Securitization: The Financial Instrument of the Future

Securitization: The Financial Instrument of the Future

Volumn , Issue , 2012, Pages

  Kothari, Vinod ^a  

^a NONE

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EID: 84891583500     PISSN: None     EISSN: None     Source Type: Book    
DOI: 10.1002/9781118390429     Document Type: Book

References (394)

1. Conceptually, an equity share is an obligation to distribute while debt is an obligation to pay. The simplest form of securitized instruments, pass-through certificates, also imply an obligation to distribute and hence are closer to equity than debt.
2. See, for example, the OECD publication titled Trends and Developments in Securitization, Financial Market Trends, No. 74, October 1999: "Initially, the term was applied to the process of disintermediation, or the substitution of security issues for bank lending. More recently, the term has been used to refer to so-called "structured finance"".
3. Quoted in Kendall, Leon T and Michael J Fishman (ed): A Primer on Securitization 1996.
4. See section title Alchemy of Securitization
5. Covered bonds are generally used in some European countries and have arguably served as an effective alternative to isolation-type securitization devices. This is discussed in a later chapter.
6. OECD publication titled Trends and Developments in Securitisation, Financial Market Trends, No. 74, October 1999
7. What Is Securitization? Commentary dated November 28, 2000
8. See details in Chapter 2.
9. See in Chapter 19 for details. See also Chapter 23 on Legal Issues in Future flows.
10. As percentage to GDP end-year data.
11. Domestic credit to the private sector.
12. Liabilities to BIS reporting banks
13. Domestic and international securities on issue
14. For more on the impact of securitization on economic capital, see Chapter 21 on Regulatory Capital
15. See for details at http://credit-deriv.com/crebook.htm
16. "The Continued Strength of the U.S. Banking System" by Alan Greenspan was delivered at the American Bankers Association conference in Phoenix, October 7, 2002. Greenspan has praised CDOs, mortgage-backed securities and other instruments for risk dispersion.
17. Third edition, 2002, Appendix A
18. Suzanne Koudsi, Sleazy Credit: Fortune; March 4, 2002.
19. Internet edition October 7, 2002
20. See Chapter 27 on Accounting Issues
21. Controlling Systemic Risk in an Era of Financial Consolidation, July 2002 paper by Prof. Arthur E. Wilmarth, Jr.
22. There are more cases from the securitization "hall of shame" at http://vinodkothari.com/sadepisodes.htm
23. Analysis of the Failure of Superior Bank: Statement of Thomas J.McCool, Managing Director, Financial Markets and Community Investment before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Feb 7 2002.
24. See also a detailed investigation report of the Inspector General, FDIC: Issues Relating to the Failure of Superior Bank February 6, 2002, at http://www.fdicig.gov/reports02/02-005.pdf, last visited Dec 18, 2005
25. Fortune, April 28, 1997.
26. A good way to understand the process of securitization may be the series of steps listed below (p. 59), in conjunction with the numerical examples in Chapter 8.
27. See Chapter 1 for more on asset-based financing.
28. See Chapter 23 on Legal Issues
29. Pfandbriefe and traditional mortgage funding instruments in Germany are discussed in detail in Chapter 3 under Germany, and also in Chapter 6 on RMBS.
30. ABCP is commonly issued by ABCP conduits - discussed in Chapter 18. Also, see Chapter 4 for more on expected and legal maturity of asset-backed securities.
31. Also discussed in Chapter 22.
32. See the section on secured loan structures in Chapter 23 on Legal Issues. Also pfandbriefs in Germany in Chapter 12 on Residential Mortgage-backed Transactions.
33. In the case studies taken up in Chapter 6 on Residential Mortgage-backed Securities, the Abbey National's Holmes transaction uses a master trust structure. Master trust structures have almost become the rule in credit card transactions.
34. See Chapter 4 on Liquidity Enhancements.
35. The term "pass-through" is covered in IAS 39 - see Chapter 27 under IAS 39.
36. We will return to asset liability mismatches later under Advantages of Securitization.
37. Over-collateralization is a form of credit enhancement discussed in Chapter 4.
38. For CDOs, the revolving structure is used, and the assets are corporate loans or bonds. If the bonds or loans do not amortize during the amortization period, they are sold, usually by way of an auction, called auction call.
39. Steven Todd: The Effects of Securitization on Consumer Mortgage Costs, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=223585, last visited December 19, 2005.
40. http://www.federalreserve.gov/Pubs/FEDS/2000/200044/200044pap.pdf, last visited December 19, 2005.
41. http://www.federalreserve.gov/pubs/feds/2001/200126/200126pap.pdf, last visited December 19, 2005.
42. The new capital standard Basle II seeks to relate capital requirements not just to the value of assets, but the risk-weighted value, while the risks will be calculated based on external or internal rating of the asset. See Chapter 29.
43. Frederick Feldkamp in Securitization: The Alchemist's Dream; International Financial Law Review; London; 2000.
44. We shall take up investors' experience, including performance and returns, in Chapter 30.
45. For example, Regulation AB requires several disclosures - see Chapter 28.
46. Author's estimate, taking into account U.S. and European data and ballpark figures of Asian and Latin American activity.
47. By Meir Kohn, Department of Economics, Dartmouth College
48. See
49. See Martin Fingerhut's "Canada's ABS Market Comes of Age" at the International Financial Law Review site http://www.iflr.com/?Page=17&ISS=17633&SID=524596 last visited July 12, 2005.
50. This is apparently comparable to the US FIN 46R - see chapter on Accounting.
51. See chapter on Legal Issues.
52. See European Securitization Forum Data Report Winter 2005
53. For a further discussion on pfandbriefs, and the German pfandbrief law, see Chapter 12 on RMBS.
54. See the website of the true sale initiative at http://www.true-sale-international.de. Also, "Germany-yet to catch up in securitization," by Nina Siedler, Peter Jark, and Robert Hofbauer, Luter Rechtsanwaltsgesellschaft mbH, in Global Securitization Review 2005/2006 Euromoney Yearbooks pg 103.
