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Grantor Trust

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					Grantor Trust
A trust in which the grantor retains some interests and control and therefore is taxed
on any income from the trust.



the term "grantor" means the same thing as the term "trustor".              In the grantor
trust, the trust is not recognized as a separate taxpayer.       Instead, the grantor, or
trustor, reports the trust income on his or her personal income tax return, as if he or
she owned all the trust assets personally and the trust did not exist.

In short, the grantor trust takes advantage of exceptions to the separate income tax and
estate tax rules that apply to trusts.

trusts that are treated as owned by grantors.

"Grantor Trust" is a term used in the Internal Revenue Code to describe any
trust over which the Grantor or other owner retains the power to control or
direct the trust's income or assets.     If a Grantor retains certain powers over or
benefits in a trust, the income of the trust will be taxed to the grantor rather than
to the trust.


By definition, cross-border securitization is not governed by one or even two legal
systems.4 The choice of a jurisdiction may depend on how receptive (善于接受的)
and accommodating a particular jurisdiction is to securitization.

The innovation of securitization is similar to the innovation of the trust in the
Anglo-American legal system in a number of ways.



Securitization and Trust as Innovations. A comparison of securitization with the
concept of "trust" highlights the innovative aspect of securitization and its special
qualities.   The innovation of securitization is similar to the innovation of the trust in
the Anglo-American legal system in a number of ways.

First, both mechanisms use a "splitting technique."     The trust splits property rights in
a unique way separating control and benefits and vesting them in different parties.
Securitization splits property rights in a similar way, and, in addition, splits the
institutional functions usually performed by banks and similar intermediaries, and
allows different parties to perform one or more of these functions.

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Second, both mechanisms put property in a kind of suspended animation(活泼,有生
气).     During the trust period, the trustee acts for the benefit of the would-be owners
but he is not subject to their control.     Nor is he subject to the control of the previous
owner. And even though the trustee controls the property he is not the owner either.
A similar situation occurs in securitization.      The sellers of the financial assets are no
longer the owners.     The buyers are only beneficial owners, and the trustee controls
the assets but does not benefit from them (except by fees).        This trust mechanism is
an integral part of securitization.

Third, both trust and securitization encourage market transactions.         Trust maintains
the simplicity of property law by vesting in the trustee legal ownership towards third
parties, yet allows the creation of in personam property rights in the beneficiaries.
The property rights of the beneficiaries vis a vis the trustee are very flexible and can
be designed by the trustor (with the trustee's consent) in almost infinite ways.       Thus,
while market transactions by the trustee can be effected through the simple and fixed
legal property estates the rights of the beneficiaries against the trustee can be highly
complex and varied.

Similarly, securitization splits the loan or obligation transaction.         Borrowers are
obligated under certain terms.        Investors, however, are entitled under other terms.
Through the process, the whole or parts of the borrowers' obligations can be
converted into securities.    For example, assume that a portion of certain financial
assets has the equivalent of a treasury bond's zero credit risk.      The residual financial
assets represent risk above this benchmark zero risk.          By using a special purpose
vehicle (a trust or a corporation), sponsors are able to isolate the part that represents
zero risk from the rest of the risks, securitize these separate parts and sell either or
both in the securities markets.       As a result, securitization can be extremely complex
in creating rights that are subject to sale in the markets.    However, when these rights
reach the markets they can be offered in the form of simple, standardized and
predictable instruments, i.e., securities, which mend themselves better to efficient
trading in the markets.       Thus, securitization requires a trust mechanism to
convert illiquid financial assets (assets of the special purpose vehicle) to liquid
assets (obligations of the vehicle).




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Fourth, both trust and securitization allow for terms that fit the special needs of the
beneficiaries/investors.       Trust allows for flexible arrangement among the
beneficiaries and trustees and can also be used in different business contexts.
Securitization allows for terms that fit the special needs of the investors; it is also
sufficiently flexible to accommodate the desires of borrowers, and can also be used in
different business contexts.

Fifth, trust and securitization are also used for similar purposes.       Historically, the
trust was used to by-pass prohibitions on devising assets by inheritance and
imposition of taxes; today trusts continue to be used for such purposes.18       Likewise
cross-border securitization can be utilized to avoid taxes and regulation because the
activities and the payments can be placed outside a taxing country.

Sixth, trust and securitization are intermediaries.     The trust intermediates between
beneficiaries and issuers of the obligations in which the trust invests.        Similarly,
securitization intermediates between investors and borrowers.

Trusts and securitization are also different.    As compared to securitization, trusts are
established and managed with fewer separate links.       In securitization, borrowers may
borrow from lenders and lenders may pass the borrowers' obligations to special
purpose vehicles, which raise funds from investors and allow these funds to pass
through to the lenders to borrowers.     In a trust, there are only two distinct links: the
trustee issues certificates representing claims against the trust's portfolio and invests
the funds in financial instruments.        The trust resembles only the part of the
securitization process that uses the special purpose vehicle.

In contrast to a private trust, securitization eliminates or weakens the personal
relationships between the various participants.      This characteristic is a function of
the number of investors, and explains why the Massachusetts business trust,19 serving
a large numbers of investors, is similar in this respect to securitization.20




In cases where the domestic legal, tax or regulatory accounting framework makes
securitization difficult, but where the law permits transfers of title, an alternative may
be to structure a transaction in an "offshore center" and to launch the issue in the


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Euro-markets.       Offshore securitization can be condemned as a means of avoiding
regulation, tax rules, and currency exchange restrictions.


Cross-border securitization allows for efficient and cost reducing credit enhancement
mechanisms to lower the cost of capital. For example, foreign investors' cost of
evaluating domestic borrowers is higher than the cost of utilizing a credible domestic
institution that can provide credit enhancement to investors.

Theoretically, cross-border securitization transactions can be effected with no
governing country law, or under a very lax fully enabling country law.



For example, for public distribution of asset-backed securities sponsors are likely to
choose a jurisdiction with active securities markets, such as the United Kingdom or
the United States whose laws are adequate to accommodate this aspect of
securitization.55    For private placement of securities to large sophisticated investors,
sponsors may seek jurisdictions that do not strictly regulate securities issuance and
sales, because these investors may choose to require of sponsors the information they
need.




Product structure

Aircraft lease securitisations can take two forms - either securitisation of receivables
out of leases with the aircrafting remaining the legal property of the originator, or
those where the aircraft itself is sold to the SPV. The latter follows the device of
Equipment Trust certificates (ETCs).             While the aircraft lease receivable
securitisation (aircraft lease portfolio securitisation - ALPS) is similar to any other
securitisation, the ETC method is a unique technology applied mostly to the aircraft
segment only.

Equipment trust certificates:

The equipment trust certificate is a pass through trust issuing certificates, often
stratified into senior and subordinated, to the investors.    The ETC gives the aircraft
on financial lease to the aircraft.   If the structure involves senior-junior tranches, the
subordinated segment is subscribed to by the airline itself, forming its equity in the


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transaction.   This leads to an enhancement in the credit of the senior securities,
which are then known as Enhanced Equipment Trust Certificates (EETC).




For example, assume Bank A has a client X, whose working capital needs are funded
by the bank.   If the bank wants to release the regulatory capital that is locked in this
credit asset, the bank can set up a conduit, essentially an SPV that issues commercial
paper. The conduit will buy the receivables of the client and get the same funded by
issuance of commercial paper.     The bank will be required to provide some liquidity
support to the conduit, as it is practically impossible to match the maturities of the
commercial paper to the realisation of trade receivables.      Thus, the credit asset is
moved off the balance sheet giving the bank a regulatory relief.




