-RFC $20.0 GM

Countrywide 18.4 Countrywide

EquiCredit 14.2 Bank of America

New Century 10.4 New Century

Option One 9.4 H&R Block

Observation # 2:Everybody’s doing “it”!

Source: Credit Suisse First Boston.

($ in Billions)

III. THE FUTURE

Structures are proven and accepted

Significant downside protection vs. secured debt

Large, healthy investor base

Observation # 3:The equity market (and Congress) may not understand “gain on sale accounting” or SPE’s but the debt market understands securitization

0

25

50

75

100

125

150

175

J an-00 J un-00 Nov-00 Apr-01 Sep-01 Feb-02 J un-02 Nov-02 Apr-03

Spre

ad (B

Ps)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

2-Year Treasury Yield

Credit Card (5-yr) Auto (2-yr) Home Equity (5-yr) A2 Financial A2 Industrial 2-yr Treasury

III. THE FUTURE

Source: Bloomberg, Credit Suisse First Boston.

Observation # 3: Stability for Borrowers

2-Year Treasury Yield

A2 Financial

A2 Industrial

III. THE FUTUREObservation # 3:Ford Unsecured vs. Secured Spreads

0

100

200

300

400

500

600

700

Mar-01 May-01 Jul-01 Sep-01 Nov-01 Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03

Uns

ecur

ed S

prea

d (B

Ps)

0

10

20

30

40

50

60

70

Secured Spread (BPs)

5-Year Unsecured Ford Spreads

2-Year “AAA” Ford ABS Spreads

Source: Credit Suisse First Boston.

III. THE FUTUREObservation # 3:Household Unsecured vs. Secured Spreads

-

100

200

300

400

500

600

Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jul-01 Aug-01 Sep-01 Oct-01 Dec-01 Jan-02 Feb-02 Mar-02 May-02 Jun-02 Jul-02 Aug-02 Oct-02 Nov-02

Spr

ead

(BP

s)

10-Year Unsecured Household Spreads

“AAA” Household Home Equity Spreads

Source: Credit Suisse First Boston.

HSBC Merger Announcement

III. THE FUTURE

Source: Credit Suisse First Boston.

3-YR Triple-A Credit Card Spread Comparison (spread to 1ML)

Observation # 4:Tiering, Tiering and More Tiering

Chase ChaseChase Chase Chase ChaseChase

0

10

20

30

40

50

60

70

80

1/9/01 4/13/01 7/16/01 10/18/01 1/20/02 4/24/02 7/27/02 10/29/02 1/31/03

Providian

MetrisMetris

MetrisProvidian

ProvidianMetrisSp

read

to

1ML

(bps

)

III. THE FUTURE

International Harvester / Navistar

Chrysler / DCX

Tyco / CIT

Conseco / Green Tree

Mexico / Emerging Markets

Observation # 5:Securitization creates inherent stability and liquidity for certain borrowers

III. THE FUTUREObservation # 6:

Dedicated investors

New investors– CBOs– ABCP

CBOs as an asset gathering tool

Observation # 6:Securitization’s effect on the buyside will continue to grow

III. THE FUTUREObservation # 6:Securitization’s effect on the buyside will continue to grow

Indeed, CBOs have become so key to the junk market that companies planning offerings frequently tailor the securities to the tastes of the CBOs. “It’s the sell side and buy side working together to try and make a more efficient market…”

- Wall Street Journal - 5/24/99

The rise of CBO has made a huge difference for the junk market. “The enormous amount of CBO activity has been a key factor in absorbing new supply” of junk issues…

Wall Street Journal - 5/24/99

III. THE FUTURE

$13.7$1.3

$4.4

$18.7

$16.9 $12.7

$14.3

$3.2

$12.6$8.0

$12.7$8.3

$3.7

$17.8

$51.8

$22.2

$17.0

$4.6

$7.2

$-

$1.3$10.8

$14.8

$22.0$0.3

$2.1

$2.7 $4.1

$6.3$6.0

$13.2$20.5 $22.0

$13.2

$12.8

$0

$20

$40

$60

$80

$100

1996 1997 1998 1999 2000 2001 2002

OtherABS/Structured Finance CDOBalance Sheet CLOInvestment Grade CBOHigh Yield CLOHigh Yield CBO

Observation # 6:CBO/CLO Annual Issuance 1996 – 2002 ($ in billions)

Source: Credit Suisse First Boston.

III. THE FUTURE

Residential Mortgages MBSConsumer Loans ABS

Commercial Mortgages CMBS/ConduitsSmall Business Loans SBA/SBL/Franchise

Senior Unsecured Loans CLOsMezzanine/Venture Capital CBOs

Regulatory Capital Arbitrage

The Virtual Bank

Observation # 7:Commoditization and disintermediation of commercial banks will continue, particularly with any secured loan products

IN CONCLUSION

Securitization has become a permanent financing alternative with implications not only for the cost of capital but also for how certain types of assets will be originated and serviced in the future.

Thank You