55. The website of the Department of Treasury contains a separate section on securitization, gives presentations, offers documents and investor reports for transactions. See http://www.dt.tesoro.it/ENGLISH-VE/Securitisa/index.htm, last visited December 28, 2005.
56. For materials on Italian securitization law, see Vinod Kothari's website at: http://vinodkothari.com/secitaly.htm.
57. See New Horizons for the Italian Securitization Market by Patrizio Messina, of Orrick, Herrington & Sutcliffe 2004. Published in the "Global Securitization and Structured Finance 2004" pg. 333.
58. Article 2447 BIS letter (a).
59. See, Changes in the Italian securitization legislation-new provisions on covered bonds. Umberto Mauro and Giuseppe Schiavello, Macchi di Cellere Gangemi. Global Securitization Review pg. 143. Also Italian Securitization Law, by Freshfields Bruckhauseringer, October 2005.
60. See, Daphne Brinkhius "The Dutch Securitization Market and Developments of the Legal Framework"; Global Securitization Review 2005-2006, Euromoney Yearbooks pg. 120.
61. As to meaning of obligor notification and implications of not giving such notice, see the chapter on Legal Issues.
62. Based on the article by Xavier de Kergommeaux and Gilles Saint Marc.
63. See, Herve Touraine and Fabrico Grillo: Overview of the French Securitization Market: Recent Innovations and Market Trends, Global Securitization and Structured Finance 2004.
64. Also, see Jean-Norbert Pontier: The Recent Changes in the French Securitization Regulatory Framework, at www.vinodkothari.com/french_securitization_law.htm.
65. Ivan Peeters "Changes in the Belgian Legal Framework for Securitization" Freshfields Briefing, May 2005.
66. Partly based on article by Miguel Castro Pereira and Inês Batalha Mendes.
67. See Paula Gomes Freire and André Figueiredo: Portugal ready to embrace new asset classes, Securitization Guide by IFLR.
68. Some useful information about Spanish securitization market in an article by Pablo Antolin, published in World Securitization News and Comment, June 1999.
69. See chapter on Legal Issues.
70. See Article by Íñigo Berrícano and Alejandro de Muns from Linklaters available on www.globalsecurtisation.com.
71. See Mattias Lampe, Olof Stenström and Christian Swartling: Securitization and Covered Bonds in Sweden, at www.globalsecuritization.com
72. Based on a paper entitled "Structuring Securitization Structures in Luxembourg by PwC available at www.vinodkothari.com.
73. Based on an article by Ahmed Pekin, Senior Partner, Fethi Pekin, Partner and Melis Cosan Baban.
74. Based on a Fitch Report, December 2002.
75. Based on an article by Michal Dlouhy, Petr Kuhn and Jan Vild.
76. Based on an article by Bela Deri.
77. Paul Sass, head of structured finance at OTP Bank, as quoted in The Banker. Available at www.thebanker.com/news/fullstory.php/aid/453/Securitization_gives_food_for_thought.html>.
78. See &P: Recent Securitization conference highlights rise of Mexico Plus Brazil's Expected Comeback, May 24, 2005.
79. S&P: Recent Securitization conference highlights rise of Mexico Plus Brazil's Expected Comeback, May 24, 2005.
80. S&P: Recent Securitization conference highlights rise of Mexico Plus Brazil's Expected Comeback, dated May 24, 2005 available at www.standardandpoor.com/ratingsdirect.
81. Based in part on International Structured Finance - Securitization in Japan: Special Report by Shinsei Bank, Japan.
82. See Moody's Reports: Japan's 2004 Securitization Market Grew To At Least ¥6.5 Trillion.
83. See, Fitch Report at www.fitchratings.com.
84. See, Toshifumi Ueda: A Legal Review of the Japanese Securitization Market: Overview of the Recent Legislation, "Global Securitization Review, published by Euromoney, 2005-2006 pg 193.
85. For details please see the website at
86. See KPMG Financial Reporting Update October 2005, issue 27 available from KPMG's Hong Kong website. For the text of the amendment please visit www.info.gov.hk.
87. See Reforms help Hong Kong Securitization, by Nicholas Chan and Susie Cheung: www.iflr.com/?Page=17&ISS=17633&SID=524604→.
88. Partly based on an article by Chaipat Kamchadduskom.
89. See Generally, Stephen Jaggs and Matthew Waudby, Thai Structured Finance Renaissance?, "Published in 2005 Structured Finance Review available at www.iflr.com/?Page=17&ISS=17633&SID=524623-.
90. Based on Paul H. Brietzke - Securitization and Bankruptcy in Indonesia
91. Sarvar Ahmad, HSBC "Structured Capital Market in Asia".
92. Based on Joong-hee Lee (Housing Finance International - March 2003).
93. For an excellent paper on NPL Securitization in China , see Johnny P. Chen Non Performing Loan Securitization in the People's Republic of China, linked at www.vinodkothari.com/secchina.htm.
94. See China Takes Another Step Toward Financial Maturity," by William Pesek available at .
95. See www.vinodkothari.com/seclaw.htm for the text of the Guideline.
96. See Securitization in Taiwan by Adrienne Showering, Berkeley Cox, Angela Kwan and Andrew O'Shea at www.globalsecuritization.com on the Asia Pacific Link.
97. For a complete discussion on the law of securitization in India, see Vinod Kothari's Securitization Asst Reconstruction and Enforcement of Security Interests.
98. See Update on Indian Structured Finance Market, July 2005 available on www.vinodkothari.com/secindia.htm, and www.icraratings.com.
99. Partly based on article written by Ahmed H. Ghazli, an attorney with the law firm of Afridi, Shah & Minallah, Lahore.