** Re-packaging of structured products.               This process could also be
called re-securitization, or repackaging of securised products.




** securitization is the issuance of a debt instrument backed by a
revenue-producing asset of the issuing company.




One of the primary goals of securitization is to isolate the receivables
from the group of assets held by the originator in the event of the
originator's bankruptcy.[16]             In order to adequately shield the
receivables from the originator's bankruptcy estate and from the reach
of the originator generally, it is necessary to set up what is known as
a special purpose vehicle ("SPV").[17]               The SPV will purchase the
receivables from the originator and issue securities backed by the
receivables.[18]      It is important that the SPV purchase the assets in what
bankruptcy law refers to as a "true sale."[19]           That means that the assets



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will not become a part of the originator's bankruptcy estate should the
originator become the subject of a bankruptcy proceeding.[20]




Although it is important to keep the SPV and its receivables out of the
originator's bankruptcy estate, it is also necessary to implement a
structure that prevents the SPV from voluntarily filing its own
bankruptcy petition.

The independent director, "when considering whether or not to cause the
SPV to enter a bankruptcy or insolvency proceeding, will owe his or her
fiduciary duties not to the shareholders, but to the [SPV] itself
(including, expressly, its [investors])."




Securitization can be analogized to a concept in physics known as potential energy:
When a spring is fully compressed, the energy it possesses is known as potential
because it will not move unless the force holding it back is removed.      As the force
holding back the spring is removed, the potential energy is immediately transformed
into kinetic energy.   A company's receivables also possess a similar type of potential
energy.   The receivables are unable to do more than produce a relatively long-term
cash flow, but if the force restraining them is removed (i.e., the originator), they are
convertible into an immediate cash infusion for the company.            However, that
"energy" remains untapped so long as the receivables are tied up in the complex
environment of the originator.    Securitizing the assets through the use of an SPV,
where assets are supposed to be safe from bankruptcy, releases the potential energy,
and the originator can harness that energy stored in the receivables.    As is the case
with the spring, a company must remove the forces on its receivables in order to
maximize their utility.




securitization may offer a distressed company the chance to continue to operate
as a going concern.


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securitization releases the potential energy of an asset which may otherwise languish
on the company's books and slowly produce a cash flow insufficient to meet the
originator's current needs.


Asset securitization allows companies to improve upon their existing good fortune, or
in some cases, it allows them to rebound from distressed financial times by tapping
their receivables as a source of capital.


"The terms 'securitization,' 'asset securitization,' and 'structured finance' are used
interchangeably" to refer "to a company's use of cash flows from its assets to raise
funding. The term 'securitization' specifically refers to the issuance of securities
backed by such cash flows." Steven L. Schwarcz, The Alchemy of Asset Securitization




Fleet Boston sold in excess of $1.5 billion of its problem loans to a
bankruptcy-remote, special-purpose entity that financed the purchase by issuing notes
into the private ABS market. Interest and principal on the rated notes will be paid
from the cash flows, including recoveries, generated by these distressed loans and
from the transaction's cash reserves.


Securitizing distressed assets provides a method by which a financial institution
can limit its exposure to further losses.




The Standard & Poor's approach to rating distressed CDOs consists of the
following:

      Quantitative and qualitative analysis of the obligor's credit worthiness;
      Model driven analysis of the probability distribution of defaults for the
       loan portfolio, based on the rating or creditworthiness of the obligor;
      Detailed analysis of the debt instruments, including an understanding of
       their position in the capital structure and the degree of subordination
       available;
      Determination of potential recovery rates for the portfolio, given the
       detailed analyses of the debt instruments;
      Quantification of liquidity needs;


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         Cash flow modeling of the proposed transaction, stressing defaults and
          their timing, recovery rates and their timing, and liquidity needs;
         Evaluation of the transaction's structure and covenants;
         Review of the experience and capabilities of the collateral manager, who
          is crucial to the success of the transaction;
         Determination of the market value of the portfolio; and
         Legal analysis.




How should the assets be transferred?

The legal methodology of "transfer" of assets is achieved by a sale of the subject
assets.    If the asset is receivables, such transfer is often called assignment.




To achieve full legal transfer, the proper method is assignment or sale.

What needs to be done to ensure a transfer or assignment?

This is the "true sale" question. That is, in order for the assignment to be regarded as a
proper sale or legal transfer, it must comply with some conditions, which differ from
jurisdiction to jurisdiction




True sale is at the very heart of legal issues in securitization.     If securitization is a
true sale, the investors get a legal right over the receivables.    If it is not a true sale,
investors may be either at par with unsecured lenders, or even worse.

The true sale question is also the foundation of off-balance-sheet accounting treatment,
regulatory relief, etc.

The genesis of securitization lies in giving the investors rights over specific assets of
the originator, such that the investors are not affected by the performance, or




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bankruptcy of the originator. This would obviously necessitate that the investors, or
the SPV which is a conduit on behalf of the investors, has legally acquired the assets.




What if a transfer is not a true sale?

If the transfer of assets for the benefits of investors is not a true sale, it might mean:

       the investors are unsecured lenders
       the transfer is regarded as creating security interest in favour of investors; so
        the investors are secured lenders (whether such security interest is perfected or
        not will depend on the procedure relating to perfection of security interests)
       worst of all, since the transaction would not have been backed by loan
        documentation, the investors may not be regarded as lenders as well - meaning,
        they might only have an equitable right to recover their money but would not
        stand as unsecured lenders.




What kind of receivables can be subject of a true sale?

This again is a question to be answered with reference to local law.          Normally, the
receivables should be existing and identifiable.      Sale of future receivables may take
place as a promise to sell in future.     Sale of unidentifiable receivables might only
create an interest in a pool of receivable, not transfer the receivables.




The word "vehicle" is a marketplace equivalent of "entity".       Therefore SPV and SPE
mean the same thing.


it hives off such asset, activity or operation into the vehicle by forming it as a special
purpose vehicle.



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an SPV must be distanced from the sponsor both in terms of management and
ownership, because if the SPV were to be owned or controlled by the sponsor, there is
no difference between a subsidiary and an SPV.




Being an independent, an SPV is responsible for its own funding, risk capital and
management decisions.      Most SPVs, for example, securitization SPVs, run on a
pre-punched program and do not have to take any managemenet decision: they are
almost "brain dead".




The present rules set out in an interpretation called EITF 90-15 are as follows:

1. A third-party owner (or owners) independent of the sponsor has a sufficient equity
investment in the SPE;

2. The independent third-party owner (or owners) investment is substantive (generally
meaning at least 3 percent of the SPE’s total debt and equity or total assets);

3. The independent third-party owner (or owners) has a controlling financial interest
in the SPE (generally meaning that the owner holds more than 50 percent of the
voting interest of the SPE—thus, if the SPE’s total equity is only 3 percent of total
assets, all of its equity must be held by one or more independent third parties); and

4. The independent third-party owner (or owners) possesses the substantive risks and
rewards of its investment in the SPE (generally meaning the owner’s investment and
potential return are “at risk” and not guaranteed by another party).




Consolidation may make isolation meaningless.                 Consolidation is the
power of a Court, in particular, a bankruptcy court, to consolidatte the
SPV with the originator.         substantive consolidation, lifting or pierceing of
corporate veil, etc.     (the court) the power to order a consolidation should be
regarded as inherent power and is applicable in all jurisdictions.


