Securitization: The Financial Instrument of the Future
Preface to the First Edition.
Part 1: Securitization: Concepts & Markets.
1. Securitization and structured finance.
Basic meaning of securitization.
Securitization of receivables.
Securitization and asset-backed finance.
Securitization and structured finance.
The big picture of securitization of finance.
Securitization as a tool of risk management.
Economic impact of securitization.
The alchemy of securitization: Is the sum of parts more than the whole?
Risks inherent in securitization.
2. Securitization: Methodology, structures, Motivators and Demotivators.
Modus operandi of securitization briefly explained.
Economic substance of securitization: where does the alchemy lie?
Features of securitization of receivables.
Securitization and factoring.
Securitization and ring fencing.
Broad types of securitization structures.
Direct portfolio transfers.
Collateralized mortgage obligation bonds.
Future flows of securitization.
Advantages of securitization for the issuer.
Advantages to the investors.
Threats in securitization.
3. The world of securitization.
Part II: Financial Substance and Ratings.
History of securitization.
The life cycle of securitization.
Present state of securitization (US, Europe, Central America, Asia, The Pacific).
Trends in global securitization.
4. Structuring and credit-enhancing securitization transactions.
Basics of securitization structuring.
Steps in a securitization transaction.
Originator credit enhancements.
Structural credit enhancements.
Third-party credit enhancements.
Sizing of credit enhancements.
Maturity of the securities.
Profit extraction devices.
5. Understanding the nature and risks of asset-backed securities.
Asset-backed securities and the underlying collateral.
Risks in asset-backed securities.
Modelling of asset risks.
6. Understanding prepayment risk in asset backed securities.
Prepayment as a risk.
Prepayment risk in asset-backed securities.
Prepayment risk in mortgage pools.
Static prepayment models.
The PSA prepayment model.
The CPR and the other static models.
Dynamic or econometric prepayment models.
Projection of interest rates.
Prepayments for adjustable rate mortgages.
Prepayment model for commercial mortgages.
Prepayment models for non-U.S. pools.
7. Understanding default risk in asset backed securities.
Nature of default risk – default as an option.
The option to default on mortgages.
Default rates as a function of seasoning.
Default risk for different securities.
8. Cashflow modeling for asset-backed securities.
Constructing the cashflow model.
Understanding the asset and its repayment over time.
The factors that affect asset cashflows.
The factors that affect the factors that affect cashflow.
Understanding transaction structure.
Modelling a real life case.
Stress testing the model.
9. Securitization: Financial evaluation for the originator.
Securitization: The quantifiables and the non-quantifiables.
Securitization versus the unknown.
The NPV of originator’s residual interest.
Impact of prepayment.
Factors affecting originator’s residual interest.
Expected value of originator’s residual interest.
10. Investor evaluation of asset-backed securities.
Spreads inherent in asset-backed securities.
Understanding of duration.
Understanding of convexity.
Impact of prepayment on ABS investments.
Computation of option-adjusted spread.
Understanding default risk.
11. Rating of securitization transactions.
Structured finance ratings vs other fixed income ratings.
Rating agency concerns.
The rating process.
Differences between structured finance and corporate finance ratings.
What credit ratings do not rate.
Role of ratings in structured finance.
Part 2: Securitization: Asset classes and applications
12. Residential mortgage-backed securitization.
Mortgage funding systems.
Government support to housing finance.
Why secondary mortgage markets.
Origin of the secondary mortgage markets.
Overview of the US RMBS market.
Secondary mortgage market in other countries.
Structuring of RMBS transactions.
Case studies of RMBS.
Home equity loans securitization.
Manufactured home loans.
Investing in the MBS market.
13. Commercial mortgage-backed securitization.
What is CMBS?
Types of CMBS.
Structure of a CMBS transaction.
Case study: GMAC’s 2001WTC transaction.
Case study: Canary Wharf – a Typical UK CMBS.
Investing in CMBS: Performance of CMBS.
14. Credit cards securitization.
Nature of credit card debt.
An overview of the market.
Development of the master trust structure.
Components of a credit card structure.
15. Auto loan securitization.
Forms of car funding.
Auto loans securitization market.
Specific issues in auto loan securitization.
Case Study – Daimler-Chrysler Auto Trust.
16. Equipment Lease Securitization.
Investing in equipment lease securitizations.
17. Collateralized Debt Obligations.
What is a CDO?
Types of CDOs.
Growth of the CDO market.
Balance sheet CDOs.
Market value CDOs.
Ramp up period.
The CDO manager.
The CDO investors.
The CDO trustee.
Credit enhancer ad swap counterparty.
Managing the assets of CDOs.
Asset quality tests.
Cashflow coverage tests.
Resecuritization or structured finance CDOs.
Distressed debt CDOs.
Hedge fund CDOs or fund of funds.
Investing in CDOs.
Risks in CDO investment – structure and collateral risks.
Taxation of CDOs.
Legal issues specific to CDOs.
CDOs and index trading.
Current problems facing the CDO sector.
Rating agencies approaches to CDOs.
18. Asset-backed commercial paper.
Genesis of asset-backed commercial paper.
The ABCP market.
Types of ABCP conduits.
Credit enhancements structure.
Parties to an ABCP program.