100. See Najmus Saquib: The Study of Prospects of Asset-backed Securitization in Corporate Sector of Pakistan" available on the international section of www.securitization.net.
101. Based in parts on Clayton Utz guide to Australian securitization market.
102. See Fabienne Michaux: Australian Securitization Update and Outlook, Global Securitization Review 2005 pg 180.
103. See "Securitization in New Zealand-the search for the Holy Grail" by the law firm Buddlefindlay.
104. Synthetic CDOs: A Growing Market for Credit Derivatives: a special report by Fitch, February 6, 2001.
105. See news item on http://vinodkothari.com/secnewsjune01.htm.
106. As in the case of managed CDOs.
107. See Chapter 2 on Revolving Structures.
108. See Chapter 2 under Asset Features.
109. See Chapter 5 on Understanding the Nature and Risks of Asset-Backed Securities.
110. See more on computation of the option adjusted spread and cost of the prepayment option in Chapter 10.
111. See discussion in Chapter 2 on companion classes or support classes.
112. There might be procedures for noteholders voting to resolve such unapprehended problems.
113. See later in this chapter.
114. See also the preceding sections of this chapter.
115. See Chapter 23 on Legal Issues.
116. Amodel legal opinion for a securitization transaction is enclosed in the Appendix to Chapter 23 on legal issues.
117. The servicing and other operational aspects of securitization are taken up in Chapter 25.
118. For detailed analysis of the concept of economic capital, see Chapter 29 on Regulatory and Economic Capital.
119. Sometimes distinction is made between normal and excess service fees - the former senior and the latter junior.
120. See Economic Capital in Chapter 29.
121. Auto Loan Criteria, pg. 23
122. See earlier in this chapter on the classes of liabilities and the retained class.
123. At http://www.afgi.org/products-assetsec.htm, last visited December 20, 2005.
124. See details in Chapter 13.
125. As it is almost impossible to think of a retail loan pool with no prepayments at all, the prepayment risk is essentially the actual speed, higher or lower, than the projected one.
126. Remarks before American Bankers Association Annual Convention, Palm Desert, California (via satellite) September 26, 2005
127. Alan Greenspan and James Kennedy: Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences, FEDS working paper No. 2005-41
128. June 16, 2005
129. Agency Hybrid ARM Prepayment Model, by John Sim and Rajan Dabholkar, March 12, 2004.
130. The U.K. Mortgage Market: Taking a Longer-Term View, a report by David Miles, March 2004
131. Prepayment Rates A Key Performance Driver In European RMBS Transactions, August 18, 2005
132. Based on GE Capital Mortgage Corporation submission to Bank for International Settlements, dated March 31, 2001.
133. Signifying that the discounting rate is static.
134. In India, for example, structured finance ratings are distinguished by a suffix AAA (SO), where SO stands for structured obligations.
135. Note the meaning of final maturity, and difference between expected maturity and final maturity, discussed in Chapter 4.
136. See S&P: Servicer Evaluations Ranking Criteria, September 21, 2004.
137. Fitch Ratings: Rating ABS Seller/Servicers, September 14, 2004.
138. Committee on the Global Financial System of the Bank for International Settlements: Role Ratings in Structured Finance, January 25.
139. Report dated November 6, 2003 by NERA: Credit Ratings for Structured Products. 320 Securitization: The Financial Instrument of the Future
140. Lea, Dr Michael: Overview of Housing Finance Systems, at www.countrywideinternational.com/article4_Overview.PDF (last visited October 23, 2002).
141. The Impact of the GNMA Pass-through Program on FHA Mortgage Costs: Journal of Finance, xxxvI, 2: 457-469.
142. Passmore, W. and R. Sparks. 1996. Putting the Squeeze on a Market for Lemons: Government-Sponsored Mortgage Securitization: Journal of Real Estate Finance and Economics 13: 27-43.
143. Bank Funding Modes: Securitization versus Deposits Journal of Banking Finance. 11: 379-402.
144. Elements of Mortgage Securitization: Journal of Real Estate Finance and Economics. 1: 331-346.
145. Todd, Steven The effects of securitization on consumer mortgage costs: Real Estate Economics; Spring 2001.
146. This seems to be a precursor to the setting up of Hong Kong Mortgage Corporation.
147. Para 3.10 of the Report titled Mortgage Corporation Proposal.
148. See also Chapter 1 on the the impact of securitization on lending costs.
149. Skarabot. Jure: Securitization and Special Purpose Vehicle Structures, paper April 29, 2002, quoting Shenker J., and A. Colletta: "Asset Securitization: Evolution, Current Issues and New Frontiers", Texas Law Review, 69, (1991), p. 1369-1429.
150. The support, given by law, includes the following: (a) The securities issued by the agencies do not require registration with the SEC; (b) The securities are exempt from both state and local taxes; (c) The Secretary of the State is authorized, but not required, to provide liquidity support to the GSEs by buying their securities up to US$2.25 billion each.
151. Bruskin, Eric, Anthony B. Sanders and David Sykes: The Nonagency Mortgage Market: Background and Overview, April 1999 (paper).
152. HUD Regulation of Fannie Mae and Freddie Mac, HUD website at http://www.hud.gov/offices/hsg/gse/gse.cfm, last visited December 22, 2005.
153. For status report, see http://www.govtrack.us/congress/bill.xpd?bill=h109-1461, last visited March 2, 2006.
154. Mortgage-bankers Association.
155. The Bond Market Association, Research Quarterly, November 2005.
156. See in Chapter 26 on Taxation Issues.
157. Nomura Fixed Income Research: A Journey to the Alt-A Zone, June 3, 2003.
158. Lea, Dr. Michael: Prerequisites for a Successful SecondaryMortgage Market: The Role of the Primary Mortgage Market (paper presented at Inter-American Development Bank conference) November 1999.
