Asset-Backed Securities. Thai Cars. Prof. Ian Giddy. Stern School of Business New York University

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1 /1 Asset-Backed Securities Prof. Ian Giddy Stern School of Business New York University Case Study: How was the transfer of assets and funds structured? Where is the SPV, and what are its assets and liabilities? Show how the swaps worked. Group work Copyright 1999 Ian H. Giddy 2

2 /2 Auto Hire-Purchase Securitization: Tru-way and Tisco are Thai finance companies with car and truck HP receivables and leases Thailand has code law system, with no provision for SPV Thai Value-Added Tax on sale of assets and withholding tax on interest made conventional ABS difficult Investors wanted dollars, not baht. Copyright 1999 Ian H. Giddy 4 : How it Should Be Investors US Dollars SPV Thai Tru-Way/ Tisco Financial Guarantee MBIA Bankers Trust Currency Swap Thai Car Owners Copyright 1999 Ian H. Giddy 5

3 /3 How was the transfer of assets and funds structured? Where is the SPV, and what are its assets and liabilities? Show how the swaps worked. Copyright 1999 Ian H. Giddy 6 : A Secured Loan, Not True Securitization The assets, the hire purchase loans and leases, remained in the possession of Tru Way and TISCO. These Thai baht assets were assigned to Tru Lease, another Thai company, which made a loan to Tru Way/Tisco Tru Lease sold the rights to the cash receipts to Limited, a special-purpose Cayman Islands company paid for these rights in Japanese yen, and issued floating-rate notes denominated in US dollars. Copyright 1999 Ian H. Giddy 7

4 /4 : Initial Exchanges US Investors US$ Cash US$ Notes Issuer (Cayman Is.) Initial principal balance equal to yen equivalent of the initial principal balance of the notes Yen Loan Tru Lease (Thailand) Cash notes/loan Cash Tru Way TISCO HP/Lease Agreements Car Buyers/ Lessors Copyright 1999 Ian H. Giddy 8 : Ongoing Flows US Investors US$ L+.22 Issuer (Cayman Is.) Principal payments equal to US$ equivalent of principal payments of Yen Loan on quarterly payment date Yen L+? Tru Lease (Thailand) Yen equivalent of the baht principal repayments interest principal Tru Way TISCO interest and principal Car Buyers/ Lessors Copyright 1999 Ian H. Giddy 9

5 /5 : Swap Initial Exchanges Swap US$/Yen Swap /Yen Amount in Yen equal to the initial principal balance of the Yen Loan (Yen equivalent at spot of $250M) Amount in US$ equal to gross proceeds of the issue of the notes ($250M) Amount of equal to the Notes purchase price (equivalent of $250M) Amount in Yen equal to the principal balance of the Yen Loan US$250M (Issuer) Loan in Yen Tru Lease Copyright 1999 Ian H. Giddy 10 : Swap Ongoing Payments Swap US$/Yen Swap /Yen Amount in US$ equal to the principal and interest to be paid on the notes (LIBOR+0.22%) Amount in Yen equal to the principal and interest on the Yen Loan (*%) Amount in Yen equal to the principal and interest to be paid on the Yen Loan Amount in equal to the principal and interest on the Notes/Loan (weekly payment date) 9.25% Dollar principal and interest LIBOR+0.22% (Issuer) Yen principal and interest Tru TruLease Copyright 1999 Ian H. Giddy 11

6 /6 Swap Must Have Declining Balance Principal Balance on HP Loans $250,000 $200,000 $150,000 PRINCIPAL BALANCE WITH PREPAYMENTS $100,000 $50,000 $ SCHEDULED PRINCIPAL BALANCE S1 10 Copyright 1999 Ian H. Giddy 12 New Thai Law Facilitates Securitization Special purpose vehicles authorized Banktuptcy remoteness Transfers of claims without notification Usury ceiling waived Securities and Exchange Commission to supervise Tax and accounting issues to be resolved Copyright 1999 Ian H. Giddy 13