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Masterarbeit, 2004, 78 Seiten
List of Abbreviations:
2.2. Market Development
2.3. Main Market Player
2.4. Classifications of Securitization
2.4.1. Classification According to Asset Types
2.4.2. Pass-Through and Pay-Through Securitization
2.4.3. Classification According to Special Purpose Entity Types
2.4.4. Asset-Backed Securities and Asset-Backed Commercial Papers
2.5. True sale Securitization and Synthetic Securitization
2.5.1. True Sale Securitization
2.5.2. Synthetic Securitization
2.5.3. Main Differences Between True Sale Securitization and Synthetic Securitization
2.6. Pros and Cons of Securitization
3. True Sale Securitization in Germany
3.1. Market Development Overview
3.2. Regulatory Prudence
3.3. Recent Market Momentum from Banking Sector
3.4. The True Sale Initiative
3.5. Right to Sell Receivables
3.5.1. Novation, Assignment and Sub-participation
3.5.2. Contractual and Legal Restrictions on Assignment
3.5.3. Data Protection and Banking Secrecy
3.6. Criteria of True Sale Securitization in Germany
3.7. True Sale and the Insolvency Law
3.8. True Sale and Tax Issues
3.9. Problems, Changes and Possible Solutions
3.9.1. Changes in Licensing:
3.9.2. Changes in Tax and Accounting System
4. True Sale Securitization in China
4.1. Market Development
4.2 Major Drivers
4.3 Barriers of the Current Chinese System
4.3.1. True Sale
4.3.2. Special Purpose Entity
4.3.3. Bankruptcy Law
4.3.4. Accounting Rule and Tax System
4.4. Is China Ready for Securitization?
5. Concluding Remarks
illustration not visible in this excerpt
Since the 1970s, securitization has become a major financial technique in the international financial arena. Most developed countries and some developing countries utilize it for financing and hedging credit risks. There are two basic types of securitization: true sale securitization and synthetic securitization. The crucial difference between these two types lies in whether or not a transaction can be treated as sale of underlying assets. If so, the assets that have been securitized can be removed from an originator’s balance sheet; if not, the underlying assets cannot be removed from its originator’s balance sheet and the transaction is rather for changing credit risk’s position of its originator. Constructing a true sale securitization generally faces more legal barriers and requirements than constructing a synthetic securitization, and is hence more expensive. Thus, in some countries with higher legal barriers and requirements for true sale securitizations such as Germany, synthetic securitization transactions have been dominant in the securitization market. However, after the Basel II Accord was released in June 2004, true sale securitization transactions play an increasingly important role for banks to find cheap funding and therefore to gain or increase their competitiveness. This is due to the fact that, unlike Basel I Accord, the Basel II Accord has abandoned the so-called “one-fit-all” capital adequacy measurement. Banks with advanced risk management are allowed to apply for internal rating based (IRB) capital adequacy measurement and therefore have fewer needs and motivation to use synthetic securitization transactions to hedge or change their credit risk positions.
Owing to its unfavorable legal system, Germany is lagging behind the United States and other countries in the European Union in true sale securitization transactions. Since 2001, because of Germany’s mediocre economic performance, German banks are losing profitability and international competitiveness. The Basel II Accord adds additional pressures on German banks, since all member states of the European Union will implement it into their domestic laws. Banks who use the IRB approach with better risk management will gain competitiveness in terms of transaction cost over other banks, which still have the standardized approach. In addition, high capital costs potentially turn major German banks into targets for merger and acquisition of large international conglomerates. Therefore, German banks and the German Federal Ministry of Finance are seeking new methods and policies to support them.