159. Culled from various periodic reports of European Securitization Forum: at www.europeansecuritization.com.
160. Based on Fannie Mae website.
161. Ginne Mae has a practice of servicing fee of 43 bps.
162. Data on Bond Market Association website at http://www.bondmarkets.com/story.asp?id=98 last visited December 22, 2005.
163. See chapter on tax issues.
164. In this particular case, the asset-base of Abbey is much larger than what is held by the master trust. Around the time of the issue discussed here, Abbey's mortgage portfolio was £68 billion.
165. Department of Treasury, SEC and Office of Federal Housing Enterprise Oversight Staff report on Enhancing Disclosure In The Mortgage-Backed Securities Markets, January 2003.
166. Deutsche Bank: Guide to US Mortgage-backed Securities January 2002.
167. http://www.investinginbonds.com/info/igmbs/versus.htm, last visited October 29, 2002.
168. The Pfandbrief - Europe's Covered Bond Benchmark Facts and Figures, 2005; Association of German Pfandbrief Banks, p. 37.
169. See regular rating transition studies of Standard & Poor's. Also see Vinod Kothari's securitization site at: http://vinodkothari.com and later chapter on Investing in Securitization Transactions.
170. Nomura Fixed Income Research: Tale of Two Cities: US Fixed Income Research Midyear Review, July 2002
171. Based on http://www.cmalert.com/Public/MarketPlace/Ranking/index.cfm?files=disp&article_id=79396, last visited October 15, 2005
172. This means the borrower is not a "special purpose company" as it owns the leasehold interest in the property and operates the same, but is limited to that purpose. Hence, it is called single purpose or a limited purpose company.
173. Offer Circular, page 52.
174. "The transaction represents the first securitization ever of uncompleted buildings." - A Clifford Chance Press release of June 12, 2001.
175. Nomura Fixed Income Research: Tale of Two Cities: US Fixed Income Research Mid-year Review, July 2002.
176. Structured Finance Trends - Yield Spreads, Credit Support, and Collateral Performance - The Big Picture, June 27, 2005.
177. REO - Real estate owned, a term implying a real estate property taken over by a mortgagee.
178. The study relates to year 2000 to 2004.
179. Mason, Howard K. and Rick L. Biggs: Credit Card Securitization: A Quick Primer May 2002. p. 1.
180. Deutsche Bank Global Securitization Research: The Essential Guide to Credit Card As Bs and Cs January 2001.
181. European Securitization Forum data.
182. Refer to the subject index for discussion at other places in this book on master trust structure.
183. Standard and Poor's European Structured Finance Report July 2003.
184. Fitch Ratings: Credit Card Movers and Shakers July 2003.
185. Rating Transitions 2001: U.S. ABS Credit Ratings Endure the Test of Recession, S&P commentary dated January 14, 2002.
186. See for details, Chapter 21 on Regulatory Issues.
187. Fitch Ratings: A Road Map to Rating Auto Loan-Backed Securitizations, March 13, 2002.
188. Auto loan ABS was No. 1 until 2000, and then moved to third position in 2001 onwards due to substantial growth in home equity loan securitization - see statistics later in this chapter.
189. For more details on the nature of capital recovery, see Vinod Kothari's Lease Financing and Hire-purchase 4th edition 1996.
190. See Chapter 30 on Investing in Securitization Transactions. Auto loan securitization 409
191. For more on the leasing industry, see Vinod Kothari's Lease Financing and Hire Purchase. For latest edition and pricing, please see http://india-financing.com
192. The U.S. SEC regulation AB has made certain quantitative limits to residual risk in case of lease transactions. See Chapter 28.
193. This section is based on the research done by the Equipment Leasing Association, U.S.: see results in The Securitization Marketplace 2002 by Equipment Leasing and Finance Foundation.
194. A U.S. securities market term for private placements.
195. Data based on European Securitization Forum, Summer 2003 report, apparently excluding synthetic CDOs.
196. Commonly Asked CDO Questions: Moody's Responds February 23, 2001.
197. Banc of America Securities: Collateralized Debt Obligations: An Introduction to Arbitrage CBOs and CLOs, June 1999.
198. Banc of America Securities: An Introduction to Arbitrage CBOs and CLOs p. 6.
199. Moody's: Responses to Frequently Asked CDO Questions (Second of Series) July 13, 2001.
200. Standard & Poor's commentary titled Cash Flow CDOs: Continued Growth Despite Economic Risks August 7, 2001.
201. Richard K Skora: Correlation-the hidden risk in Collateralized Debt Obligations.
202. See, for example, Standard & Poor's Commentary titled Distressed Debt CDOs: Spinning Straw Into Gold dated May 7, 2001.
203. The U.S. SEC recently formulated rules about registration of funds that fall under certain criteria.
204. This might only serve as a broad classification, amplified through the use of leverage. The CSFB Tremont Hedge Fund Index identifies 10 major hedge fund strategies-convertible arbitrage, dedicated short bias, emerging markets, equity market-neutral, event-driven, fixed-income arbitrage, global macro, long-short equity, managed futures and multi-strategy.
205. S&P's new CDO Evaluator, version 3 supposes a 5% inter-industry correlation. The assumption was zero in earlier models.
206. Based on Structured Finance Global Ratings Roundup Quarterly: Second-Quarter Performance Trends.
207. See details in Chapter 27 on Accounting for Securitization.
208. Restructuring, for example, is not a hard credit event as it is not a default.
209. In physical delivery credit default swap transactions, usually the protection buyer has the option to deliver an asset that qualifies for the "deliverable obligation" characteristics. Obviously the protection buyer buys the cheapest asset prevailing in the market and delivers the same.
210. The word "commercial paper" might have different meanings in different countries. It is typically taken to mean funding for a term up to 270 days, in some cases, going up to 365 days. The definition of the term "security" is in the U.S. Securities Act excludes securities with maturities up to 9 months-hence, CP of 270 days' maturity is exempt from securities regulation. Commercial paper is issued mostly in the form of promissory notes.