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the basis of consolidation is that the SPV is substantially the same as the originator.




SUMMARY: Independent director requirements and other bankruptcy remote
provisions contained in borrower organization documents may not be effective in
preventing the commencement of bankruptcy cases if corporate procedures are not
properly respected and followed.       Investors, rating agencies, and servicers should
tighten their surveillance as to organizational formalities now, while CMBS and
underlying loan performance is at or near its probable peak, and well before the
inevitable downturn begins.




What are the main accounting standards on securitization?

Internationally, the most comprehensive accounting standard on securitization is the
SFAS 140 from Financial Accounting Standards Board, USA.             The UK accounting
standards body has issued FRS 5, which is essentially not dedicated to securitization
but provides the substance-over-form approach, wherein it also contains provisions on
securitization.   The International Accounting Standards Committee has issued IAS
32/ IAS 39, again generally on accounting for financial instruments, which also
contains sections on securitization.




What are the main accounting standards on securitization?

Internationally, the most comprehensive accounting standard on securitization is the
SFAS 140 from Financial Accounting Standards Board, USA. The UK accounting
standards body has issued FRS 5, which is essentially not dedicated to securitization
but provides the substance-over-form approach, wherein it also contains provisions on

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securitization. The International Accounting Standards Committee has issued IAS
32/ IAS 39, again generally on accounting for financial instruments, which also
contains sections on securitization.




What is the crux of these accounting standards?

The essential question in securitization is: whether the transfer of receivables involved
in the securitization transaction is a sale, or should the asset be retained on books?    If
it is a sale, the asset in question will go off the books, the money raised thereby will
stay off the books, and the transfer might result into a gain or loss on sale. Thus,
removal-of-assets treatment is also normally associated with gain-on-sale treatment.

On the other hand, if the transaction is not treated as a sale, it will be accounted for at
par with a financial liability or secured lending.




What is the key determinant of whether sale-of-assets should take place?

While traditionally, accounting standards have been concerned with risk-rewards
approach, securitisation accounting standards have adopted a different stand.            The
risk-reward approach would tell us to treat a purported transfer of assets as a sale if
there is a substantial transfer of risks and rewards in the asset.       If the assets are
transferred, but the risks and rewards of the transferor remain unaffected, then the
transaction is not a sale but a financial transaction.

Securitisation accounting is not essentially based on risk/reward approach, but rather
the "transfer of control" approach.       The standard-setters view a transfer of control
as a proxy for transfer of risk or rewards.    Transfer of control would mean the assets
have gone out of the reach of the transferor, whereby the transferor cannot re-acquire
the same, except at market price, and the transferee is free to deal with the assets and


                                              12
make a profit on the assets.    The underlying basis is: if I sell my car to you, and you
are free to sell it further and make a profit, then I have in fact transferred the reward to
you: the reward of making a profit on market prices or enjoying it otherwise, and
when there is a transfer of a reward, there is inherently a transfer of risk as well - the
risk of not earning the reward.

So, the basic determinant of removal-of-asset accounting is transfer of control.




What is a qualifying SPV?

Clear of the verbosity of the standards, a qualifying SPV is an independent legal
entity, independent in the sense that it does its own decision-making ("auto pilot",

as they say).    And it must be a "special purpose" entity, with limitation on its
business, assets that it can hold and the transactions it can enter into. The assets as
well as the transactions are related to the business of securitization.




What is so wrong with the buyback option?

As stated before, to qualify for removal-of-asset, the asset must be transferred without
any retained option to buyback with the transferor. The purpose of this condition is
clear: a transfer with a buyback option is not surrender of control. Example: I sell
my car to you but I have the option to buy it back at a prefixed price, I have not
actually surrendered my control, as I have still have a beneficial interest.     Retention
of an option is retention of benefit. Therefore, transfers with call options with the
transferor do not qualify as sales.




How about transfers with put options?

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A put option is an obligation to buy back, not an option. The option is with the
transferee: and understandably, the transferee will not exercise this option for the
benefit of the transferor.     Hence, there is no problem with a mere put option.
However, an "option as well as obligation", that is, one that is a future contract, will
disqualify sale treatment.




How about clean up calls?

Clean up calls are call options with the transferor to clean up the transaction, when its
outstanding amount falls to an uneconomic level, typically 10% of the original.
Such call options are permitted: they will not lead to financing treatment.




If my transaction is eligible for sale-of-assets, how do I compute the gain-on-sale?

Fairly complicated, and based on a substantial amount of "guesstimates".               The
working has to do with (a) finding the fair value of assets sold, that is, net of losses or
liabilities created by the transaction; (b) estimating the value of retained interests,
such as subordinate interests, servicing assets, residuary interest, etc; (c) allocating the
carrying amount of the assets as per books to the values in (a) and (b) proportionately.




Stamp duty on securitization transactions

Stamp duty is a crucial issue for securitization transactions.        It can add up to a
substantial cost in several jurisdictions.

The genesis of the stamp duty issue lies in the fact that a securitisation transaction
represents an assignment or transfer of receivables from the originator for the benefit
of the investors. The legal document by which this transfer is effected is regarded in
law as a conveyance, that is, the instrument by which the transfer is effected, and such
instrument in many jurisdictions is liable to a stamp duty.

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UK, Hong Kong, Malaysia, India, etc are examples of jurisdictions where assignment
agreements are liable to stamp duty.




      What are the common ways to avoid the duty?

The following are commonly used devices to avoid stamp duty:

   1. Equitable assignment - that is, the assignment is not perfected but is kept as
       an equitable assignment creating a trust between the assignor and assignee.
   2. Oral assignment - the duty being a duty on the instrument and not the
       transaction, an oral agreement to assign would not mostly be liable to duty.
       See more below.
   3. Shifted jurisdiction - as stamp duty is applicable on the instrument, its
       jurisdiction depends on the place where the instrument is executed. So if the
       instrument is executed at a place where the duty is affordable, or not
       applicable, the instrument will escape duty. Beware, however, of differential
       duty provisions - these provisions, applicable in most cases, require payment
       of differential duty when the instrument executed outside the jurisdiction
       physically comes in the jurisdiction.
   4. Incompleted offer - another device commonly used is that the assignor makes
       an offer to transfer, which is not completed by the assignee by acceptance, as
       legally, an acceptance is required for an agreement to be completed. In our
       view, this is not a strong defence, as acceptance of the offer is implied by
       conduct, but then, again, it is an arguable point that the duty is on the
       document, not on the transaction, and the document remains incomplete.
   5. Exempted transfers: In UK stamp law, for example, transfers to certain group
       entities is exempt. If the SPV can qualify as a group entity, the originator's
       document transfering the receivables may not come for duty. Amendments
       made in 2000 provide that intra-group relief will not be available if the seller
       can exercise voting control over the SPV. This condition directly clashes with
       accounting and regulatory requirements of independent SPVs - hence it is
       unlikely that this exemption will be of any use in securitisation transactions.

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Not only does securitization transform illiquid assets into tradeable 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.


The more complicated the securitized asset and the less uniform its
characteristics, the more difficult it is to achieve the balance required to satisfy
investor concerns.




The most crucial question in securitization of non-performing loans is: does a bad

apple, when sliced, become a good apple?