Under these circumstances, in April 2003, the Kreditanstalt für Wiederaufbau Group (KfW Group) together with the Citigroup, Commerzbank, Deutsche Bank, Dresdner Bank, DZ Bank, HypoVereinsBank Group (HVB) and other banks jointly issued the “True Sale Initiative”. The aim is to “support a new segment of the German securitization market, the so-called “true sale”, which will be groundbreaking for the future importance of the German financial place in international competition”. These actors think that true sale securitizations can help German banks to cut down their high capital costs by removing assets from the balance sheets and finding cheaper funds, thus regaining their competitiveness in the international market.
The similarities between the German and Chinese financial system is the main incentive for this study. Both Germany and China have a financial system that is dominated by banks and at the same time features a weak capital market. Banks are the main external financing sources for domestic corporations. Furthermore, in both countries banks are suffering losses and carrying burden of non-performing loans (NPLs), due to the bad performance of domestic corporations (China has been suffering a huge amount of NPLs, whereas Germany just started to have this problem since 2001). Banks in both countries are also facing cutthroat international competition and have motivations to improve their competitiveness.
By analyzing the legal obstacles that lie in the true sale securitization transactions in Germany, as well as the pros and cons of its “True Sale Initiative” plan, I will argue that China is not yet prepared for capital market orientated financial systems like the U.S. and the U.K. There are no developed concepts and legal frameworks for corporate governance, shareholders’ rights and management fiduciary, and currently banks are still the main external sources for corporate financing. China should learn from Germany’s experiences to strengthen its banking sector, since both countries have similar problems in how to improve banks’ profitability and competitiveness. From Germany’s recent experiences in true sale securitization I will shed some light on what China needs to do in order to utilize securitization for Chinese banks. China is under huge pressures to open its financial market to foreign banks, according to China’s commitments to the World Trade Organization (WTO), and upholding a competitive domestic banking structure is of equal importance in both Germany and China.
The questions I will tackle in this thesis are: Does true sale securitization have advantages over synthetic securitizations in financing? Which is preferred: a special true sale securitization law or revisions of relevant laws? Does China need to develop a true sale securitization market, and how?
In section 2 I will introduce definitions, theories and categories of securitization, as grounding in historical development and theories of financial innovation is valuable for later assessments. In section 3, I will describe the application of securitization in Germany, in particular how true sale securitization works in the German legal context, as well as the “True Sale Initiative” and recent development. The fourth section gives an introduction of the Chinese banking system and legal system, and analyzes legal barriers for carrying out securitization transactions in China. I will then conclude by linking the experiences of Germany with potential for the Chinese market to embrace true sale securitization.
Securitization is a modern financing technique. It can take many different forms and has been described in a variety of ways. Steven L. Schwarcz refers to it as ‘alchemy’, due to its magical financing effects. The name “securitization” comes from the fact that the instrument that parties use in this financing technique is a security.
The broadest definition perhaps was given by Cumming in 1987: “the best definition of securitization is the matching up of borrowers and savers wholly or partly by way of the financial markets […] Such a definition covers issuance of securities such as bonds and commercial papers-a practice that entirely replaces traditional financial intermediation- and also sales of mortgage-backed and other asset-backed securities-transactions that rely on financial intermediaries to originate loans but use the financial markets to seek the final holders”. A more narrow definition alludes to the process of pooling and repackaging of loans or generally illiquid assets of banks, thrifts and other intermediaries for sale in securities forms in the financial market.
Therefore, asset (or credit) securitization is “the carefully structured process whereby loans and other receivables are packaged, underwritten, and sold in the form of securities (instruments commonly known as asset-backed securities). As such, it is a subset of a broader trend seen throughout the capital markets for many years, ‘securitization’, that is, the general phenomenon whereby more and more fund raising is occurring through the agency of securities.” Securitization thus allows borrowers to enter financial markets directly instead of relying on financial intermediaries to channel funds from financial markets.
