European ABS: Time for an Applelation Controlee?

Host: ABN-AMRO Bank, Amsterdam
Instructor: Prof. Ian Giddy New York University

Asset Securitization

Asset-backed securities constitute a growing segment of the US and global capital markets. The asset securitization technique, while complex, has won a secure place in corporate financing and investment portfolios because it can, paradoxically, offer originators a cheaper source of funding and investors a superior return. Not only does securitization transform illiquid assets into tradable securities, but it also manages to transform risk by means of the separation of good financial assets from a company or financial institution with little loss of revenue. The assets, once separated from the originator, are employed as backing for high-quality securities designed to appeal to investors.

For more details see the instructor's website,
absresearch.com

Instructor

Ian Giddy has taught finance at NYU, Columbia, Wharton, Chicago and in 30+ countries abroad for the past two decades. He was Director of International Fixed Income Research at Drexel Burnham Lambert from 1986 to 1989. The author of more than fifty articles on international finance, he has served at the International Monetary Fund and the U.S. Treasury and has been a consultant with numerous corporations and financial institutions in the U.S. and abroad. He is the author or co-author of The International Money Market, The Handbook of International Finance, Cases in International Finance, Global Financial Markets, Asset Securitization in Asia and The Hudson River Watertrail Guide.


Prof Ian Giddy
Stern School of Business
New York University
44 West 4th Street
New York, NY 10024
USA

+1 212 998 0426

giddy.org

    European ABS: Time for an Appelation Controlee?

The European asset-backed securities market has provided fertile ground for financial hybridization. Originating in a number of countries and legal frameworks, ABS deals often wander far from the original ABS idea: securities backed by assets that have been separated from their originator and placed in a special-purpose company. This paper will explore some of these variants, including those which perhaps do not deserve the ABS appellation. In addition to ratings, European may need a quality designation system devised to protect producers from imitators and to guarantee authenticity to consumers.
Focus: True ABS vs Synthetics vs Whole Business Securitization

Outline of Presentation

Vintage ABS

  • 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.

The Legal and Tax Aspects

  • Typical ABS structure
  • Key legal requirements
  • True sale aspects
  • Nature of special-purpose vehicles
  • Independence and bankruptcy issues

Synthetic Structures

  • CLNs are SPV debt backed by the credit of the selling bank (or better)
  • No loans are sold to the SPV
  • But performance is based on the performance of a reference pool of loans
  • If the reference credits perform, full debt service is made on the CLN
  • If the reference credits default, the CLN is deemed “defaulted”and payment is halted.
  • Credit default swap terms and conditions
  • Synthetic unfunded ABS

 

Whole Busines Securitization

  • A securitization where the cash flows derive not from the repayment of debt or other pre-contracted cash flows or receivables, but from the entire range of operating revenues generated by a whole business (or a segregated part of a larger business).
  • An attempt to improve the credit quality of corporate debt by tying the debt to specific elements of a stable business
  • The issuer typically owns a loan to an operating company or companies. The loan is in turn secured by operating business assets in ongoing use.
  • Both the SPV and the operating companies are owned by the corporate parent. The UK model offers legal assurance that the assets will not be sequestered if the parent enters bankruptcy protection.
  • In the event of the insolvency of the corporate parent, the SPV and its trustees continue to run the business.

Problems with WBS

  • The issuer typically owns a loan to an operating company or companies. The loan is in turn secured by operating business assets in ongoing use, not self-liquidating financial assets like loans.
  • Both the SPV and the operating companies are owned by the corporate parent. While the UK model offers legal assurance that the assets will not be sequestered if the parent enters bankruptcy protection, the independence of the SPV has yet to be tested, in the UK as well as elsewhere. 
  • In the event of the insolvency of the corporate parent, the SPV and its trustees must find managers to continue to run the business. The “purpose” of the vehicle looks less and less “special.”

    Key Distinguishing Features

  • HOW ARE THE ASSETS TRANSFERRED?
  • ARE THE ASSETS IDENTIFIABLE FINANCIAL CLAIMS ON SPECIFIC PARTIES?
  • IS THE POOL AMENABLE TO STATISTICAL AND HISTORICAL ANALYSIS?
  • IS ITS VALUE DEPENDENT ON THE SUCCESS OF THE SPONSOR’S BUSINESS? 
  • IS THE STRUCTURE IMMUNE FROM EVENT RISK?
     


Other resources on asset-backed securities: 
 
Mortgage-Backed Securities:
An Investor's Guide to Mortgage Securities - A Comparison of Mortgage Pass-Through Securities - A Glossary of Mortgage-Backed Securities - Types of Mortgage-Backed Securities
Seminars conducted by Ian Giddy Powerpoint presentation documents
Articles Case studies
Spreadsheets Internet links
Related websites:

giddy.org
giddyonline.com
financefixit.com
absresearch.com
 

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