The real miracle that securitization does to non-performing loans is not to turn bad
into good.   Therefore, turning back to the question with which we started - it is not
that the bad apple becomes a good apple when sliced, but that the good portion
of the bad apple is sliced and given to outsiders, while the bad part is retained by
the originator or other enhancers.        Most non-performing loans securitizations
have been supported by substantial over-collaralization or subordinated interests
retained by the originating banks.   Most of the Italian securitizations, for example,
are credit-enhanced by a substantial extent of subordinated notes which are retained
by the originator.

In case of the Korean non-performing loan securitization, it is the put option with the
Korea Development Bank that enhances the acceptability of the bonds.




              Korea: non-performing loans securitization

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By Sean Bulmer 07 November 2000


KAMCO's recent securitization of NPLs is a ground breaking deal.           Simmons &
Simmons' Partner, International Finance Group, examines some of the legal
issues.

Korea Asset Management Corporation (KAMCO) recently completed its first
international securitization of non-performing loans (NPLs).     This transaction is one
of the few international securitizations to have emerged from Korea.           It is the
first securitization of non-performing assets by a Korean Government agency.        We
outline some of the key features of this important transaction, which was arranged by
Deutsche Bank and UBS Warburg (as joint lead managers).           Simmons & Simmons
advised KAMCO.

Summary

The transaction involved the establishment of two special purpose vehicles (SPVs),
one in Korea and the other in the Cayman Islands.               KAMCO sold a static
portfolio of NPLs (denominated in US dollars and Japanese Yen) to the Korean
SPV.      The Korean SPV issued notes which were purchased by the Cayman
SPV.      The Cayman SPV in turn issued notes secured on, amongst other things,
the Korean SPV's notes and the NPLs.

The transaction required the approval of the Financial Supervisory Commission of
Korea (FSC).

The Korean SPV

The Korean SPV, Korea 1st International ABS Speciality Co., Ltd., was incorporated
as an off-balance sheet limited liability company in accordance with the Korean Act
on Asset Backed Securitization of 1998 (the Act).       Under the Act, the Korean SPV
may not engage in any business other than the securitization transaction itself and
certain activities ancillary to such securitization.   The shares of the Korean SPV are
owned by its sole director and KAMCO.              KAMCO, in its capacity as master
servicer, is responsible for the management of the NPLs on behalf of the Korean SPV


                                             17
in accordance with the Act.

True sale of NPLs

Each NPL is the subject of a settlement agreement made between KAMCO and the
Korean commercial bank from which it originally purchased the relevant NPL. Each
settlement agreement contains an option which allows KAMCO to put an NPL back
to the selling bank on the occurrence of certain events such as a payment default in
respect of the NPL continuing for six months or longer.

The NPLs and the settlement agreements were transferred to the Korean SPV under a
loan portfolio transfer agreement governed by Korean law. KAMCO, as master
servicer, is responsible for exercising the put options with the Korean banks on behalf
of the Korean SPV.

Under the Act, the transfer of the NPLs would constitute a true sale - rather than the
creation of a security interest over the assets in question - only if:

        the transfer was by way of sale and purchase,
        the transferee has the right to profits in respect of the assets and the right to
        dispose of such assets,
        the transferor has no right to demand the return of the assets and the transferee
        has no right to repayment of the purchase price for the assets, and
        the transferee assumes all of the risks associated with the assets, except that
        the transferor may provide certain warranties in respect of the assets.

In general, for a transfer of the NPLs to be perfected and enforceable against a
borrower, it is necessary for the borrower's consent to be obtained for such
transfer. However, the Act provides that it is sufficient for a transfer to be perfected
against a borrower if the transferor or transferee sends a notice of transfer to such
borrower.

The transfer of the NPLs had to be registered with the FSC.

Korean SPV notes

The Korean SPV issued senior and subordinated notes, the proceeds of which

                                             18
comprised the purchase price for the NPLs. The security for the senior note
included, amongst other things, a Korean law pledge over the NPLs. In addition
to the subordinated note, further credit enhancement for the senior notes was provided
by way of an irrevocable credit facility from The Korean Development Bank to the
Korean SPV in respect of amounts payable under the Korean SPV senior note.

For reasons of Korean regulation, the terms of the senior note prohibit redemption of
principal (either in whole or in part) until after the first anniversary of the issue date of
the senior note.

Cayman SPV

The Korean SPV senior note was sold to the Cayman SPV, Korea Asset Funding
2000-1 Limited, which in turn issued floating rate notes. Those notes are secured on,
amongst other things, the Cayman SPV's interest in the Korean SPV senior
note. The Cayman SPV senior notes are rated BBB+ by Fitch and Baa2 by
Moody's. They are listed on the Luxembourg Stock Exchange.                These notes were
offered to qualified institutional buyers in the United States pursuant to Rule 144A.

Sean Bulmer is a Partner, International Finance Group, with Simmons & Simmons,
Hong Kong.




       Electricity receivables securitised in India
        Added on 30th Dec. 1999
        The Karnataka Electricity Board has securitised power receivables and sold
        them through an SPV to Housing and Urban Development Corporation,
        making this the first electricity receivables securitisation in India.




SPE = Special Purpose Entity that allows "sponsor/originator" companies bearing as
much as 90% of the SPE's debt risk to keep that debt off the consolidated balance
sheet under U.S. Generally Accepted Accounting Principles.




                                             19
      Synthetic Lease Structure (Sponsors Sell the Asset to the SPE and Then
       Lease It Back)

          1. A common approach is for the sponsor to sell the asset to the SPE and
              then lease it back from the SPE via what is known as synthetic
              leasing.      A synthetic lease is structured under FAS 140 rules such
              that a sale/leaseback transaction takes place where the fair value of the
              assets "sold" can be reported by the sponsor as "revenue" for financial
              reporting.     In a synthetic lease, this "revenue" does not have to be
              reported up-front for tax purposes even though it is reported up-front
              for financial reporting purposes.

          2. Proceeds from the sale to an SPE in this instance are generally
              long-term receivables rather than cash (which is the primary reason the
              sale revenues are not taxed up-front)..

          3. The synthetic leaseback terms are generally such that the sponsor does
              not have to book the leased asset or the lease liability under FAS 13 as
              a capital lease (i.e., some clause in the lease contract allows the asset to
              be kept off balance sheet as an operating lease). Hence the financing
              of the lease asset remains off balance sheet. This is one ploy used by
              airlines and oil companies to keep assets and "debt" off the balance
              sheet as well as deferring taxes.

          4. If the SPE actually manages the transferred assets (e.g., a pipeline or a
              refinery), then throughput or take-or-pay contracts may take the place
              of leasing.




      Meets requirement for "tax neutral," "pass through" vehicle; not taxed at entity
       level and treated as conduit for tax purposes




Structured financing typically involves the transfer of an income-producing asset to
a separately created entity.

                                           20
re-characterization of an asset transfer as a collateralized loan effectively annuls the
securitization transaction, frustrating investor expectations.


The typical structured financing involves the transfer of an income-producing asset to
the SPV, which finances its purchase by issuing securities backed by the asset. This
process is called "securitization" because, in essence, the assets have been converted
into securities.


Securitization allows the seller, among other benefits, to isolate the assets and
place them in a legally separate structure, effectively placing them beyond the
reach of creditors and a trustee in a subsequent bankruptcy. So, structured
financing theoretically creates a "bankruptcy-remote" SPV.




Securitization is likely to take on an increased role in the arena of corporate finance as
other capital sources retrench. Unfortunately, the current uncertainty about the
treatment of structured financing in bankruptcy unnecessarily assails the utility of this
financing mechanism.