Although Europeans first invented securitization, the modern style securitization was first coined in the United States. The development of securitization in the United States dates back to the 1970s and was facilitated by the federal government’s housing plan. The federal government or sponsored agencies such as the Government National Mortgage Association (Ginnie Mae) in 1970s, the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) in the early 1980s helped mobilize the secondary mortgage markets, standardize the securitization process and encourage securitization deals by providing credit backing and guarantees. It was only in 1985 that the first non-mortgage public securitization occurred. Since then, almost every asset can be securitized, and the securitization market in the United States has developed very fast and profound, in terms of market size and structural innovations. For instance, the U.S. securitization market has grown from $316 billion in 1995, to $1.5 trillion in 2002, and $1.7 trillion in 2003.
After the first mortgage-backed securitization (MBS) was issued in the UK in 1987, the European securitization market continued to grow at an average rate of 61% per annum. However, it still remains much smaller than that of the United States. For instance, in 2001 the issuance in the European securitization market exceeded 150 billion Euros for the first time. In 2003, the total issuance of securitization in Europe grew to 217.2 billion Euros, and for the first two quarters of 2004, the total issuance was 125.7 billion Euros. Issuance among European countries also varies widely. Italy, Spain and the UK are the most active participants in European securitization markets. Projecting into the future, the European securitization market is expected to continue to grow, especially under the process of implementation of the Basel II Accord.
Following the United States and Europe, developing countries also started to reap the benefits of this new financing tool in the 1990s. Except for Japan, most of the Asian countries have utilized this tool since 1998 after the Asian financial crisis. Banks and corporations in Latin America also participated in this market, especially in financial crises haunted Argentina, in order to restructure their balance sheets. In comparison, however, the Asian Pacific securitization market has developed faster than the one in Latin America. The development of the securitization market means a lot to developing countries, and can potentially develop very fast in those countries. Nevertheless, those countries need to improve their market infrastructure, and establish proper legal, tax and accounting rules in order to make securitization an effective tool for their banking and corporate sectors.
In a typical true sale securitization, there are several main players: originator; special purpose entity (SPE); credit rating agency; credit enhancement providers; and investors.
Originator is an owner of existing or future income-producing assets from its obligors, which are identified by the originator to raise funds through securitization. These assets typically represent rights to payments at future dates (usually referred to as “receivables”) and they normally have predictable performance and value data. After identifying the assets, the originator transfers the assets to a SPE. This SPE is a bankrupt remote entity from its originator. More specifically, bankruptcy remoteness means, originator’s creditors will not claim against SPE’s assets when the originator goes bankrupt. The purpose is to isolate those assets from risks associated with the originator and from risks of the originator’s other assets. SPE can be set up in the legal forms of trust, corporation or partnership. In order to raise funds to purchase assets from the originator, the SPE issues securities to the investors in the capital markets.
The credit rating agencies rate securities backed by those assets transferred from the originator to the SPE. The securities’ face values are mainly based upon those ratings, since most of investors do not have time and expertise to analyze those securities. Their investment decision mainly depends on the credit ratings given by credit rating agencies. The less risky those assets are, the higher the rating these securities get; and the higher the rating the securities have, the lower the interest rates the SPE has to pay; the lower interest rates the SPE pays to investors, the lower discount of the underlying assets can be made to the SPE.
In order to obtain a higher rating, the credit enhancement provider renders credit enhancement to minimize receivables’ credit risks. There are internal credit enhancements given by the originator like subordination of interests, over-collateralization, excess spread, reserve accounts, collateral interest; and external enhancements provided by the third party (bank, insurance companies, and surety companies) such as letters of credit, agreements to purchase defaulted receivables, financial guarantees and surety bonds.
Investors of asset-backed securities are most likely institutional investors like insurance companies, pension funds and mutual funds or sometimes, individuals.
There are also service agent or/and trustee for collecting payment from the originator to the SPE or investors. Normally the service agent is the originator, since he has special knowledge about its obligors, and this kind of arrangement can also alleviate the transaction from the restrictions of business secrecy and data protection. When a SPE issues securities, an investment bank or a banking consortium gets involved and is in charge of underwriting those issuances.
