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Structured Finance:
Asset-Backed Securities
Prof. Ian Giddy
New York University
Structured Finance
Asset-backed
securitization
 Corporate financial
restructuring
 Structured financing
techniques

Copyright ©2002 Ian H. Giddy
Structured Finance 2
Asset-Backed Securities:
The Typical Structure
FORD (SPONSOR)
LOANS.
Servicing Agreement
SALE OR
ASSIGNMENT
SPECIAL
PURPOSE
VEHICLE
LOANS.
Copyright ©2002 Ian H. Giddy
ISSUES
ASSET-BACKED
CERTIFICATES
Structured Finance 3
Legal Aspects
 Goal:
Credit quality must be solely
based on the quality of the assets and
the credit enhancement backing the
obligation, without any regard to the
originator's own creditworthiness
 Otherwise, quality of the ABS issue
would be dependent on the originator's
credit, and the whole rationale of the
asset-backed security would be
undermined.
Copyright ©2002 Ian H. Giddy
Structured Finance 4
Three conditions enable the separation
of the assets and the originator
The transfer must be a true sale, or its legal
equivalent. If originator is only pledging the
assets to secure a debt, this would be
regarded as collaterized financing in which
the originator would stay directly indebted to
the investor.
 The assets must be owned by a specialpurpose corporation, whose ownership of the
sold assets is likely to survive bankruptcy of
the seller.
 The special-purpose vehicle that owns the
assets must be independent

Copyright ©2002 Ian H. Giddy
Structured Finance 5
The Alternative: Synthetic ABS
DB (Originator)
REFERENCE
POOL OF LOANS
(Stay on
balance sheet)
CREDIT SWAP
AGREEMENT
SPECIAL
PURPOSE
VEHICLE
TOP QUALITY
INVESTMENTS
Copyright ©2002 Ian H. Giddy
ISSUES
ASSET-BACKED
CERTIFICATES
Structured Finance 6
Credit Enhancement: Guarantee Method
Finance Co.’s
Customers
Hire-Purchase
Agreement
Finance Co. Ltd
(Seller)
Rating Agency
Top Rating
Servicing Agreement
Proceeds
FCL 1997-A
(Special Purpose Co.)
Sale of Assets
Proceeds
Investors
Asset-Backed
Securities
Trustee
Trust
Agreement
Copyright ©2002 Ian H. Giddy
Guarantee
Agreement
Financial Guarantee
Provider
(if required)
Structured Finance 7
Credit Enhancement:
An Alternative Approach
Rating Agency
Top Rating
Senior
Lower Rating
Finance Co. Ltd
(Seller)
Proceeds
FCL 1997-A
(Special Purpose Co.)
Subordinated
Sale of Assets
No Rating
More Subordinated
Guarantee
Agreement
Copyright ©2002 Ian H. Giddy
Financial Guarantee
Provider
(if required)
Structured Finance 8
Example:
Franchise Loan Securitization
Franchisees
(Borrowers)
Loan
Agreement
Loan
Payments
Atherton Capital
(Seller)
Proceeds
Atherton FLF 1998-A
(Special Purpose Co.)
Sale of Assets
Servicing Advisor
Mellon Mortgage
(Servicer)
Copyright ©2002 Ian H. Giddy
Servicing Agreement
Proceeds
Investors
Asset-Backed
Securities
Class
A1,A2,A-x
B
C
D
E
F
Issuer balance
Rating
AAA
AA
A
BBB
BB
B
NR
Subordination
28%
22%
16.5%
12%
8.5%
5.5%
0%
Structured Finance 9
Rating Process
Issuer/Banker
Requests rating
List information requirements
Due diligence &
Meeting with management
Pool credit analysis
Legal analysis
Stress testing
Credit enhancement
negotiation
Deal documentation
“Rating CLOs” (Fitch)
on Workshop Website
giddy.org/abs-hypo.htm
Copyright ©2002 Ian H. Giddy
Rating committee
Presale report
Final report
Surveillance
Structured Finance 10
Example:
Ford Credit Owner Trust 1999-A
Copyright ©2002 Ian H. Giddy
Structured Finance 11
Ford Structure
Ford
Ford Motor Credit
Sale
Class A-5 and A-6
Ford Credit Auto
Rec. Two LP
Sale
Ford Credit Auto
Owner Trust
Class A-1 to A6
Class B
Class D
Receivables
Class C
Class D
Copyright ©2002 Ian H. Giddy
Structured Finance 12
Trade Receivable Backed CP
Over $500 billion outstanding in US
alone
 Key feature is pooling of different
companies’ trade receivables, allowing
smaller companies to take advantage of
ABS market
 Need two-tier legal structure – SPV at
level of each company’s receivables
pool, and at multi-company program
(the “conduit”)