Rating of ABCP conduits.
Case study: Spinnaker Capital ABCP Program.
19. Future flows securitization.
What future flows are securitizable.
Why future flow securitization?
Types of future flow deals.
Existing asset, future income: A case of toll revenues securitization.
Servicing risks in future flows.
The future flows market.
Legal taxation and accounting issues.
Experience with future flows.
20. Whole business and operating revenues securitization.
Structural and credit enhancements.
The legal basis.
Businesses where whole business securitization is possible.
Why SPV in a whole business structure.
Case study: South East Water (Finance) Ltd.
21. Other miscellaneous asset classes.
Securitization of intellectual property.
Securitization of non-performing loans.
Financial future flows.
22. Synthetic securitization and other risk transfer devices.
Cash vs synthetic securitization.
Advantages of synthetic securitization over cash transfers.
Inefficiencies of a synthetic securitization.
Distinction between cash-funded and synthetic securitization.
Balance sheet and arbitrage synthetic securitization.
Elements of balance sheet synthetic securitization.
Arbitrage synthetic CDOs.
OC and IC triggers for synthetic CDOs.
Evolution and growth of synthetic securitization.
Investing in synthetic CDOs.
Insurance risk securitization and other methods of alternative risk transfer.
Part IV: Technical and Operational Aspects.
23. Legal issues in securitization.
The significance of legal issues in securitization.
Why are securitization legal issues complicated?
Securitization: The big picture.
What are the main legal issues?
Securitization and loan obligations.
The true sale question.
Case law on true sale.
The factors that make or mar a true sale.
Factors in determination of a sale.
Methods of transferring receivables.
Legal system and assignment of receivables.
Procedure for assignment of actionable claims.
Stamp duty on securitization.
Avoiding stamp duty by shifting jurisdiction.
Stamp duties on transfer of securities of the SPV.
Stamp duty on securitization transactions: Indian case.
Stamp duty relaxations in other countries.
Secured loan structures.
Legal issues in synthetic structures.
Bankruptcy remote securitization.
Organizational forms of SPVs.
Bankruptcy remoteness of SPVs.
Consolidation of the SPV.
Legal rights of the investor: Legal nature of the investor’s right.
Legal nature of a future flow securitization.
Legal issues in arbitrage transactions.
Ideal legal framework for securitization.
UNCIRAL initiative for uniform law on assignment of receivables.
24. Legal documentation for securitization.
Basic structure of documentation.
The pooling and servicing agreement.
The trust deed.
25 Operational issues in securitization.
Significance of operational risk.
Types of servicers.
Reporting by the servicer.
Role of trustees in operation of the transaction.
26 Tax issues in securitization.
Concept in tax neutrality or tax transparency.
Substance of the transaction: sale or financing.
Tax treatment in the originators’ hands.
Tax treatment of the Special Purpose Vehicle (SPV).
U.S. taxation rules for securitization.
Thin capitalization rules and SPV taxation.
Taxation of SPVs where no specific provisions exist: India.
Deductibility of expenses by the SPV.
Tax treatment in the hands of the investors.
27. Accounting for securitization.
Securitization accounting in flux.
The basic accounting rule: Substance over form.
Development of accounting principles on securitization.
Sale treatment vs loan treatment.
Pre-conditions for sale treatment.
Pre-conditions for sale accounting.
Sale treatment – balance sheet and revenue impact.
Retained interest valuation in a real life case.
Gain on sale accounting.
IAS 39 Revised and securitization.
Financing treatment and linked treatment.
Comparative view of sale and financing treatment.
Disclosures by the originator.
Accounting by the SPV.
Consolidation of SPV accounts with the originator.
Consolidation of variable interest entities under U.S.
Attaining sale treatment for accounts and loan treatment for taxes.
Accounting for revolving asset securitizations.
Accounting for future flow securitization.
Other securitization accounting standards.
Servicing rights and QSPE amendments.
28. Regulation AB: Securities regulation on asset-backed securities.
29. Regulatory and economic capital in securitization.
The regulator’s concerns.
Background of regulatory concerns.
Overview of Basle-II norms.
Basic approach to securitization.
Pre-requisites for regulatory relief.
Generic principles of securitization.
Capital rules under standardized approach.
Internal ratings-based approach.
U.S. regulatory requirements: Historical.
FSA UK’s guidelines for capital relief.
EU capital directive.
Regulatory requirements in other countries.
Securitization and economic capital.
30. Investing in securitization instruments.
Part V: Investing in Asset-backed Securities.
Distinguishing between securitization instruments and other fixed income investments.
Investors’ concerns in securitization investments.
Performance of securitization investments.
Evaluation of an ABS investment.
Tables of Cases.
A chartered accountant and company secretary, Vinod is also the author of Credit Derivatives and Synthetic Securitization, Securitization, Asset Reconstruction and Enforcement of Security Interests and Lease Financing and Hire Purchase.
His website, www.vinodkothari.com is one of the most frequently visited sites on securitization.
Every year, through distance training, international workshops, industry forums and conferences in over two dozen countries,Vinod trains executives at all levels on complex financial topics such as securitization, synthetic CDOs and credit derivatives.
Based in Kolkota, India, Vinod can be contacted at firstname.lastname@example.org.
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