The chart below shows the basic relations between those market players. Abbildung in dieser Leseprobe nicht enthalten
There are various classifications of securitization according to different criteria.
Depending on the types of securitized assets, securitization can be categorized accordingly. The most common types of securitized assets are residential mortgage, commercial mortgage, credit card receivables, student loans, automobile loans, equipment leases, high yield bonds, bank loans, export receivables, and other receivables. Recently the less common assets like insurance premiums, film receivables, and hospital receivables also become securitized in the market.
According to the payment structure, there are pass-through securitization and pay-through securitization. A pass-through securitization is the simplest form of mortgage-backed securitization. It is so called because an issuer of asset backed securities transfers a pool of assets to a trust or other entity in exchange for pass-through certificates. Each certificate evidences undivided beneficial ownership interests in the pool of mortgage loans, and it entitles the investor to receive a pro rata share of all payments of principal and interest made on the underlying assets. The issuer just passes through the principal and interest to investors. However, the underlying asset pool cannot be changed over the lifetime of securitization, and the trust cannot reinvest any payments received from the asset pool.
In contrast, an issuer of a pay-through securitization issues securities into tranches, which are secured by the underlying assets as collateral. The issuer does not transfer beneficial ownership of the underlying assets to investors. Investors therefore have only contractual rights to payment that is independent of underlying assets’ performance. Payments to different tranches can be arranged according to financing needs. The pay-through type is often used today in all kinds of collateralized obligations, like collateralized debt obligations (which includes collateralized bond obligations and collateralized loan obligations), and collateralized mortgage obligations.
According to the types of SPE, there are “one-off” securitization and “multiseller” securitization. In a one-off structure, SPE is created specially for a particular originator and a particular transaction. In order to prevent SPE from being seen as the alter ego of the originator, a minimum stated capital is needed. Therefore, the transaction cost can be comparatively high. On the other hand, SPE provides significant flexibilities since it is created according to the needs of investors and the transaction structure. It is especially often used in private placements when the investors are institutional investors, since they can design the structure of a SPE with their special needs.
In multiseller structure, SPE is a common pre- existing entity, which can be used by different originators. Although multiseller structure can minimize the transaction cost by achieving economy of scale, it has higher risk of getting involved with bankruptcy claims when single originator goes bankruptcy. It can adversely affect legal existence of the multiseller SPE. Thus, multiseller SPE is often used in transactions with investment grades, because those originators are less likely to go bankrupt. Alternatively the potential risk caused by originator’s bankruptcy can be mitigated by special arrangement so called “compartment” stated in special securitization law, like the Securitization Law issued in March 2004 in Luxembourg. Of course, a SPE is not a must for all securitizations. Some synthetic transactions can be done without SPEs.
According to whether the receivables are on an on-going basis, there are asset-backed securities’ securitizations (ABSs) and asset-backed commercial papers’ securitizations (ABCPs). In a typical ABS transaction, an originator transfers a pool of assets to a SPE, which issues securities based on the underlying assets. After the securities are fully paid off, the SPE winds down. Most of ABS transactions have a fixed life span depending on the underlying assets’ maturity. There are active secondary markets for asset-backed securities issued by the SPE. Normally an originator transfers the underlying assets at once, and it is common that banks are originators.
In an ABCP transaction, the underlying assets are conveyed to a SPE or a Conduit in a revolving basis. Except termination events happen, the transaction goes on without specific termination date. ABCP issues have no active secondary markets, nor long maturities, since commercial paper is a short-term financing instrument. Normally banks in such transaction are sponsors, credit enhancement providers, service providers and administrative agents for originators (they are generally companies) who own the underlying assets.
There are also other typologies of securitizations. For instance, there are domestic securitizations and cross-border securitizations. A domestic securitization does not involve any foreign jurisdiction whereas a cross-border securitization involves at least one foreign jurisdiction.