211. April 1993 by Mark Adelson.
212. For more on direct credit substitute and aspects of regulatory capital, see Chapter 21 on Regulatory Issues.
213. Recent commercial paper outstandings may be found on http://www.federalreserve.gov/releases/cp/default.htm#outstandings.
214. Analysis of data http://www.federalreserve.gov/releases/cp/table1.htm, last visited December 24, 2005.
215. S&P Global ABCP Criteria.
216. S&P Global ABCP Criteria.
217. Global ABCP Criteria, September 29, 2005.
218. See, for impact of executory clauses on the transfer, Chapter 23 on Legal Issues.
219. This chapter deals with the generic technology of future flows. See Chapter 21 for some specific forms of future flows such as intellectual property.
220. Fitch Ratings: Toll Road Securitizations: Where the Future Flows, January 2004
221. Wachovia Securities Structured Products Research: Emerging Market Future Flows Securitizations, November 20, 2003.
222. Avianca airlines filed for bankruptcy. Apart from a case of default, the transaction has also put to question the legal methodology of securitization transactions under a US jurisdiction. Notably, here, the transferee trust is domiciled in the U.S.
223. Fitch Ratings: Under Pressure: Structured Transactions in Emerging-Market Stress-Update 2003, dated August 5, 2003.
224. See, of example, news reports at http://vinodkothari.com/secnewsfeb02.htm.
225. Moody's Special report: 2002 Review and 2003 outlook: European Whole Business Securitization, January 21, 2003.
226. Rating Transitions 2004: Upgrades Outnumber Downgrades For First Time In European Structured Finance.
227. See Fitch Ratings: Note Acceleration in Whole Business Securitization, April 2, 2004, graphic giving scenarios where different senior securities will suffer downgrade.
228. In law, debentures do not have to be marketable securities. A single loan instrument is also a debenture. The instrument acknowledging a floating charge is, by definition, a debenture.
229. Agnew v. Inland Revenue Commissioner, 2000 (7) SCC 291.
230. Cosslett Contractors Ltd. (in administration), in re (2001) BCC 740.
231. Whole Business Securitizations: A Unique Opportunity for U.K. Assets, October 19, 2000.
232. Fitch Ratings: Criteria for Whole Business Securitization, January 28, 2004.
233. John S Hillery: Securitization of Intellectual Property, Recent Trends from the United States, March 2004.
234. See http://www.pullmanco.com.
235. Manhattan Supreme Court Justice in July 2003 ruled that rather than possessing "a unique formula," Mr. Pullman merely used previously known techniques to analyze the numbers: Pullman Group v. Prudential Insurance, 600772/01.
236. So much so that one of the best selling fiction writers Linda Davies wrote a novel titled Something Wild that features the lives of music stars and also talks of Bowie Bonds. David Pullman was featured by Time as an innovator: http://www.time.com/time/innovators/business/profile_pullman.html, last visited December 26, 2005.
237. Fortune, April 28, 1997.
238. A brief description of several instances of music and other intellectual property securitization transactions may be found on http://www.ex.ac.U.K./~RDavies/arian/bowiebonds.html, last visited December 26, 2005.
239. See Chapter 23 on Legal Issues.
240. See Chapter 27 on Accounting Issues.
241. Press release on http://www.paulcap.com, last visited December 26, 2005.
242. Global Non-performing Loan Report 2004.
243. National Accounts Classifications, LCR Securitized Bonds August 2, 2005.
244. Report dated July 20, 2005: Performance Report on Italian Treasury Sponsored ABS transactions.
245. May 21, 2002.
246. For example, the Integrated Prudential Sourcebook of the FSA, U.K., Annex 2G.
247. For more on credit derivatives, see Vinod Kothari: Credit Derivatives and Synthetic Securitization
248. As a synthetic securitization reduces balance sheet risks, it creates fresh capacity for balance sheet funding. This is true both in regulatory sense and in economic sense. However, a synthetic securitization does not reduce the balance sheet size for financial reporting purposes.
249. There is an elaborate definition of credit events, but broadly standard documentation includes bankruptcy, failure to pay, acceleration, obligation default, moratorium and restructuring.
250. Theoretically, the structuring of the risk transfer is comparable to an inter-creditor arrangement where some investors agree to provide a first line of defense to others. It may be argued that the distribution of credit risk to the various classes is only a matter of allocation, and the weighted-average coupon of all the classes should be equal to the coupon for an unstructured risk transfer. However, this rule is seldom followed in practice; if this rule were applicable, the issuer will be indifferent as to the sizing of the individual classes.
251. The position may change under Basle II, which permits the risk-weighting of the uncovered senior position to be at par with that applicable to the senior-most of the rated securities. Regulatory aspects of credit derivatives are dealt with at length in Vinod Kothari's Credit Derivatives and Synthetic Securitization.
252. As a swap counterparty, the protection seller is required to keep regulatory capital for the risk, although theoretical, undertaken by providing the protection.
253. A claim against a person is referred to as an actionable claim or a chose in action; a claim over an asset in possession is called a chose in possession. See Chapter 23 on Legal Issues.
254. There is an attempt at harmonizing and modernizing the law relating to assignment or transfer of receivables; UNCITRAL has formulated a model law for assignment of receivables that will be circulated among member countries of the United Nations for adoption. See Chapter 23, also Appendix 2 to that chapter, on Legal Issues.
255. For example, the two tier SPV structure used in U.S. transactions.
256. Obligor notification is a requirement in many countries, but it is seldom ever done in practice. Such countries still recognize the transfer as an "equitable transfer."
257. This junior-most piece seldom takes the form of legal equity, but is nevertheless an economic equity of the SPV. The legal form can be preference shares with participation rights, subordinated loan and zero coupon bond.
