Session 26 - Class Notes (3) - Session24:StructuredFinancing

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Session 24: Structured Financing  and Special Purpose Entities Hye Sun Chang ACCY 303  
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Discussion Questions Discussion Questions 1. What is a SPE (Special Purpose Entity)?  What  are the common uses of SPEs?   2. What is securitization? 3. What are the advantages of securitization to the  company and to investors? 4. How do we account for securitization?
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Special Purpose Entities Special Purpose Entities special purpose entity  (SPE) is a body created to fulfill  narrow, specific or temporary objectives, primarily to  isolate financial risk, usually bankruptcy but sometimes a  specific taxation or regulatory risk. The legal form may be a limited partnership, a limited  liability company, a trust, or a corporation. SPEs share the following characteristics: – Often thinly capitalized.  – No independent management or employees.  – Their administrative functions are often performed by a trustee.  – One of these parties usually services SPE assets under a servicing  agreement. 
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Objectives of SPEs Objectives of SPEs • Financing certain assets or services and keeping  the associated debt off the balance sheet of the  sponsors.  • Transforming certain financial assets, such as  trade receivables, loans, or mortgages, into liquid  securities.  • Engaging in tax-free exchanges. 
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Securitization Securitization Securitization  involves the issuance of bonds secured by  assets that generate known or estimable cash flows.  The  cash flows from an asset such as accounts receivable are  guaranteed to make the payments on a related debt  issuance.  The assets are usually held in a tax-neutral,  bankruptcy-remote Qualified Special Purpose Entity  (QSPE). Securitization first occurred in the late 1970s and has  evolved into a vital funding source with an estimated total  aggregate outstanding of $8.06 trillion (as of the end of  2005, by the Bond Market Association) and new issuance  of $3.07 trillion in 2005 in the U.S. markets alone.
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Securitization Securitization Corporation records cash  sale of securitized assets  to  SPE SPE collects securitized receivables and makes periodic interest payments to Investors SPE issues debt to investors using assets as collateral SPE repays the principal to investors when debt matures Corporation Toyota Finance       SPE Consumers Auto purchasers Investors $100 mil  cash $100 mil 7%  auto  receivables $100 mil auto  receivables $96 mil cash, $4 million  retained interest $96 mil of 5 ½ % B/P $96 mil  cash
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Session 26 - Class Notes (3) - Session24:StructuredFinancing

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