In addition, there are also so-called true sale securitization and synthetic securitization.
Actually, “true sale” is not an accurate concept, since it has different meanings depending on each applicable legal area such as accounting, tax and bankruptcy. True sale securitization essentially means that the transfer of assets from an originator to a SPE constitutes a “sale” under each applicable law. It is so called true sale, because it has to be distinguished from the normal financing method-secured loan, namely originator transfers assets as collateral for commercial loans.
True sale securitization is an old form, so sometimes it is also called “traditional securitization”. The purpose of an originator to have a true sale securitization is to segregate the securitized assets from the credit risks of its other assets and its entity. By doing this, the originator can obtain cheaper funding it cannot otherwise get. Other objectives a true sale securitization can achieve are, inter alia, transferring of credit risks, access to capital markets and influencing balance sheet.
For accounting purpose, a true sale securitization allows an originator to take the securitized assets off its balance sheet, thus improving its leverage. A true sale under the taxation law will have different tax levies on investors from a secured loan. The most important aspect of true sale securitization is to make the transaction bankruptcy remote from its originator. If the transfer of underlying assets from a originator to a SPE constitutes a true sale for bankruptcy purposes, then even when the originator goes into bankruptcy, it will not adversely influence an SPE’s right to the underlying assets and their collection. Therefore, investments to the asset-backed securities will be secured. In turn, the rating for the securities will be higher and the financing cost will be lower.
A synthetic securitization is a structure that combines some properties of both true sale securitization and credit derivatives. In other words, a synthetic securitization means using credit derivatives (i.e. credit default swaps, credit-linked notes) to synthesize/replicate the commercial effect of a true sale securitization.
A synthetic securitization is not subject to the legal requirements like a true sale securitization in that it does not need to constitute a sale. That an originator chooses a synthetic securitization due to several reasons, inter alia, it needs not to meet so many legal restrictions as a true sale securitization does; the originator is not allowed to assign its assets to a third party or the originator wants to keep relationships with its obligors untouched; or the originator only wants to hedge its credit risk associated with the underlying assets but not for cheap funding.
 Sale has different meanings according to different applicable legal areas such as accounting, tax and bankruptcy. Here, it means that an originator transfers its assets to a third party (a special purpose entity), which constitutes a sale according to relevant jurisdictions and can be distinguished from a secured loan. If a transaction is treated as a sale, the transferred underlying assets can be removed from its originator’s balance sheet; therefore, sometimes a true sale transaction is also called an off-balance sheet transaction.
 It was drafted and released by the Basel Committee on Banking and Supervisory Practice (hereinafter Basel Committee). The Basel Committee was established at the end of 1974 for the purpose of maintaining international financial stability. In 1988, the Committee released a Proposal for International Convergence of Capital Measurement and Capital Standards, a capital adequacy and credit risk measurement framework (hereinafter Basel I Accord). On June 26, 2004, the Committee based upon two Consultant Papers and three Quantitative Impact Studies, issued the International Convergence of Capital Measurement and Capital Standards: a Revised Framework (hereinafter Basel II Accord), a revised capital adequacy and credit risk measurement framework, please see at http://www.bis.org/publ/bcbs107.htm for further details.
 There are standardized and internal rating based (IRB) approaches for weighting credit risks and operational risks of the pillar I in the Basel II Accord. The standardized approach is similar to the old capital adequacy measurement but the IRB can help firms holding highly rated tranches to reduce capital requirements but increase deeply subordinated tranches’ capital requirement. Therefore, the changes in the weighted risk arising from the IRB may make firms reconsider their motivation in carrying out securitizations (with a move from capital risk arbitrage to cheap funding) and a change in the issuance mix, with firms trying to remove high-risk assets from their balance sheets. See the Basel II Accord at http://www.bis.org.
 BNP Paribas (2003), “German Banks, Awaiting a Recovery”, Conjuncture, July – August 2003, p.16.
