Asset Securitization. From Moody s Perspective. Presented by: Li Ma, VP Senior Analyst, Structured Finance Group Hong Kong. November 7, 2005 Shanghai

Transcription

1 Asset Securitization From Moody s Perspective Presented by: Li Ma, VP Senior Analyst, Structured Finance Group Hong Kong November 7, 2005 Shanghai

2 Agenda What is Securitization? What Can be Securitized? Where are the Asian Players? How about Mainland China? How does Moody s rate them? Q&A

3 What s Securitization?

4 Definition Securitization is a financial technique that pools various financial assets together and, in effect, turns such pool of assets into tradable securities. The cashflow from the underlying assets being securitized can be current or contingent, The payor of such cashflow can be rated or unrated, The ownership of these assets may or may not be transferred, and The performance of the securities issued may or may not be affected by the operation of the originator(s) of those assets.

5 Several Impacts of Securitization Increase liquidity of Certain Assets Redistribute of Risks Among Market Participants Provide Financing Alternative to Asset Originators Provide Funding Flexibility through Adjustment in Deal Structure

6 Typical Securitization Structure Credit Enhancement Cash Originator SPV Receivables Cash Receivables Trust or SPV Obligors Senior Securities Junior Securities

7 What Can Be Securitized?

8 Major Issuance Types Traditional A/MBS Single/multiple originator(s) Single asset-type Actuarial/pool analysis Long-term rating Collateralized Obligations Specified # of originators Non-homogeneous profile Credit/portfolio analysis Long-term rating Asset-Backed Commercial Paper Unspecified # of originators, assets Analysis is on conduit/additions Short-term rating

9 Commonly Used Underlying Assets In Asia Traditional A/MBS Residential Mortgage Loans Commercial Mortgage Loans Credit Card Receivables Auto Loans Other Personal Loans Trade Receivables Airline Receivables Taxi license fees Road/Bridge/Tunnel tolls Non Performing Loans Collateralized Obligations Cashflow CBO Cashflow CLO Synthetic CBO/CLO Asset-Backed Commercial Paper Trade Receivables Equipment Leases

10 Commonly Used Structures in Asia (ex-japan) Revolving + Controlled Accumulation Revolving + Controlled Amortization Non-amortization (bullet pay) Static/Dynamic Pools Master Trust Synthetic & Cashflow CDOs ABCP Credit/Liquidity Facility covering principal and/or interest payments External Credit Supports

11 Who are the Players?

12 Issuance Volume By Market 4,000 3,500 3,000 US$ Million 2,500 2,000 1,500 1, Hong Kong Korea Malaysia Singapore Taiwan Philippines Others (Issuance volume from Moody s-rated non-cdo term transactions)

13 Korea Mainly an ABS & RMBS market, but interest grows in the CDO and CMBS as well Consumer finance receivables (credit cards, auto loans) dominated the securitization landscape before 2002 RMBS was the major asset type in 2004, total issuance US$1.5 billion Concentrated on repeat issuers originator base very concentrated

14 Singapore Driven by property-related activities, mainly CMBS & progressive/deferred payment CMBS: more varieties of underlying collateral retail & office buildings, car parks, industrial buildings, warehouses Majority of CMBS performed through REITs Expects trend of property-related deals to continue

15 Hong Kong 2003 taxi & PLB loans-backed transaction and issuance from Hong Kong Mortgage Corporation s Bauhinia MBS Limited program 2004 Majority from government-sponsored projects: toll facilities & RMBS 2005 Growth constraints by ample liquidity in the market

16 Taiwan Passed securitization laws in 2002 and 2003 A good variety of assets and structures so far Assets: credit cards, cash cards, auto loans, residential properties, commercial properties, trade receivables etc. Structures: Master Trust, ABCP, REIT etc. Expects Taiwan will continue to thrive in 2005

17 Securitization in Mainland China

18 Necessity Impact on Financial Institutions Asset/Liability Duration Matching Internal Risk Management and Control Additional Source for non-banking Related Income Impact on Macro-economy New Financing/Investment Alternative Risk Pricing Credit Awareness Protection of Private Property Ownership

19 Feasibility Securitization Through SPT Structure Foundation PRC Trust Law Already adopted in NPL related transactions Basic structure design for pilot RMBS transaction Further development in regulations and laws Road Map : PBOC and CBRC - Administrative Measures Related to Pilot Securitization of Loan Assets Other accommodating measures related to asset registration, accounting treatments, trading and info disclosure already in place Tax rulings pending Procedure and IT Systems within FI Standardization of loan origination procedures Standardization of loan servicing procedures Digitalization of collection data

20 Recent Developments Huarong NPL (RMB 1 billion) ICBC NPL (RMB 2.6 billion) Pilot CLO of Project Loans Pilot RMBS CMBS Being Considered Potentially the biggest securitization market in Asia

