COMPARISON (PowerPoint download)

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					   SECURITIZATION

 “PROCESS OF TRANSFORMING
OTHERWISE FINANCIAL ASSETS
  INTO MARKETABLE CAPITAL
     MARKET SECURITIES”
EARLY TYPICAL SECURITES
•   GNMA ‘PASS THROUGH’
•   AUTOMOBILE LOANS
•   CREDIT CARD RECEIVABLES
•   COMMERCIAL LEASES
•   COMPUTER LEASES

• NOW: BUSINESS LOANS
            EXAMPLE


• DAYTON HUDSON CREDIT CARD
  MASTER TRUST

• GO OVER
SECURITIZATION PROCESS
• LOAN ORIGINATON - SETS TERMS
• TRUST - BUYS LOANS FROM BANK
  AND ISSUES SECURITIES
• INVESTMENT BANKER - SELLS
  SECURITIES FROM TRUST
• GUARANTOR -
• INVESTORS
       BUSINESS LOAN
       SECURITIZATION

• VERY SMALL SO FAR:

  – LOANS OUTSTANDING - $155 BILLION

  – SECURITIZED LOANS - <$900 MILLION
          COMPARISON
• TRADITIONAL LENDING - originate,
  fund, service, monitor

• SECURITIZED LENDING - originate,sell,
  service
Asset(loan)                     Securitized
•   Illiquid                •   Liquid
•   imprecise valuation     •   efficient market val.
•   lender monitoring       •   Third party assesses
•   high operating costs    •   low operating costs
•   limited rates/terms     •   wide range of rates
•   local investor market   •   national/global market
       REQUIREMENTS
• STANDARD CONTRACTS
• RISK RATING SYSTEM
• REPUTABLE CREDIT ENHANCERS
• STANDARDIZED LEGAL
  FRAMEWORK
• STANDARDIZED SERVICING
  QUALITY
 LOW GROWTH=HIGH COST
• Specific borrower /local condition info.
  Needed for prediction of repayment
• Lack of standard loan term
  –   line of business/credit quality
  –   loan maturity
  –   pricing/covenants/collateral
  –   bank underwriting standards
• Lack of long term performance info.
 SBA GUARANTEED LOANS
• GUARANTEED PORTION =
  SECURITIZED

• MONEY STORE INC. -$380 MILLION
  SBA LOANS
• FREMONT FINANCIAL - $330 MILLION
  IN LOANS SECURED BY A/R, INV.
  AND F/A
   WHY THESE WORKED
• RIGOROUS UNDERWRITING STAND.
• SBA LOANS - VERY STANDARDIZED
• SIMILAR COLLATERAL/DOCUMENT.
• SBA CAN SUPPLY HISTORICAL LOSS
  EXPERIENCE DATA
• HIGH VOLUME LENDERS
       BACKUP REQUIRED
• LOSS PROTECTION ON 11-20% OF THE
  LOAN POOLS

• OR



• PURCHASE PRIVATE BOND
  INSURANCE
 MAIN BENEFITS TO LOAN
      ORIGINATOR
• LOANS SOLD/NO FUNDING NEEDED

• REDUCES MONITORING COSTS

• LOWER BORROWING COSTS DUE TO
  PREDICTABLE CASH FLOW FROM
  POOL OF ASSETS, NOT ONE
            CONT.
• RELEASE BANK CAPITAL TO OTHER
  PURPOSES

• MANAGE CREDIT RISK

• DIVERSIFY LOAN PORTFOLIO
   WHY FIRMS USE ASSET-
       BASED DEBT
• AVOID ASSET SUBSTITUTION COSTS

• “Mgmt. Often replaces low risk assets with
  high risk after debt financing. Only the
  stockholder get the higher return.
• Only securitized debt ties the bond to
  specific asset - thus, no substitution
                  Cont.
• Avoid underinvestment

• “Equity holders of stressed companies
  unwilling to make marginal investment as
  only bondholders get the return.”
• Use of asset-based security removes general
  company risk
                 Cont.


• Secured debt reduces information
  asymmetry problem of management not
  acting in bondholders’ interests
      ISSUES FACED BY
         INVESTORS
• GUARANTEE ONLY PROVIDES
  LIMITED CREDIT PROTECTION

• INTEREST RATE RISK LIMITED BY
  BUYING “TRANCHES” IN DIFFERENT
  MATURITIES
             CONT.
• LIQUDITY RISK NOT A PROBLEM

• PERFORMANCE RISK - EX. CREDIT
  CARD RECEIVABLES IN A
  RECESSSION
            CONT.
• PREPAYMENT RISK - PARTICULARLY
  IN SECURITIES BACKED BY
  MORTGAGES

• GEOGRAPHIC CONCENTRATION
 MAIN BARRIERS TO BANK
  LOAN SECURITIZATION
• SIZE CONSIDERATIONS
  – MIN. POOL FOR PRIVATE PLACE. -$50m
  – MIN. POOL FOR PUBLIC OFFER.-$100m

• RECOURSE - INVESTOR HAS CLAIM
  IF SECURITY DEFAULTS

• RISK EXPOSURE - POOLED ASSETS
  ARE DIFFICULT TO MONITOR
                  Cont.
• Lack of long term performance information

				
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