 Details see the True Sale Initiativ e at https://www.commerzbank.de/presse/pool_data/p300404/tsi_handout_300404.pdf, and the KfW’s Press Release at http://www.kfw-bankengruppe.de/Dateien_RSP/pdf/033_e.pdf.
 The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of world’s trading nations and ratified in their parliaments. The explicit goal is to help producers of goods and services, exporters and importers to conduct their business. For details of “what is the WTO” please see at http://www.wto.org/english/thewto_e/whatis_e/whatis_e.htm.
 See S. L. Schwarcz (1994): “The Alchemy of Asset Securitization”, Stanford Journal of Law, Business & Financ e, Fall 1994, pp. 133-154, p.134.
 Security in this context means an “instrument that signifies an ownership position in a corporation (a stock), a creditor relationship with a corporation or governmental body (a bond), or rights to ownership such as those represented by an option, subscription right and subscription warrant”. Dictionary of Finance and Investment Terms, John Downes & Jordan Elliot Goodman, 6th ed., 2003.
 Financial markets are markets “for the exchange of capital and credit in the economy. Money markets concentrate on short-term debt instruments; capital markets trade in long-term debt and equity instruments. Examples of financial markets: stock market, bond market, commodities market, and foreign exchange market”. Dictionary of Finance and Investment Terms, John Downes & Jordan Elliot Goodman, 6th ed., 2003.
 C. Cumming (1987), “The Economics of Securitisation”, FRBNY Quarterly Review (Autumn), pp. 11-13, pp. 11- 12.
 See Bank for International Settlements (1986), Recent Innovations in International Banking, Basel: Switzerland, April; C. Cumming (1987), “The Economics of Securitisation”, FRBNY Quarterly Review (Autumn), pp. 11-13; C. A. Pavel (1989), Securitisation: The Analysis and Development of Loan Backed/Asset Backed Securities Market, Chicago: Probus Publishing; B. Kavanagh (1992), “Asset-Backed Commercial Paper”, Federal Reserve Bulletin (February), pp . 107-116.
 The capital markets are “markets where capital funds-debt and equity-are traded. Included are private placement sources of debt and equity as well as organized markets and exchanges”. Dictionary of Finance and Investment Terms, John Downes & Jordan Elliot Goodman, 6th ed., 2003.
 J. A. Rosenthal and J. M. Ocampo (1988), Securitisation of Credit: Inside the New Technology of Finance, New York: John Wiley and Sons, Inc., p.3.
 For example, ‘compera’ in 1164, which backed by controlling of a tax, was invented by Italian city-states to fund major expenditures; details see M. Kohn (1999), “The Capital Market Before 1600”, p. 9. This paper is available at http://www.dartmouth.edu/~mkohn. The Pfandbrief structure was created by the executive order of Frederick the Great of Prussia in 1769, details see J. Skarabot (2002), “Securitisation and Special Purpose Vehicle Structures”, Working Paper, Haas School of Business, University of California at Berkeley, 29th April.
 A good summary of the history of securitization see C. A. Hill (1996), “Securitisation: A Low-Cost Sweetener For Lemons”, Washington University Law Quarterly (Winter), pp. 1113-1120. The first asset-backed securitization other than mortgage backed securities in the modern time was completed by Sperry Corporation, which issued computer lese backed notes in 1985, see A.A Jobst (2002 ), “Collateralised Loan Obligations (CLOs)-A Primer”, Center for Financial Studies, Working Paper, December 2002, p. 5, also available at http://www.ifk-cfs.de.
 A. Davidson (2003), Securitisation: Structuring and Investment Analysis, New Jersey Wiley.
 See M. Boehringer, U. Lotz and et al. (2001): Conventional versus Synthetic Securitisation – Trends in the German ABS Market, p.4.