21 Moody s Structured Finance Rating Approach

22 Moody s SF Rating Analysis Pyramid The Focus is the Structure Rating Issuer Structure Company Structure Operating Position Management Quality Industry Trends Sovereign & Macroeconomic Analysis

23 Moody s Global Rating Scale Long-term Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C Short-term Prime - 1 Prime - 2 Prime - 3 Not Prime Investment Grade Non-Investment Grade

24 Consistent Rating Results Cumulative Default Rates after 1, 5, 10, 15 and 20 Years by Moody's Ratings, % 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% Caa-C B Ba Baa A Aa Aaa 1- Year 5- Year 10- Year 15- Year 20- Year 0.00%

25 Moody s SF Rating Expression of Moody s opinion about the likelihood of full and timely payment on a rated security Reflects the joint effect of the frequency and the severity of expected future defaults on that security Expected Loss = Frequency of Default x Severity of Loss

26 4 Levels of Risk Analysis Legal/Regulatory Collateral Quality: Actuarial or Portfolio-driven Structural (includes moving parts ) Operational/Administrative

27 Legal/Regulatory Risks United States True sale? In bankruptcy, might the court consolidate assets of the SPV with the originator? Do you have a perfected, first priority security interest in the receivables? True sale? Asia In bankruptcy, might the court consolidate assets of the SPV with the originator? Legally feasible? Regulatory blessing? Unforeseen risks in legal creativity? Value of a legal opinion? If cross border, potential sovereign intervention?

28 Asset Quality Static Pool Data Receivables Aging data grouped by time of origination shows cash flow and realized losses each period cumulative lifetime loss experience forms the pool benchmark data undifferentiated by time of origination information content is lower as to magnitude and rate of loss conservative assumptions required

29 Structural Risk Cashflow waterfall following intended priority? Typical risks fully addressed? tax, financial, credit of the moving parts, substitution, sovereign risks Credit enhancement reflect the real riskvariance?

30 Operational/Administrative Risks Operational Administrative Co-mingling Servicer experience & quality role of backup servicer Quality and comprehensiveness of reporting Payment system issues Conduits have separate administration function Originators retain role of servicer

31 Sizing The Risks Credit Enhancement (CE) Easier To Quantify Harder To Quantify Taxes Second Lien Position Operational Commingling risk Impaired collections Financial FX risk Basis risk Timetable Sovereign and Regulatory interference Non-cooperation among the parties under the transaction documents Macro-economic distress

32 Role of Credit Enhancement (CE) Protects investors against loss when there is loss in the underlying collateral Brings the credit quality of the transaction to the desired rating

33 Types of CE Internal Over collateralization Senior/Subordinated Structure Excess Spread / Excess Collection Cash Reserve External Third-Party Provider

34 Internal CE Over collateralization Initial size of collateral > initial balance of securities Cash flow or market value from collateral use to offset any losses stemming from defaults and delinquencies

35 Internal CE Senior/Subordinated Backed by common pool of collateral Shifting credit loss toward the lower-creditquality classes of securities In effect, the subordinated class is backed by the worst portion of the pool Credit support provided by the subordinated classes depends on the loss allocation method (e.g. senior class has less risk if it has senior claim on both P&I, instead of P only)

36 Internal CE Excess Spread / Collection Interest Rate on collateral > Coupons on securities + servicing expenses Difference is available to serve as a cushion against losses Worth more if: it is trapped in a spread account => all past unused spread is accumulated to be available to cover losses unpaid pool losses are accrued instead of being taken immediately as a loss => all future spread available to pay for losses

37 Internal CE Cash Reserve Set aside to absorb credit loss (e.g. funded on closing or via capturing excess cash flow that would otherwise be returned to originator) Assurance of sufficient cash in the transaction to pay for contingent payments (e.g. servicer transfer fees and notification expenses) Assurance of appropriate liquidity to meet the payment obligations of the issuer in a timely manner Performance-related triggers to trap additional cash if quality of underlying collateral deteriorates

38 External CE Third Party Provider Insurance Policy, Letter of Credit, Corporate Guarantee, Surety Bond, Swap Provider, Recovery Guarantee, etc. Amount of Enhancement Fully-supported structure Stand-by fully supported structure Direct-pay fully supported structure Partial Support e.g. World Bank and ADB partially guaranteed transactions such as EGAT and PSALM

39 Fully-Supported Structure Security Default = 3 rd Party Default + Insufficient funds from collateral to pay off investors as promised ( two-party pay ) Severity of loss is likely to be lower in the event of default Rating of security depends on: Quality of assets and the support provider Correlation of asset quality with the fortunes of the 3 rd party Possible that the final rating will be higher than that of the 3 rd party

40 Contacts Name Title Phone No. Michael Ye Managing Director Jerome Cheng VP/Senior Credit Officer Myrna Fajardo VP/Senior Credit Officer Marie Lam VP/Senior Analyst Li Ma VP/Senior Analyst Elaine Ng Analyst Joe Wong Senior Associate

41 Thank You