In a securitization transaction, "perfection" means protecting the SPV's interest in the
transferred receivables from claims of the originator's creditors.            For assets
physically located in a particular jurisdiction, the law of that jurisdiction or,
sometimes, of the transferor's jurisdiction usually governs perfection.


“Clean-up Call” shall refer to an option granted to the Seller to purchase the
remaining Assets in the Asset Pool.




“Credit Enhancement” shall refer to any legally enforceable scheme that is intended
to enhance the marketability of the ABS and increase the probability that
investors receive payment of amounts due to them.



                                            21
“Residual Certificates” shall refer to certificates issued representing claims on
the remaining value of the Asset Pool after all ABS holders are paid.




“Servicer” shall refer to the entity designated by the Issuer primarily to collect
and record payments received on the Assets, to remit such collections to the
Issuer and perform such other services as may be specifically required by the
Issuer excluding asset management or administration.

The ABS are transferable by endorsement of the certificate.      The transfer shall
be recorded in the books of the Trustee,

The investor has an investment risk;

The Trustee does not guarantee the capital value of the ABS or the collectibility
of the Asset Pool;



              Conveyance of Assets.

              a. That the conveyance of the Assets comprising the Asset Pool shall
       be done within the context of a true sale and, for this purpose, the Seller
       may not retain in its books the ABS, except the residual certificate, if any.

              b. The Seller shall have no obligation to repurchase or substitute
       an Asset or any part of the Asset Pool at any time, except in cases of a
       breach of representation or warranty, or under a revolving structure, to
       replace performing Assets which have been paid out in part or full.

              c. The Seller shall be under no obligation to provide additional
       Assets to the SPT to maintain a “coverage ratio” of collateral to
       outstanding ABS. A breach of this requirement will be considered a credit
       enhancement and should be charged against capital. However, this will not
       apply to an Asset Pool conveyed under a revolving structure such as the
       securitization of credit card receivables.


                                           22
 d.   Securitized Assets shall be considered the subject of a true sale
between the Seller and the SPT.          Sold Assets shall be taken off the books
of the Seller and shall be transferred to the books of the SPT.               For
accounting purposes, the transfer shall only be considered a true sale if three
(3) conditions have been satisfied:        (1) the transferred Assets have been
isolated and put beyond the reach of the Seller and its creditors; (2) the SPT
has the right to pledge or exchange its interest in the Assets; and (3) the Seller
does not effectively maintain control over the transferred Assets by any
concurrent agreement.

 e.   All expenses incidental to underwriting, conveyance of the Asset Pool
including expenses for credit enhancement may be paid by the
Originator/Seller: Provided, That no further expenses shall be borne by the
Originator/Seller after the Asset Pool has been conveyed to the SPT.




Third Party Review

 A due diligence review by an independent entity mutually agreed upon by the
Seller and the Issuer shall be done before the Assets are sold.


The Trustee shall initiate all civil actions including foreclosure of mortgaged
properties to effect collection of receivables in the Asset Pool.   The Servicer
or any other party may be designated by the Trustee to perform such function
on a case-by-case basis.



The Trustee shall designate a replacement of the Servicer if the latter fails to
satisfactorily perform its duties and responsibilities according to the terms and
conditions of the Servicing Agreement.



To be consistent with the concept of true sale, subordinated securities
shall be sold to third party investors other than Originator’s/Seller’s


                                    23
        parent company or its subsidiary/affiliate and the Trustee or its
        subsidiary/affiliate or, if held by the Seller, capital charges should be
        booked upfront.         Otherwise, the subordinated securities shall be treated as
        deposit subsitute subject to legal reserves.


(Hong Kong)
“clean sale”


If an institution cannot clearly demonstrate that all responsibility for loss has
been removed, then the assets will remain on balance sheet for capital adequacy
purpose - even if the assets are regarded as being off balance sheet for statutory
accounting purposes.




The purpose of subordinated tranches of MBS is to absorb the credit losses
which may arise in the mortgage portfolio which support the MBS.                    They
should accordingly be weighted at 100%.




The seller may not give a representation and warranty in respect of the future
performance of the assets.




Securitisation is a process whereby a pool of similar loans (eg residential
mortgages) or other financial assets are packaged and sold in the form of
marketable securities. This has the effect of transforming long-term illiquid assets
into tradeable liquid assets.




A credit enhancement is simply an arrangement which provides protection
against credit risk (ie the risk that borrowers will not repay the funds borrowed).


                                              24
Where such services are provided on more favourable terms and conditions than
those which would apply to an unrelated party, the bank may be effectively
absorbing credit losses on the loans without explicitly recognising that this is
what is happening.




"Originator" means a person who transfers to a Special Purpose Vehicle any assets in
the form of present or future receivables as a consequence of Securitisation;

"Securitisation" means a process whereby any Special Purpose Vehicle raises funds
by issue of Term Finance Certificates or any other instruments with the approval of
the Commission, for such purpose and uses such funds by making payment to the
Originator and through such process acquires the title, property or right in the
receivables or other assets in the form of actionable claims;




Banks may also feel pressured to support a securitisation transaction, beyond
any legal obligation, in order to protect its reputation.




Increasing use of derivatives in securitisations:

An increasing number of securitisations are using the synthetic method - that is,
transferring risks using credit derivatives.        Later, we undertake a detailed discussion
on synthetic securitisation.    Essentially, the purpose in a synthetic securitisation
might be either funding with transfer of risk, or mere transfer of risk with no funding
involved.




                                               25
In central place of activity in synthetic securitisation is Europe.   At the beginning of
year 2001, synthetic CDOs were estimated to be occupying more than 50 % of CDO
volumes in Europe. The reasons for increased acceptance of synthetic CDOs in
Europe are not difficult to find - they do away with the tedious process of asset
transfers and yet achieve the significant effects of capital relief, risk transfer and
reduced concentration.

Synthetic securitisation is an important development for both securitisation and
derivatives. It is an unfunded securitisation and a funded derivative. Going
forward, it is clear that the trend towards synthetic securitisation would be gather
more strength and result into increasing use of securitisation for pure transfer of risks.




Equity into debt, and debt into equity:

Once again, it is the rule of convergence.       A CDO essentially strips a portfolio of
debts and converts into several layers of debts, leaving an equity tranche.             In
other words, it carves out an equity tranche into debt.

Recently, a path-breaking transaction was noted - carving out debt out of equity.
This was securitisation of private equity investments, notable as the first such
application of securitisation.   Prime Edge, a securitised portfolio of investments into
private equity funds, made the headlines in innovative finance in June 2001.           By
securitising private equity investments, the transaction allows bond investors to
participate into the venturesome area of private equity investments.




Securitization is a self-amoritising device; the cashflows or assets dedicated by the
originator should automatically retire the investors' security.

There must be a true sale, because a true sale would mean the legal interest in the
asset has been divested by the originator and vested into the SPV.




                                            26
there is a clawback rule in most countries which permits a court to recapture
assets transferred within 6 months prior to bankruptcy, as fraudulent
preferences or transfers in anticipation of bankruptcy.




there is a possibility that the Court may substantively consolidate the originator
and the SPV, that is, lift their separate corporate veil and treat them as one
entity.




         Interest rate risk management by securitisation

Securitisation offers some very interesting opportunities for interest rate risk
management.

