Lecture 16_ABS - L16 Xiaoding Liu 5 FIN4243 Fall 2009...

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Lecture 16 Asset-Backed Security L16 Xiaoding Liu 1 FIN4243 Fall 2009
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Asset-Backed Security Credit card debt, auto loans, bank loans, and corporate receivables are often securitized in the same way as mortgages are in the MBS structure These financial assets are the underlying collateral for bonds which are called asset-backed securities L16 Xiaoding Liu 2 FIN4243 Fall 2009
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Asset-Backed Security Motivation for a corporation to issue ABS is to reduce borrowing costs L16 Xiaoding Liu 3 FIN4243 Fall 2009
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Special Purpose Vehicle Or special purpose corporation SPV is a separate legal entity to which a corporation transfers the financial assets for an ABS issue L16 Xiaoding Liu 4 FIN4243 Fall 2009
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Special Purpose Vehicle This shields the assets from the claims of the corporation’s general creditors Making it possible for the ABS issue to receive a higher credit rating than the corporation as a whole SPV is termed a bankruptcy remote entity Highly unlikely to be subject to any claims arising from the bankruptcy of the corporation
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Unformatted text preview: L16 Xiaoding Liu 5 FIN4243 Fall 2009 External Credit Enhancements • ABS, on their own, may not receive the highest possible credit rating, issuer may choose to enhance the credit rating by providing additional guarantees or security L16 Xiaoding Liu 6 FIN4243 Fall 2009 External Credit Enhancements • External credit enhancement – Corporate guarantees: provided by the corporation creating the ABS – Letters of credit: obtained from a bank for a fee – Bond insurance: obtained from an insurance company • All come with cost, need to tradeoff cost with benefit L16 Xiaoding Liu 7 FIN4243 Fall 2009 Collateralized Debt Obligations • CDO is an ABS that is collateralized by a pool of debt obligation such as – Corporate bonds with ratings below investment grade – MBS and ABS (structured financial products) – Bond issues in emerging markets – Corporate loans advanced by commercial banks – Special situation loans and distressed debt L16 Xiaoding Liu 8 FIN4243 Fall 2009...
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This note was uploaded on 12/03/2009 for the course FIN 4243 taught by Professor Dudley during the Fall '08 term at University of Florida.

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Lecture 16_ABS - L16 Xiaoding Liu 5 FIN4243 Fall 2009...

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