 The American Securitization Forum, http://asf.staged.hubbardone.com/docs/Citron%20Impact_On_Economy.ppt#4811, Slide 1, accessed on 21st September 2004.
 A. Davidson (2003), Securitisation: Structuring and Investment Analysis, New Jersey Wiley. Mortgage-backed securities are one kind of asset-backed securities. The name comes from the fact that the underlying assets are mortgage loan portfolios.
 European Securitisation Forum, available at http://www.europeansecuritisation.com/tblSecIss.shtml, accessed on 21st September 2004.
 European Securitisation Forum, available at http://www.europeansecuritisation.com/tblSecByCC.shtml, accessed on 21st September 2004.
 K.E. Herr and G. Miyazaki (1999), “A Proposal for the Japanese Non-Performing Loans Problems: Securitisation as a Solution”, April 14, 1999, available at http://www.vinodkothari.com/JPN-securitization.pdf, and R. Reside, S. G. Rhee and Y. Shimomoto (1999), “ The Feasibility of Creating Mortgage-Backed Securities Markets in Asian Countries”, available at http://www.chinasecuritization.com/information/internationalmarket/countryspecific/gb/absinasia(overview).pdf.
 See Fitch report at http://www.fitchinv.com/shared/latam_covlist.pdf.
 See JP Morgan (2004): “ Global ABS/CDO Market Weekly Market Snapshot”, at http://www.securitization.net/knowledge/articles.asp?id=403.
 Most market practitioners refer to it as special purpose vehicle (SPV). The SPE definition comes from Basel II Accord. “An SPE is a corporation, trust, or other entity organized for a special purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPE, and the structure of which is intended to isolate the SPE from the credit risk of an originator or seller of exposures. SPEs are commonly used as financing vehicles in which exposures are sold to a trust or similar entity in exchange for cash or other assets funded by debt issued by the trust.” See the article 552 of the Basel II Accord, available at www.bis.org.
 See S. L. Schwarcz (1994): “The Alchemy of Asset Securitization”, Stanford Journal of Law, Business & Financ e, Fall 1994, pp. 135.
 Trust as a legal form of SPE is more commonly used in Anglo-Saxon legal system. Details see S. L. Schwarcz (2004 ): Structured Finance – A Guide to the Principles of Asset Securitization, Third Edition, Practicing Law Institute, pp. 3.17-3.20. Also see K.N. Klee and B.C. Butler (2002): “Asset-Backed Securitization Special Purpose Vehicles and Other Securitization Issues”, Uniform Commercial Code Law Journal, Vol. 35 #2, p.47.
 The three world wide big rating agencies are: Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Ratings Group (“S&P”), and Duff and Phelps and Fitch Investors Service, Inc. (“Fitch”).
 For example, at any point in time, the interest rate on securities rated AAA (the highest rating) by Moody’s will be less than the interest rate needed to attract investors on securities rated BAA by Moody’s. The interest rate for notes of AAA class was 5.55%, and the interest rate for notes of BAA1 was 6.51%. Data comes from the CAST 1999-1 Information Memorandum.
 See S. L. Schwarcz (1994): “The Alchemy of Asset Securitization”, Stanford Journal of Law, Business & Financ e , Fall 1994, p. 139. Also see K. Rinne (2004): “An Analysis of the Treatment of Asset Securitization Under the Proposed Basel II Accord and the U.S. Banking Agencies’ Advance Notice of Proposed Rulemaking (ANPR )”, The Fletcher School, p.13, available at http://fletcher.tufts.edu.
 See C. A. Hill (1996): “Securitization: A Low-Cost Sweetener for Lemons”, Washington University Law Quarterly, Winter 1996, p.1067.
 If only the originator is entitled by the SPE to pay directly to investors, otherwise it is a common practice that the SPE pays to investors directly.