One of the popular instruments in collateralised mortgage obligations (CMO)
structures is a floating and inverse floating instrument.         These two instruments
mutually absorb the risk of interest rate variations.        To understand how, let us
visualise the crucial issue before the risk manager of any financial firm: how to take
care of the interest rate risk if the entity has invested in fixed rate applications.   The
obvious answer is to go for an interest rate swap.        The swap buyer (the financial
entity in case) has now passed on the interest rate risk to the swap seller - if rates
of interest go up, the swap seller would pay the swap buyer for the rate movements,
and vice versa.    As for the swap buyer, the rate of return is now a floating rate.     If
one looks at the swap seller, his rate of return varies inversely with interest rate
movements.      Any increase in interest rate will bring down his income, as he will
have to pay to the buyer. Any downward movement will double his earnings, as he
will earn both the swap fees as also the spread on account of reduced interest rates.

The floater and inverse floater structure uses the same concept but instead of
involving any swap counterparty, it spreads the interest rate risk between two sections
of the investors. Those who buy floating rate notes will have a floating rate of return,
and those who buy inverse floaters will have a rate of interest that varies inversely to
interest rate movements. For example, if the mortgages originated by the originator


                                            27
pay 10% interest which, net of fees, etc., say, pays 8% return to the investors. Let us
assume that this rate to start with is the same for floaters and inverse floaters. Now if
the reference rate of interest goes up by 1%, the floaters will get 9% return, and the
inverse floaters will get 7% return. If the rate of interest goes down by 1%, the
floaters will earn 7% but the inverse floaters will earn 9%.

As one would appreciate, this structure has put the inverse floater investors in the
position of an interest swap seller. And this could be an excellent hedging instrument
for investors following different strategies. So, an institutional investor who has built
up a stock of floating rate investments may like to hedge by buying an amount of
inverse floaters that would even out the ups and downs in returns from the floating
class.

Securitised instruments offer tremendous hedging opportunities to investment
managers.




Aircraft lease securitisations can take two forms - either securitisation of receivables
out of leases with the aircrafting remaining the legal property of the originator, or
those where the aircraft itself is sold to the SPV. The latter follows the device of
Equipment Trust certificates (ETCs).            While the aircraft lease receivable
securitisation (aircraft lease portfolio securitisation - ALPS) is similar to any other
securitisation, the ETC method is a unique technology applied mostly to the aircraft
segment only.




Banks would resort to securitisation essentially with 4 motives, in different
combinations: sourcing cheaper funds, attaining higher regulatory capital, better
asset-liability management, and reduced non-performing or under-performing
assets.




                                           28
The    term     "cross-border         securitizations"      covers     securitization
transactions in which the obligors, originator, "special purpose
vehicle" (or "SPV"), and investors are in two or more jurisdictions.




In a securitization transaction, payments treated as interest for income tax
purposes may be subject to U.S. or foreign withholding taxes, whose cost must be
factored into the transaction.        Withholding taxes may arise in the following
situations: (i) if there is a tax sale of receivables with obligors in one country paying
interest on the underlying obligations to an SPV or investors in another country; (ii) if
a transaction between the originator in one country and an SPV or ultimate investor in
another country is treated as a tax loan to the originator; or (iii) if an SPV in one
country raises money by issuing debt to holders in another country.




Under the investment safe harbor, a person will not be deemed engaged in a U.S.
trade or business (and, therefore, not subject to net U.S. income tax) 24 if its sole
activities consist of effecting transactions in stocks or securities for its own
account.25




If a "financial asset securitization investment trust" (or "FASIT") is used in a
securitization transaction, the sale versus loan and entity-level tax issues do not
arise under U.S. law. A FASIT is a new and unique tax vehicle that is governed by
a specific set of rules contained in the Internal Revenue Code ("I.R.C.").    While U.S.
rules on FASITs do not apply for purposes of non-U.S. law, FASITs could be used in
the United States to hold non-U.S. obligations or to issue interests to foreign investors,
subject to certain limitations.   Although FASITs came into effect September 1, 1997,
regulations that had been expected by that date and that are needed to clarify a
number of points in the statutory provisions have not yet been issued.       Accordingly,
although at least one FASIT transaction has been consummated, widespread use likely
will await issuance of regulations.




                                            29
The point of securitization is to separate good assets from a bank and use them
as backing for low-risk securities appealing to investors.




payments on nonperforming debt are often not readily divisible into principal
and interest components that would be applied to interest and principal
respectively, on the securities.       Instead, non-performing loan collections are
typically applied first, to trustee and servicing fees and related expenses, next to
reserve account replenishment, then to pay interest on the securities, and finally, to the
extent of any remaining collections, to reduce principal on the securities.




Packages of destressed consumer loans are typically purchased via auction or
under forward flow arrangements.




Typically the servicer will evaluate a receivable and assign an estimated cash
recovery amount to that receivable having regard to the servicer’s evaluation of
loans under its own credit card grading model and other considerations including its
personnel and systems, its credit and collection policy and its historical collection
experience with respect to non-performing assets of the same type and having the
same location.   As the estimated cash recovery amount assigned by a servicer to
loans is heavily dependant upon the servicer’s own capabilities, one servicer’s
estimate of the collectability assigned to certain loans may be different than that
of other servicers.




“track record” of collections performance




Moreover, unlike credit card or auto loan receivables, payments on nonperforming
debt are often not readily divisible into principal and interest components that


                                            30
would be applied to interest and principal respectively, on the securities.
Instead, non-performing loan collections are typically applied first, to trustee and
servicing fees and related expenses, next to reserve account replenishment, then
to pay interest on the securities, and finally, to the extent of any remaining
collections, to reduce principal on the securities.




Credit Enhancement and Liquidity Enhancement


A feature of most conventional securitisation transactions is credit and liquidity
enhancement.     Nonperforming loan securitisation transactions have not required
specific liquidity enhancement (other than as provided by reserve accounts) because
the securities are only entitled to receive interest on each distribution date and
principal to the extent of available collections in excess of amounts necessary to pay
interest, servicing fees and certain other amounts.   Credit enhancement addresses
the risk of uncollectibility of the non-performing loans whereas liquidity
enhancement addresses the risk of payment at the wrong time of underlying
loans. Non-performing consumer loans, by definition, are an asset class demanding of
credit enhancement.    In non-performing loan securitisations credit enhancement
is typically in the form of “seller support” or overcollateralisation and
establishment of reserve accounts of approximately 8% of the principal amount
of the issued securities.    Third party credit enhancement was not typical in early
distressed loan securitisations but is becoming increasingly common following the
bankruptcy of Consumer Financial Services Inc. with surety bonds being issued by
insurance companies to support the issuer’s obligations and a rating of “A” on the
senior tranche of issued securities.




A back-up servicer




Consequently, it is critical that an issuer be able to demonstrate the accuracy of
the predictive power of its model in order to justify reliance upon its model as a


                                          31
basis for establishing levels of credit enhancement.          The credit enhancement
consisting of overcollateralisation is typically expressed as a function of the amount
of collections that the issuer’s grading model predicts will be collected on the
securitised pool.   “Payoff balance” or the gross amount due from the underlying
obligor often bears little relationship to the value on likely collections to be realised
and, consequently, is not an important element establishing credit enhancement levels.
In early transactions, the collections (net of servicing fees) expected on a pool would
approximate 150% of the principal amount of issued securities.      Over time, as rating
agencies became more conservative, this percentage increased to almost 200%;
equating to an “advance rate” of 50% of the issuer’s projected collections on the
nonperforming assets.