Copyright ©2002 Ian H. Giddy
Structured Finance 13
Trade Receivable-Backed
Commercial Paper (ABCP)
Corporation A
Trade
receivables
Corporation B
Trade
receivables
Corporation C
Trade
receivables
Pool A
Pool B
Pool C
Credit
enhancement
facility
provider
Fees
SPECIAL PURPOSE VEHICLE
“CONDUIT”
Fee
s
Sponsor/
administrator
Copyright ©2002 Ian H. Giddy
Payments on
maturing ABCP
INVESTORS
Fee
s
Liquidity
facility
provider
Nominal
dividends
Legal owner
Structured Finance 14
The Process
Is the company
ready?
Are the assets
suitable?
What pool?
What legal
structure?
What credit
enhancement?
Copyright ©2002 Ian H. Giddy
Structured Finance 15
Case Studies
Evaluate the pool and legal structure in:
 Belenus
 Ford
Copyright ©2002 Ian H. Giddy
Structured Finance 16
Belenus
What is the nature and value of the
assets?
 How strong is the legal structure?
 Is the collateral sufficient? Would you
recommend purchasing the second (B)
tranche?
 What could go wrong with this deal?
What could go right?

Copyright ©2002 Ian H. Giddy
Structured Finance 17
Belenus Credit Enhancement
Class
Orig
rating
Curr
rating
A
AA
B
C
Copyright ©2002 Ian H. Giddy
Paid
Orig
C/E
12/96
62
Curr
C/E
11/98
0
A
AA+
48
95.5
BBB
AA-
38
75.6
Structured Finance 19
Ford Structure: Default or Loss?
Receivables
Class A-1 to A6
Class B
Class C
Class D
Copyright ©2002 Ian H. Giddy
Structured Finance 20
Can an ABS SPV Declare Bankruptcy?
Only assets in SPV available to protect
investors
 No need for protection from creditors
 Obligations are defined as limited to those
available from the assets
 No recourse to originator
 So default and bankruptcy have different
meaning than for normal corporation.

Copyright ©2002 Ian H. Giddy
Structured Finance 21
Ford Structure: Waterfall
Receivables
Class A-1 to A6
Class B
Class C
Class D
Copyright ©2002 Ian H. Giddy
Structured Finance 22
Ford Structure: Waterfall
Other Deals – Check the Paydown
Structure
DVI Receivables
 Stratford

Copyright ©2002 Ian H. Giddy
Structured Finance 25
Paydown:
Waterfall vs Soft Bullet Structure
Copyright ©2002 Ian H. Giddy
Structured Finance 26
Implications of Waterfall Upgrades



The capital allocated to a well-balanced ABS
portfolio should slowly decrease over time,
whereas the same cannot be said of a similar
corporate loan portfolio.
Rating upgrades should be the norm in the
ABS world, and downgrades the exception
(currently, the situation is exactly the
opposite). In the corporate world, we should
rather expect downgrades to equal upgrades
over long time intervals.
An ABS portfolio should be traded much more
actively than a corporate loan portfolio to take
advantage of its inherent rating volatility.
Copyright ©2002 Ian H. Giddy
Structured Finance 27
 www.stern.nyu.edu
 www.giddy.org