Credit enhancement levels

A typical auto or consumer loan ABS transaction features one to four tranches, generally rated between triple-A and triple-B. Exhibit 14.11 shows the credit enhancement levels for the FIAT 1, the Globaldrive B, and the PPAF 1 transactions. The three transactions are all structured differently and as such, the senior notes in each issue benefit from different levels as well as types of credit enhancement. 

The FIAT 1 issue benefits from a credit enhancement level of 11% from subordination of the unrated class M notes. The Globaldrive B issue benefits from 4% credit enhancement of the class B notes and a reserve fund, which builds up from 1.8% at the closing date to 2.75% of the balance of the initial pool. Fully funded, the Globaldrive B class A notes benefit from a total credit enhancement of 6.75%. The PPAF 1 issue benefits from a credit enhancement level of 33.3% from subordination of the class B and the class C notes (20.5% and 8.5%, respectively) and a cash reserve of 4.3% of the initial notes balance. 

The result is that multiseller securitization conduits typically utilize both liquidity facilities and credit enhancement. Providers of liquidity facilities often insist that conduits obtain credit enhancement as well to emphasize that the liquidity facilities providers are ensuring only timeliness of payment and not guaranteeing against ultimate loss. They also may require credit enhancement if they are uncomfortable with the structure or the level of security of a given transaction. 

To achieve a true sale, an originator must limit, if not forego, its right to the residual value of the receivables sold to the SPV. This residual value can often be significant since the SPV must obtain a level of receivables well in excess of the amount necessary to pay the securities issued by the SPV. Such "overcollateralization" is needed to assure investors and providers of liquidity and credit enhancement that they will not suffer losses from delayed collection or defaults. Conflict may develop over the amount of overcollateralization necessary for the SPV originators want the level of overcollateralization to be low, while investors and credit enhancers want it to be high. Because the amount of receivables... 

Excess spread is available to build up the reserve fund to its required level and cover any principal deficiencies. For example, in the Holmes Financing transactions there is a mechanism whereby, if the yield on the mortgages falls below a certain specified level, excess spread will be trapped in a second reserve fund to provide additional credit enhancement as compensation for the reduction in excess spread. 

The amount of credit enhancement for a transaction is determined by the rating agencies and varies by issuer depending primarily on the performance of the underlying collateral. Exhibit 13.9 shows total enhancement levels for three recent transactions completed by different issuers. 

Strictly speaking, the FIAT 1 transaction does not generate excess spread. This explains the high level of credit enhancement from the unrated class M notes (usually, unrated tranches are either privately sold or kept as an equity tranche by the originator). On the closing date, an amount of notes was issued which was equal to the net present value of all future cash payments due from the collateral (as opposed to the principal balance of the collateral). The discount rate used was the fixed rate payable to the swap counterparty (swap rate plus coupon on the class A notes and all fees associated with the transaction). Structured this way, the receivables always yield the discount rate, leaving no excess spread in the transaction. However, losses on the FIAT 1 portfolio can be covered to a certain degree from interest collections because the structure provides for delinquent principal and defaults to be covered before interest is paid on the class M notes. 

A plasticizer is a material that enhances the processibiIity or flexibility of the polymer with which it is mixed. The plasticizer may be a liquid or solid or another polymer. For example, rigid polyfvinyl chloride) is a hard solid material used to make credit cards, pipe, house siding, and other articles. Mixing with about 50-100 parts by weight of phthalate ester plasticizers converts the polymer into leathery products useful for the manufacture of upholstery, electrical insulation, and other items. Plasticizers in surface coatings enhance the flow and leveling properties of the material during application and reduce the brittleness of the dried film. 

Their bankruptcy remoteness is greatly enhanced through one of the most reassuring features of the French law and that is its specific exclusion of the SCF from any bankruptcy proceedings initiated at the level of its parent(s). The SCF is therefore less vulnerable to the default of its parent credit institution. 

Transaction costs Transaction costs close related to trust and reputation in buyer-seller relationships. Guanxi accelerates problem solving and increase problem tolerance in relationships with international customers which enhance long term business success. Thus transaction costs in international markets are lower than in domestic markets for higher level of trust and creditability of reputations which lead to less information and enforcement costs. 

The APIOOO Level 1 shutdown PRA has estimated the CDF to be 1.23x10 events/year, see Table 5. 4.3-1. This CDF is conservative because credit is not taken forthe design enhancement in using diverse squib valves in the recirculation lines. If credit is taken forthe diverse squib valves in the recirculation lines of the APIOOO plant, the estimated CDF of the Level 1 shutdown PRA would be the 1.04x 10 per year. 

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