 The chart is quoted from S. Henke, H-P. Burghof and B. Rudolph (1998): “Credit Securitization and Credit Derivatives: Financial Instruments and the Credit Risk Management of Middle Market Commercial Loan Portfolios”, CFS Working Paper Nr. 98/07, p. 7, also available at http://www.ifk-cfs.de/papers/98_07.pdf.
 A more detailed securitized assets’ list please see Shearman & Sterling (2002): Handbook On Securitization, Securitization & Derivatives Practice Group, Shearman & Sterling, p. 3.
 See J. H.P. Kravitt ed. (2003 ): Securitization of Financial Assets, Second Edition, Aspen Law & Business, pp. 12-17.
 See S. L. Scharcz (1994): “The Alchemy of Asset Securitization”, Stanford Journal of Law, Business & Finance, Fall 1994, pp. 138-141.
 Investment grade in Moody’s means at least BAA for long-term ratings, and P-2 for short-term ratings (with original maturity not exceeding 13 months); In Fitch means at least BBB- for long-term ratings, F3 for short-term ratings (with maturity less than 12 months); In Standard & Poor’s means at least BBB for long-term ratings, and A-3 for short-term (with maturity less than 12 months) ratings. Details are available at their websites.
 See Wildgen & Partners (2004): “Securitization Law Adopted on March 9, 2004”, Newsflash, March 2004. Also see Bonn Schmitt Steichen Avocats (2004): “Legal Alert: Securitisation-Law of March 9, 2004 on Securitisation” at http://www.bsslaw.net/optimized/pdf/241834970.pdf.
 Synthetic securitization will be explained under the section 2.5.2. The more detailed descriptions about synthetic transactions without SPEs please see A. A. Jobst (2002): “Collateralized Loan Obligations (CLOs)-A Primer”, Center for Financial Studies, Working Paper, December 2002, pp. 37-39. It is also available at http://www.ifk-cfs.de.
 See C. L. Culp (2002): The Art of Risk Management – Alternative Risk Transfer, Capital Structure, and the Convergence of Insurance and Capital Markets, John Wiley & Sons. Inc., p. 309.
 See FitchRatings (2001)“Asset-Backed Commercial Paper Explained”, Asset-Backed Criteria Report, November 8, 2001, at www.fitchratings.com.
 See S. L. Schwarcz (2004 ): Structured Finance – A Guide to the Principles of Asset Securitization, Third Edition, Practicing Law Institute, p. 4-2.
 Traditional securitization means “a structure where the cash flow from an underlying pool of exposure is used to service at least two different stratified risk positions or tranches reflecting different degrees of credit risk. Payments to the investors depend upon the performance of the specified underlying exposures, as opposed to being derived from an obligation of the entity originating those exposures. The stratified/tranched structures that characterize securitizations differ from ordinary senior/subordinated debt instruments in that junior securitization tranches can absorb losses without interrupting contractual payments to more senior tranches, whereas subordination in a senior/subordinated debt structure is a matter of priority of rights to the proceeds of liquidation”. See Basel II Accord, Article 539. It is available at www.bis.org.
 Leverage here means the debt-to-equity ratio. It is commonly believed that highly leveraged companies have high default and insolvency risks since they are more likely getting into risky business.
 Derivative is short for derivative instrument, a contract whose value is based on the performance of an underlying financial asset, index, or other investment. The common derivatives are options, futures and swaps. See at Dictionary of Finance and Investment Terms, John Downes & Jordan Elliot Goodman, 6th ed., 2003, p. 173.
 According to the Article 540 of the Basel II Accord, a synthetic securitization is “a structure with at least two different stratified risk positions or tranches that reflect different degree of credit risk where credit risk of an underlying pool of exposure is transferred, in whole or in part, through the use of funded (e.g. credit-linked notes) or unfunded (e.g. credit default swaps) credit derivatives or guarantees that serve to hedge the credit risk of the portfolio. Accordingly, the investors’ potential risk is dependent upon the performance of the underlying pool”. It is available at www.bis.org.
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