258. See more in Chapter 27 on Accounting Issues
259. Business Week, October 26, 1998.
260. As a forceful example of volatility in investing in subordinate CDOs, cash or synthetic, American Express had to write off US$370 million in June 2001 on a $1.4 billion CDO portfolio.
261. In practice, the flexibility to an extent is retained by the originator retaining a call or substitution option for such assets needed back for obligor service. But the call back option is constrained by both legal and accounting restrictions, and is generally as complicated as the initial transfer itself.
262. As rating agency Fitch puts it: "Some of the considerations investors must grasp when analyzing synthetic deals include the potential linkage to the sponsoring entity (i.e. bank) via the credit derivative and the resultant structural risks; the composition of the reference obligations and the sponsor's credit culture, origination process and ability to substitute obligors; definitions of credit events and loss recognition for impaired assets; and, finally, appropriate policies for collateral investments." [Fitch Special Report on Synthetic Securitization:Unique Structures, Analytical Challenges, June 4, 2001]
263. Atotal rate return (TROR) swap is different from credit default swap. In this case, without having to depend on a default on a regular basis, the protection buyer will swap with the protection seller the total return, that is, all the coupon received plus appreciation minus depreciation, against a base rate + spread. Thus, the protection buyer replaces his actual return from a portfolio with an indexbased return plus a spread.
264. Presumably, in such cases, the rating of the protection seller should act as a cap on the rating of the unfunded swap.
265. Banc of America Securities Asset-backed Research: Collateralized Debt Obligations, An Introduction to Arbitrage CBOs and CLOs, June 1999, p.9
266. Moody's: Responses to Frequently Asked CDO Questions (Second of Series) July 13, 2001
267. Financial Times, December 8, 2005.
268. The Financial Times report above states that the pricing ranged from 17 bps for the AAA class to 700 bps for the junior most class.
269. Intesa BCI, an Italian Bank, launched its e1 billion synthetic securitization of aircraft loans vide Leonardo SPV in May 2001. After September 11, there have been some downgrades on the junior classes, but many people have regarded this deal as a prototype for similar risk transfers to come. Journal Asset Finance International regarded this as the "bank finance deal of the year"-Asset Finance International April 2002.
270. As per Standard & Poor's Presale rating rationale, NIB Capital Bank NV's synthetic transaction called Latitude Synthetic is referenced to a portfolio of shipping loans.
271. See Chapter 2 of Vinod Kothari's Credit Derivatives and Synthetic Securitization
272. Guy Carpenter: 2005 The World Catastrophe Reinsurance Market. p. 2
273. This view has gathered more force with the submissions of the American Securitization Forum to the FASB, of an alternative method of accounting where the assets of the SPV will appear as a segment on the balance sheet of the originator. See details on Vinod Kothari's editorial website http://vinodkothari.com/secedit.htm, simultaneously published in Asset Securitization Report, August 1, 2003.
274. Also called a protected cell company.
275. The inclination of a court to go into the substance question is essentially the tradition of judicial approach. Some countries are known as "form countries" while some others get a reputation of being "substance countries."
276. English common law has for ages treated such a sale as a conditional sale, treated as a variant of a mortgage. If a transfer of property is made with the understanding that upon discharge of the debt, the property will be re-conveyed to the original owner, it is a mortgage by way of conditional sale.
277. Debtor-in-possession (DIP) funding is a special funding organized during a bankruptcy resolution with the sanction of the court.
278. "The LTV Steel ABS Opinion is predicated on unusual circumstances and, therefore, it is not likely to open the floodgates for ABS challenges in bankruptcy" Robert Stark: "Viewing the LTV steel ABS opinion in its proper context", Journal of Corporation Law, Winter 2002. Some have even held that the Court was influenced by psychic factors such as the location of the Court near to LTV's headquarters, and the presence of several Congressmen in the hearings.-Kenneth N. Klee and Brendt C. Butler: "Asset-backed securitization, special purpose vehicles and other securitization issues" Uniform Commercial Code Law Journal, Vol. 35, No. 2.
279. "Rethinking the role of recourse in the sale of financial assets," The Business Lawyer, November 1996.
280. The presence of third-party investors was considered to be a crucial factor in Frank Lyon and Company, a tax case dealing with sale and leaseback transactions.
281. Robert D. Aicher and William J. Fellerhoff: Characterisation of a Transfer of Receivables as a Sale or a Secured Loan Upon Bankruptcy of the Transferor 65 AM. BANKR. L.J. 181 (1991).
282. For example, In re Golden Plan of California, Inc., 829 F.2d 705 (9th Cir. 1986).
283. The Business Lawyer, November 1996. In fact, this is a report, citing opinions of nine legal experts.
284. The Business Lawyer, November 1996. In fact, this is a report, citing opinions of nine legal experts.
285. See Chapter 29 on Regulatory Issues.
286. Colombia Business Law Review, 1993, No. 2, p. 147.
287. See the chapter on Accounting for Securitization.
288. Linden Gardens Trust Ltd v. Lenesta Sludge Disposals Ltd, [1994] 1 AC 85.
289. Available on the web at: http://www.firstam.com/faf/html/cust/jm-summaries.html, last visited December 13, 2005.
290. Exposure Draft dated August 11, 2005; see more in the chapter on Accounting Issues.
291. Frederick Feldkamp in "Asset securitization: The alchemist's dream," International Financial Law Review, London, 2000.
292. For more, see Vinod Kothari: Securitization, Asset Reconstruction and Enforcement of Security Interests. For details and latest edition information, see http://vinodkothari.com/arcbook.htm.
293. The early stamp laws referred to stamping "every skin or piece of vellum or parchment, or sheet or piece of paper, on which shall be engrossed, written or printed."
294. See Standard & Poor's report "Securitization without true sales: They do things differently in Europe" (published on October 6, 2003).