Such levels and form of credit enhancement have generally been considered to be
wide enough to cope with poor collection performance and shrinkage in case obligors
raise set-off or other claims against the loan originator.     It must be emphasised,
however, that any financial ratio imposed by rating agencies for appropriate levels of
credit enhancement depend upon the nature of the servicer and the applicable assets.




Covenant Protection


Under a distressed loan securitisation the key covenant protections afforded to
investors derive from the Servicer.     The Servicer will be required to service the
distressed loan pool with reasonable care, prudence skill and diligence to
maximise the expected present value of the pool.        In so doing the Servicer will be
required to comply with applicable law, the securitisation documentation, procedures
it establishes with respect to comparable loans and the credit and collection policy
agreed with the ratings agencies.   All payments from obligors will be required to be
paid into a specified account usually within one day of receipt thereof by the Servicer.
The Servicer will also be precluded from freely resigning from its responsibilities as
servicer.


The Servicer’s appointment may be terminated upon the occurrence of a servicer
default which will usually include any of the following:

                                           32
                       failure to deliver any required amount to the collection or other
                        specified account;
                       failure to perform other covenants or agreements in the
                        securitisation documentation;
                       insolvency of the Servicer or other material parties;
                       breach of net worth covenants;
                       unauthorised changes in control of the Servicer; and
                       breach of financial covenants such as minimum monthly
                        collections and cumulative collections.




The purchase price paid for distressed loan portfolios is carefully scrutinised by the
ratings agencies for three reasons.    First at any time the securitised assets may need
to be liquidated and the proceeds of liquidation should be sufficient to equal the
unpaid principal amount of the securities issued plus accrued interest and
discount.    If the purchase price is too high it is unlikely that principal will be repaid
in such circumstances.      Secondly, since the bankruptcy of Commercial Financial
Services Inc. issuers have only been permitted to issue securities by reference to the
purchase price of the asset pool.          Thirdly, reserve account levels and credit
enhancement will be set having regard to the purchase price.




The ratings process is principally focused upon the collectability of the loans and
the capabilities of the servicer.




In assessing collectability of distressed loans rating agencies focus heavily upon the
staffing and resources of the servicer.        Rating agencies have understood that a
portfolio’s yield is highly dependent upon the staffing and systems support employed
by the servicer.    Several rating agencies can also be engaged to assign a separate
rating to the servicer after reviewing its capabilities.


                                             33
Commercial Financial Services Inc. was an Oklahoma based company and the
largest issuer of marketable securities backed by non-performing loans.




the originator will generally extract profit through charging servicing fees.         In
this regard consideration must be paid in the context of European transactions to the
impact of VAT which in the United Kingdom is imposed at a rate of 17.5% on the
supply of goods and services.      Repayments of principal and interest are exempt
supplies for United Kingdom VAT purposes.




Any such taxes would increase the costs of the securitization and likely render
securitization uneconomic.      The most prominent taxes which may be imposed
include federal, state and local income taxes, franchise taxes, transfer taxes, and
intangible taxes.   However, the single most significant tax that may be imposed is
federal income tax.   The federal income tax laws generally subject corporations to
tax on their net income




While the federal income tax laws generally tax corporations on their net

income, the federal income tax laws do not subject partnerships and certain
trusts to tax on their net income.         Thus, as an alternative to using an SPE
structured as a corporation, a sponsor can structure an SPE as a trust or as a
partnership.   A trust that qualifies as a "grantor trust" for federal income tax
purposes will not be subject to federal income tax.     In order to qualify as a grantor
trust, a trust must comply with two requirements in the federal income tax laws
generally designed to differentiate active businesses being conducted through entities
which are in form trusts from the passive nature of a true trust.   First, the trustee of
a grantor trust may not have the power to vary the investment of the trust.
Selecting investments is regarded as a business function inconsistent with the passive
nature of a true trust.    Accordingly, if the trustee is granted the power to vary the
investment, the trust will be taxed as a corporation for federal income tax purposes.

                                           34
Similarly, subject to certain limited exceptions, the trust may not have multiple
classes of interests.      Multiple classes of interest (e.g. securities with different
maturities) evidence an intent to derive a business profit as distinguished from the
trust simply being a means of holding property for the benefit of its beneficiaries.
Again, if the trust has multiple classes of interests, the trust will be taxed as a
corporation for federal income tax purposes.




a grantor trust may well be a useful entity for securitization of project loans.
First, the prohibition against granting the trustee the power to vary the investment
should not significantly inhibit the use of grantor trusts to securitize infrastructure
loans.   This prohibition has precluded sponsors from using grantor trusts to
securitize revolving loans, such as credit card receivables and trade receivables.
Those securitizations require that the trust continually change its pool of assets.      In
contrast, however, a sponsor may securitize project loans which can be held in a
grantor trust until the loans liquidate.   In this respect, securitization of infrastructure
loans would be similar to securitization of retail automobile loans and real estate
mortgages, in which the trustee does not need to have the power to vary the
investment of the trust.

Second, although the prohibition against multiple classes of interests may preclude a
sponsor from obtaining the advantages gained from issuing securities with differing
maturities secured by a single pool of infrastructure loans, the grantor trust rules do
permit issuance of a single class of highly rated certificates supported by a
subordinate class of interests as an exception to the general prohibition against
multiple classes of interests.     Thus, a grantor trust may be a useful vehicle where
little or no benefit is obtained from issuing multiple classes.




"Owner trusts" are treated as partnerships for federal income tax purposes, to
securitize financial assets.     Use of an owner trust taxed as a partnership has the
advantage of avoiding entity level federal income tax without the constraints imposed
by the grantor trust rules.    Owner trusts issue both debt and equity classes of
interests and thereby obtain the advantages of issuing securities with differing

                                             35
maturities. An owner trust may also be used as a continuing investment vehicle if
new asset purchases are desirable.     Owner trusts, however, require an even higher
degree of tax structuring than other securitization vehicles and thus are generally only
used when the sponsor can obtain significant advantages from issuing securities with
differing maturities.




Under the REMIC rules, if substantially all of the assets of a securitization
vehicle consist of obligations which are principally secured by an interest in real
property, the vehicle, if properly structured, may elect to be treated as a REMIC,
which is statutorily exempt from federal income tax.       The REMIC rules generally
define an obligation as principally secured by an interest in real property if the fair
market value of the real property securing the obligation is at least 80% of the
principal amount of the obligation [(this may be true for some projects, e.g., a toll
road)].




If the REMIC rules are applicable to a securitization of project loans, the
REMIC rules generally provide for favorable tax treatment.          The REMIC itself
is generally not subject to federal income tax and the REMIC may issue multiple
classes of securities.




Clean Break Requirement:

         The transferred assets must have been legally isolated from the transferor
          and its creditors even in bankruptcy or receivership-satisfaction of this
          element must be supported by a legal opinion.
         The transferee must be a qualifying1 special-purpose vehicle and the
          holders of the beneficial interests in that entity must have the right to
          pledge or exchange those interests.
         The transferor must not maintain effective or indirect control over the
          transferred assets.

                                            36
In addition, clean-up calls must represent a relatively small percentage of the
overall securities backed by the asset pool.


If a securitization transaction does not meet the minimum standards set forth above,
the securitized assets must remain in the originating bank's risk-weighted assets for
purposes of calculating its risk-based capital ratios-even if the transaction otherwise
would be a "true sale" for legal or accounting purposes.



A commitment will be considered a liquidity commitment if it is structured to cover
timing mismatches and market disruption but not to cover the credit risk of the
asset pool.




