Issued notes, collateral

Under a guarantee agreement, the originator is able to recover an amount equal to the net realised losses on the reference pool of loans, including the costs incurred in the foreclosure and recovery process, in return for a periodic payment of a guarantee fee. This fee is calculated to make up any shortfall between the interest received on the credit-linked note collateral pool and the expenses and interest costs of the issuing SPV. Realised losses are applied in reverse sequential order to the notes, by can-... 

From the 28 CCABS transactions shown in Exhibit 13.4, 26 are backed by sterling-denominated credit card receivables and two have euro-denominated collateral. In 2000, Findomestic Banca S.p.A. issued 311 million of notes backed by Italian credit card receivables. In 2001, Diners Card Europe S.p.A. (and other European Diners Club operations) completed its first transaction in a euro-denominated issue. The collateral includes receivables in Italy, Germany, the United Kingdom, Ireland, the Netherlands, and Belgium. 

As already discussed, collateralised debt obligations are a form of security whose interest and principal payments are linked to the performance of a specific pool of assets (sourced either directly or by reference). These underlying assets act as the collateral for the issued notes, hence the name. In terms of basic principals, there are many similarities between CDOs and their predecessors asset-backed securities (ABS) (see Exhibit 15.5). The major difference between CDOs and other ABS securities is... 

In an ABS or CDO the SPV will issue notes and will use the proceeds to purchase assets, in the case of an ABS, or debt, in the case of a CDO (the Collateral ). The SPV will receive a return from the issuer of the collateral and will use such returns to pay the investors a return on the bonds. 

The traditional concept of a custodian as explained above is applicable to those deal types that hold the assets noted. This is usually the case for ABCP programs (although these deals may be set up to fund exclusively trade receivable assets), collateralized debt obligations (CDOs), and special investment vehicles (SIVs). With certain forms of CDO transactions, the proceeds of issued notes are sometimes invested in collateral. This is also held by the deal custodian. In addition ABS deals may also... 

Notes issued in synthetic structures are organized by tranche. With the proceeds from the notes it issues to investors, the SPV purchases high-quality (AAA) liquid securities—for example, U.S. Treasuries, bank asset-backed paper such as credit card ABS, and German bonds, such as Pfandbriefe —to serve as collateral. This collateral will generate LIBOR-related interest and principal cash flows that the SPV passes on to the investors together with the swap premium, which creates an additional credit spread on the notes. The cash flows from the collateral may not match the payments due on the issued notes—for example, the bonds used as collateral may pay a flxed rate and the issued notes a floating one. To remedy this, the... 

The structure of a mortgage master trust is essentially identical to a credit card master trust except that credit card receivables are replaced with mortgage collateral (see Exhibit 11.13). The originator sells an equitable interest in a specified group of mortgages to the master trust. This can then be used as collateral for a number of securitisations. Over time, additional mortgages may be added to the trust, subject to various constraints to protect the quality of the collateral. The same pool of mortgages will support all the series of notes issued by all issuers, with... 

Double credit risk is a particular feature of such synthetic transaction structures. Not only are investors exposed to the performance of the reference pool of commercial mortgages, but also to the performance of the collateral the issuer is holding. If this includes notes issued by the originator itself then this will also include exposure to the credit rating of the originator. 

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. 

These can include trapping and diversions of cash flows from some tranches to others in certain scenarios (e.g., breach of over-collateralization tests). We note but do not explore these issues. 

The drafting of the Priority of Payments is probably the clause that will take the most time for the documentation of the Exchangeable Notes. In addition to the Priority of Payments clause determining what would occur if the Final Notes are not issued and the collateral needs to be realised, two additional waterfalls will be necessary, one to determine what to do with the interest paid in the Collateral Debt Securities during the Warehouse Stage on the Final Closing Date, the second to determine what to do with the proceeds from the issuance of the Final Notes (see below). 

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