295. Except in English mortgage and mortgage by way of conditional sale, where a decree of foreclosure vests the lender with a proprietary interest in the property. For details, see Vinod Kothari's Securitization, Asset Reconstruction and Enforcement of Security Interests. For latest edition information, see http://vinodkothari.com/arcbook.htm.
296. Legal provisions about fixed and floating charges and recognition of the floating chargeholder holding a generic security interest on the assets of the borrower exist in all those countries that have structured corporate laws based on the U.K. pattern. Obviously, floating charges have no meaning for non-corporate borrowers.
297. Goode, RM: Principles of Corporate Insolvency Law, 1997, p. 167.
298. Significant recent judicial pronouncements have been made on the concept from House of Lords, recently in the case of National Westminster Bank plc v. Spectrum Plus Limited & others [2005] U.K.HL 41, and before that, in Cosslett and Brumark case. For details, see Vinod Kothari: Securitization, Asset Reconstruction and Enforcement of Security Interests.
299. For details and latest edition information, check at http://vinodkothari.com/crebook.htm
300. See, for example, the case studies of RMBS and CMBS transactions in the chapter on Synthetic Securitization.
301. See, for details, the Powers Committee report, February 1, 2002.
302. Based on S&P's SPV criteria.
303. Legal Criteria for Structured Finance Transactions, April 2002.
304. For instance, for the Avianca-see ante in this chapter.
305. Mark Raines and Gabrielle Wong: "Aspects of Assignment of Future Cash Flows under English and New York Law" Duke Journal of Comparative & International Law, Spring 2002.
306. See earlier in this chapter.
307. Subsequently, the ESF has come out with a detailed exposure draft of the Securitization Framework. See the full text at http://www.europeansecuritisation.com.
308. http://www.uncitral.org/en-index.htm, last visited on August 31, 2003.
309. Sometimes, difficulties of stamp duty may suggest that the actual instrument of transfer be kept different from the assignment agreement embodying the commercial and other detailed terms. This may also be desirable if the conveyance requires registration.
310. See Chapter 29 on Regulatory Issues.
311. October 1998. Duff and Phelps was later taken over by Fitch.
312. Also referred to as freehold property.
313. This is applicable for financial leases. For operating leases, suitable modification has to be made. For detailed exposition of financial and operating leases, see Vinod Kothari's Lease financing and hire purchase. For the latest edition, see http://india-financing.com
314. Fannie Mae's servicing standards may be viewed online at http://www.allregs.com/efnma/[last visited August 24, 2003]. Servicing requirements are now also required to be disclosed at length in offer documents as per SEC's Regulation AB. See chapter dedicated to the said regulation.
315. For example, in Conseco Finance's case. See also Chapter 25.
316. For bond-type transactions, where reinvestments are made for the longer term, the benefits from reinvestments obviously accrue to the bondholders.
317. In many cases, the trust is brought into existence by settlement of a nominal amount, and thereafter, the trust acquires further property with the money provided by the beneficiaries.
318. If the junior certificates are of the nature of residual interest certificates, as in the case of REMICs, they will be entitled to all the interest remaining after discharging other classes.
319. This is a sequential paydown structure. For paydown structures and their significance, see Paydown Structures in this book.
320. Structured finance market opinion survey confirms operational risk remains a serious concern for securitization professionals, report dated February 24, 2005.
321. Servicer Evaluation Ranking Criteria, September 21, 2004.
322. Uniform Single Attestation Program-a Mortgage Bankers Association standard
323. Real Estate Settlement Procedures Act.
324. Fair Debt Collection Practices Act.
325. Backup servicer plays vital role in non-commodified securitizations, June 20, 2005.
326. Article at http://www.iflr.com/?Page=17&ISS=17633&SID=524704 last visited December 27, 2005.
327. See http://www.bondmarkets.com/market/CDO_Trustee_Template.pdf, last visited December 27, 2005.
328. City of Chandler, et al., v. Bank One, N.A., et al. (D. Az.); Metropolitan Life Ins. Co. v. Bank One, N.A. (D.N.J.); Bank One, N.A. v. Poulsen, et al. (S.D. Ohio), State of Arizona et al. v. Credit Suisse First Boston Corporation et al., in Superior Court of Arizona.
329. CNN news on December 21, 2005. Full text of the SEC complaint is at: http://www.sec.gov/litigation/complaints/comp19509.pdf, last visited December 28, 2005.
330. In a public meeting with the Central Board of Direct Taxes.
331. FASITs were subsequently repealed effective January 1, 2005.
332. Supplement V to their book: Federal Taxation of Securitization, p. 1.
333. Situation may be arguable if a total rate of return swap where the entire risk and rewards are exchanged by a completely new set of risks and returns. The point is so far not settled in tax laws. See, for further details, Vinod Kothari: Credit Derivatives and Synthetic Securitization.
334. This applies except when there are specific rules to include the value of retained interests while computing gains on sale.
335. So called, these were issued in pursuance of an offer by Sears Mortgage Securities Corp of fast pay and slow pay certificates.
336. Chapter on RMBS markets.
337. Letter dated July 28, 2003.
338. See letter dated July 28, 2003: "If FASB does not accept our key suggestions (or make other appropriate changes), the resulting guidance will not be operational, and we urge FASB to consider a new start. In Part VI of this letter we discuss the matched presentation, which we view as an attractive alternative in those circumstances."
339. See chapter on RMBS.
340. We have also noted why, in form countries, an approach solely based on a legal nature may lead to very unhappy results.
341. Thus, various methods such as equitable transfers, participations and declaration of trusts may lead to off-balance sheet treatment.
342. There is an exception under IAS 39-see later.
343. Text of FAS has been revised by FAS 156, in March 2006. See later in this chapter.
344. This could also be understood in option pricing language. The value of any option is the difference between its market price and strike value. If the strike price is the same as the market value, the option always has a zero value and should, therefore, be disregarded.