"Synthetic securitizations" are transactions in which banks transfer all or some
portion of the credit risk associated with specified asset pools to third parties
through credit derivatives, such as credit linked notes and credit default swaps.




Sale, Transfer And Isolation Of Assets: credit risk of assets must be divorced from the credit
risk of the originator of those assets.

Using a synthetic structure to achieve the bank's objectives can transfer the
credit risk attributes of the corporate borrowers to a counterparty. The
originator's risk profile is thereby improved. The documentation of a credit swap is
much more straightforward than that of the transfer of beneficial ownership of the
right to receive cash streams.



Synthetic securitisation structures can, by not incurring many of the legal
complexities present in funded transactions, resolve some important tax issues,
such as (in the UK) Stamp Duty on the transfer of receivables at a rate of up to
4% of the value transferred and, in cross-border situations, withholding tax.



A structure can be a “cash flow” or “synthetic” securitization vehicle.             In a cash
flow-based securitization, the ownership of the assets whose cash flows are to be

                                              37
securitized are actually transferred to the SPV.   In a “synthetic” securitization, by
contrast, the cash flows and/or economic exposure is transferred to the SPV
through the use of a total return swap or some other derivatives transaction.




Asset-backed securities mature when all principal payments have been made.
Special-purpose entities are then terminated and the remaining financial assets,
if any, are returned to originating banks.




Capital from small investors is pooled into a single enterprise--a real estate
investment trust.     The trust company, equipped with professional skills in
ownership and management of properties, is required to pay virtually all of its
taxable income to investors or shareholders as dividends.       The shareholders are
allowed to take interest and property depreciation deductions to reduce taxable
income.



trading of such securities--certificates of beneficiary--will be exempt from securities
transaction taxes, while real estate investment trust companies can enjoy preferential
land and housing taxes.




                                           38
Criteria Related to Retention of Subordinated Interests by Transferor in a True
Sale
In certain circumstances, Standard & Poor's is unwilling to rely on the
characterization of a transaction as a true sale even though the parties to the
transaction are comfortable that they have achieved a true sale and counsel is willing
to deliver a true sale opinion as required by Standard & Poor's criteria.      For example,
Standard & Poor's will generally not rely on true sale opinions if the transferor
takes back a subordinated interest in assets that, in Standard & Poor's opinion, do
not have an adequate capacity to pay principal and interest on the subordinated
interest.   This subordinated interest may be in the form of a deferred purchase
price, subordinated note, or subordinated certificates.              Similarly, Standard &
Poor's generally will not rely on true sale opinions if the transferor guarantees
payments significantly higher than reflected by the level of historical losses on the
assets being sold. Standard & Poor's believes that, although these transactions may
actually be true sales, they have a higher likelihood of being recharacterized as
secured loan transactions.

In structured transactions in which the securities issued are rated 'AAA', the assets
should be able to withstand severe economic stress scenarios.         Thus, the value of the
assets purchased will be in excess of the amount of rated securities issued.             On
the other hand, to avoid fraudulent conveyance concerns, the purchase price should
reflect the fair market value of the assets.        The balance required to pay the purchase
price may be contributed as capital to the SPE, or if the SPE is a wholly owned
subsidiary of the originator, the assets in excess of the amount of securities issued
may be contributed by the originator to the capital of the SPE.           Alternatively, the
SPE, regardless of whether it is a subsidiary of the transferor, may use a subordinated
promissory note to cover the balance of the purchase price of the assets.               The
subordinated note permits the deferral of the payment of a portion of the
purchase price until the SPE has funds available for the payment.                Payment is
usually made in accordance with a schedule based upon anticipated cash flow on the
assets.

In other instances, a transferor may retain a subordinated interest in a
senior/subordinated transaction characterized by the subordination of certain

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certificates to serve as credit support for the senior certificates.      (More complex
transactions involve multiple levels of subordination and also may be structured to
contain reserve funds and/or insurance policies to provide credit support for certain
enhanced classes of subordinated certificates.)     In these instances, the SPE usually
sells the senior certificates and the enhanced subordinated certificates either to the
public through an underwriter or through a private placement offering and transfers
the unenhanced subordinated certificates to the transferor as partial consideration for
the sale of the assets.

When a transferor takes back either a subordinated note or subordinated certificates
(either in partial payment for the assets that are sold or otherwise) or guarantees
payment on the sold assets, the sale from the transferor to the intermediate SPE (or
directly to the issuing SPE) can be undermined.       The transferor could arguably be
said not to have fully divested itself of all rights to the assets (one of the legal tests

of ownership) by holding the subordinated note or subordinated certificates or by
guaranteeing payment on the assets.      A court could view and recharacterize the
transfer of assets and the holding of the subordinated note or subordinated
certificates or the making of the guarantee as a financing by the transferor (secured by
a pledge of or lien on the assets), rather than a true sale of such assets.   Standard &
Poor's is concerned that the use of a subordinated note or retention by the
transferor of subordinated certificates (or the provision of a guarantee) may be
viewed as recourse to the transferor, that is, that the transferor continues to bear the
risk of the assets because, to be repaid, the transferor is dependent on the performance
of the assets.

Accordingly, Standard & Poor's will evaluate the likelihood of repayment of the
subordinated note or payment of the retained subordinated certificates (or the
likelihood of any payment being made under the guarantee) in adequately stressed
economic conditions to get comfort that no recourse was retained by the transferor.
Generally, Standard & Poor's requires that the subordinated note or retained
subordinated certificates be shadow rated on a pool default analysis, that is, without
regard to possible dilutions in the pool, at an investment-grade level.   In the case of a
retained subordinated note, Standard & Poor's analysis typically focuses on, among
other things, the amount of equity that is contributed to the SPE and is available for


                                            40
payment of the subordinated note.        This requirement offers Standard & Poor's
additional comfort that the risks and benefits analysis (because of the likely
repayment of the subordinated note or payment of the retained subordinated
certificates) would result in the transaction being deemed a sale in the event of the
transferor's bankruptcy.

In many cases, the transaction can be structured in a manner acceptable to Standard &
Poor's or the transaction can be analyzed under a blended rating approach (relying, in
part, on the issuer credit rating of the parent). In some situations, the transferor may
hold the subordinated note or subordinated certificates if they represent only a
small portion of the assets or if the retained subordinated certificates constitute a
strip or noneconomic residual.             Alternatively, the transferor may retain
subordinated certificates if it represents that it intends to resell the retained
subordinated certificates.     If the transferor retains all of the securities issued in a
structured transaction, Standard & Poor's generally requires the true sale opinion to
state that when the securities are sold to a third party, the transfer of assets by the
transferor will be deemed a true sale, except for any portion remaining with the
transferor.

In other cases, an affiliate (either a wholly owned subsidiary or a sister company of
the transferor) may hold the subordinated certificates or subordinated note.         The
affiliate may or may not be an SPE.      In such a case, particularly if the affiliate is
newly created solely for the purpose of holding the subordinated certificates or
subordinated note, there is a concern that creditors of the transferor in
bankruptcy might argue that the affiliate is really the transferor.            Therefore,
when an affiliate of the transferor holds subordinated certificates or a subordinated
note, in addition to the opinions otherwise required by the transaction structure,
Standard & Poor's will generally request a nonconsolidation opinion to the effect that
the affiliated entity holding the subordinated certificates or subordinated note would
not be consolidated with the transferor in the event of the latter's bankruptcy.

Outside the U.S., because there is less history of recharacterization, the effect of
the retention of a subordinated interest will be reviewed under local law.




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