Structural Developments and Innovations in the Asset- Backed Commercial Paper Market

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1 Structura Deveopments and Innovations in the Asset- Backed Commercia Paper arket ark H. Adeson anaging Director, Asset-Backed Commercia Paper oody s Investors Service Strategic Research Institute 1997 Asset Securitization Symposium February 9-12, 1997, Scottsdae Princess, Scottsdae Arizona oody's Investors Service

2 Focus on Trick Liquidity Trick Liquidity: An arrangement abeed as a iquidity faciity which in fact provides a fu wrap insuating ABCP investors from a credit and iquidity risks of an associated poo of receivabes. oody's Investors Service The rating of an ABCP program that uses trick iquidity may be based entirey on the trick and not at a on the quaity of the assets financed through the program.

3 Partiay Supported ABCP Paradigm Separate iquidity and credit enhancement CE is scarce (10%) and unconditiona LIQ is abundant (100%) but conditiona LIQ funds against assets, not against ABCP LIQ funds against good assets, not a assets LIQ avaiabiity is cacuated with a formua Investors bear asset performance risk, not just bank risk oody's Investors Service

4 Typica Partiay Supported LIQ Formua LIQ = Purchased Receivabes ess Defauted Receivabes pus Discount (yied) on ABCP pus cash coected but not remitted pus deemed coections (diution etc.) oody's Investors Service

5 ABCP Aocation of Risks unforeseen iabiities Obigor Bankruptcy preference diution representations & warranties deemed coections Seer Bankruptcy cash coected but not remitted Credit Enhancement Faciity oody's Investors Service Liquidity Faciity

6 #1 - Cover Page Trick Support Agreement Liquidity Agreement ABS Anayst Objectives Writing: oody's is a pubishing company. An ABS anayst shoud write we and write a ot. Each anayst shoud write new issue reports for a rated deas and shoud write two or three specia comments each year. In addition, memos shoud be written about each dea that is the subject of a rating anaysis but which utimatey is not rated. Of course, rating memos shoud be written for a deas that are rated. Computer fies for a memos shoud be oaded into the Lotus Notes database for genera reference. Customer Reations: An ABS anayst shoud use every opportunity to promote good reations with our customers. This incudes using the customer focus skis in which we have received training and, particuary, the four stage cyce of customer interaction: (1) connecting, (2) understanding, (3) heping, and (4) sustaining. We shoud aways be responsive and return phone cas prompty. Even when we disagree with a customer, we shoud try to preserve a cordia atmosphere. erey maintaining existing reationships is not enough; we must constanty improve them and buid new ones. Anaysis: An ABS anayst shoud use the appropriate anaytic toos and methods to reach a rating concusion. Quantitative methods often must be used, but by themseves they are not sufficient. Sound judgment and the abiity to make decisions are aso necessary. An anayst must be abe to think ceary and think fast in order to hande difficut issues. ABS anaysts shoud consut with each other on difficut issues to reach the best determination about how a nove feature of a proposed dea woud affect oody's rating opinion. Our function demands more than simpy spotting issues, it demands that we be creative and resourcefu in determining the rating impact of each feature of a proposed transaction. We shoud aways have a credibe rationae to support our rating opinions. Knowedge: An ABS anayst shoud try to acquire a working knowedge of a areas of structured finance. In addition, an ABS anayst shoud aso try to earn about other areas of the rating business. The anaysis of ABS transactions and structures often is best served by a knowedge of simiar (though not identica) transactions competed in other areas. Aso, because a oody's debt ratings share a common set of definitions, we must be aware that our decisions might confict with our coeagues' views in other areas. Take a simpe, ordinary, 100% support agreement and ca it a iquidity agreement. Some Japanese banksponsored ABCP programs use this trick. Time anagement: An ABS anayst shoud not waste his/her time or others' time. The ABS dea fow is aready arge and it can be expected to grow. We need to use time efficienty and respect the vaue of each others' time. Interna meetings and rating committees -- even informa ones -- shoud be focused and shoud ast no onger than necessary. Conduct: A of our actions refect on oody's as an organization. In our work, we occasionay encounter unscrupuous, unethica, or dishonest behavior on the part of issuers, awyers, or intermediaries. We must not sink to their eve. In our deaings with customers, we must aways dispay the highest eves of honesty and integrity. Aso, we shoud be courteous, dipomatic, cooperative, and cheerfu. Even when we deiver "bad news," we shoud do so in a professiona and responsibe manner. oody's Investors Service

7 #2 - Caendar Trick Use a typica partiay supported LIQ formua but pug in numbers from an od report so that there is aways enough money to retire maturing ABCP. Optiona: Add a credit enhancement faciity to protect iquidity providers. oody's Investors Service

8 #3 - Bucket Trick aximum maturity of ABCP is ess than the amount of time that can pass between the breach of a deinquency trigger and the excusion of the deinquent receivabes from the iquidity funding base. A reated device (not a fu trick) is to imit ABCP maturities and to use triggers to partiay shift credit risk to iquidity faciities. oody's Investors Service

9 #4 - Formua Trick LIQ PR - DR x x DR LIQ PR - DR DR LIQ PR The LIQ formua subtracts Defauted Receivabes from Purchased Receivabes and then adds back the amount of defauted receivabes under a different name. oody's Investors Service

10 Bottom Line on Trick Liquidity Tricks are neither good nor bad; they just are Tricks shift the emphasis of oody s anaysis away from the underying assets The administrator of a program that uses tricks must prove that it understands the tricks A program that uses tricks can finance very weak assets and sti attain a Prime-1 rating because the tricks, rather than the assets, wi be the basis of the rating oody's Investors Service

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