345. An Exposure Draft has already been issued to revise the prevailing QSPE conditions and amendments to the standard may be expected in 2006. See later for discussion of the Exposure Draft.
346. See later in this chapter.
347. That is not the end. The FASB has already decided to bring another amendment to FAS 140 to further amplify these conditions. At the time of writing this [December 2005], the FASB had come out with a revised exposure draft on which the comment process had ended and a new standard is expected in 2006. For latest developments, see Vinod Kothari's website at http://vinodkotharicom/accountingissues.htm.
348. Rosenblatt, Johnson and Mountain: Securitization Accounting, 7th edition, p. 11.
349. For discussion on an Exposure Draft on Hybrid Financial Assets that deals with the derivatives held by a QSPE, see later in this chapter.
350. Rosenblatt, Johnson and Mountain: Securitization Accounting, 7th edition, p. 12.
351. See later in this chapter.
352. Refer to the heading What if an SPE is not a QSPE?
353. FASB Statement of Concepts no. 7: Using Cash flow Information and Present Value in Accounting Measurements.
354. Para 23 of FASB Statement of Concepts no. 7: Using Cash flow Information and Present Value in Accounting Measurements.
355. As disclosure standards require disclosure of assumptions used in valuing retained interest, including discounting rate, one can see the disclosures in published accounts of several major securitization entities. Some examples are shown later in this chapter.
356. For more on computation of option-adjusted spread, see the relevant chapter.
357. For further discussion on this, refer to Chapter 9.
358. Public domain document at http://www.ge.com/ar2004/note_29.jsp, last visited December 18, 2005.
359. While future interest itself is not a recognized asset yet, the value of the composite asset may be split between value of principal and value of interest.
360. Bankruptcy remoteness is an issue only in the event of bankruptcy, while accounts are prepared under the going-concern presumption.
361. A subordinated investment or over-collateralization may be viewed as funded guarantees-guarantees along with investment of cash or collateral by the seller.
362. See Vinod Kothari's website at http://vinodkothari.com/secedit.htm.
363. S&P: Is FIN 46 the Wrong Solution to the Right Problem? Securitization Professionals Share Their Views in Standard & Poor's SF Market Opinion Survey, April 11, 2003.
364. Form S-3 is one of the several forms used for SEC registration statements relating to issue of securities. Form S-1 is the basic form applicable where no other form applies. S-3 is a brief form for shelf registration. For foreign issues, the forms are labeled as F-1, F-3, etc.
365. Synthetic transactions were excluded despite ISDA's representation-see ISDA representation dated March 8, 2005.
366. The term depositor in U.S. parlance typically means the entity that acquires receivables and transfers them to the issuer.
367. Also see SEC's guidance on Regulation AB, on SEC website at: www.sec.gov/interps/telephone/cftelinterps_regab.pdf, last visited April 11, 2006.
368. Reference seems to be the change of servicer.
369. These reports may have different market names: for example, call reports (Consolidated Report on Condition and Income), as they are referred to in the U.S.
370. International Convergence of Capital Measurement and Capital Standards: A Revised Framework
371. The reference to paragraph numbers in this chapter is to the revised version of November 2005.
372. The Advance Notice of Proposed Rule was published on October 20, 2005, and is available at http://www.fdic.gov/regulations/laws/federal/2005/05basel1020.html, last visited December 27, 2005.
373. Notably, Pillar 2 is a supervisory discretion.
374. Para 552.
375. Requirements of Para 452 to 459 define when an asset is in default.
376. Ratings may be inferred only for unrated senior positions; where there are rated positions subordinated to the unrated position and certain other operational conditions, listed in Para 617, are satisfied. In practice, this would mostly apply for super-senior tranches, where an inferred rating is equal to the senior-most rating to rated tranches.
377. For the theoretical foundations of the model, see Model Foundations for the Supervisory Formula Approach, by Michael B. Gordy, July 2004.
378. When the amount of a receivable suffers a reduction on account of set-offs or deductions, such as netting off of mutual claims, the amount of receivables are diluted, other than on account of default. This is dilution risk.
379. OCC 96-52 Securitization-Guidelines for National Banks September 25, 1996.
380. The risk weights are different from those under BIS Consultative Paper 3, but it may be noted that at the time when U.S. regulators framed these proposals, consultative paper 1 was only available. 14 June 2001 version, amended from time to time. The version used here is latest version is available on FSA site at http://fsahandbook.info/FSA/html/handbook, last visited December 28, 2005.
381. These methods of asset transfer have been discussed in the chapter on Legal Issues.
382. By definition, a silent assignment would be treated as an equitable assignment in law.
383. See for details, the chapter on Accounting for Securitization
384. These are credit derivative contracts. For more details, see Vinod Kothari's Credit Derivatives and Synthetic Securitization. For latest information, see http://vinodkothari.com/crebook.htm
385. Unless specified or implied by context, in this chapter, we use the words "assetbacked securities" as including mortgage-backed securities.
386. For more on computation of N, the number of effective obligors in a pool, see our chapter on Regulatory Issues.
387. Tables based on Fitch data: source.
388. RMBS Rating Transitions 2004, January 21, 2005.
389. US Fixed Income 2006 Outlook/2005 Review, December 15, 2005.
390. "Structured finance trends-Yield spreads, credit support, and collateral performance-The Big Picture," June 27, 2005.
391. Or, rather, tracks, as this is presumably an ongoing research. See Nomura Fixed Income Research: ABS Credit Migrations updated March 5, 2002. The later data cited here are from ABS Credit Migrations dated December 7, 2004.
392. In the instant case, the obligor in question was Enron, where recovery rates were assumed to be 10%.
393. Responses to Frequently Asked CDO Questions (Second of Series) July 13, 2001.
394. This is a form of a credit derivative. For details, see Vinod Kothari's Credit Derivatives and Synthetic Securitization. For latest edition information, see http://vinodkothari.com/crebook.htm.