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Similaire à MS 2012 Structure Finance Guide (20)
MS 2012 Structure Finance Guide
- 1. MorgaN
StearnS
CorporatioN
Strategic Management Partners
• Copyright ©2012
- 2. STRUCTURED
FINANCE
Accessing
Capital Markets
through Securitization
Presented by
MorgaN StearnS
Corporation
• Copyright ©2012
- 3. SETTING THE SCENE
Structured Finance has become an increasingly
important tool in today's financial markets.
“With the credit crisis and ensuing economic downturn, however, conventional finance’s
winning streak had come to an end. Deal volumes have fallen dramatically, revenue growth
rates that once topped 50 percent per year have plunged, and risk provisions have soared. “
Structured Finance resurgence has been turning the crisis to an advantage and
given rise to optimism. Over the past several years, the rise of structured
finance—the business of accessing capital through capital market investments to
build power plants, airports, roads, ships, and other expensive assets; to finance
trade flows; and to acquire companies—has mirrored the global economic
expansion. Indeed, it is the allocation of capital by structured finance that in a
very real sense makes economic expansion possible. Structured financing
operations have spanned into a wide array of instruments: leveraged buyouts,
management buy-outs, restructuring, industrial projects, infrastructure projects;
restructure secured debt; term loans, operating loans and asset-based secured
lending.
The concepts and strategies have been limited to High Net Worth corporations
and although accessible to mid to large-scale transactions in the emergent market,
there are few that have knowledge to these opportunities.
For well over a decade, Morgan Stearns Corporation has made it possible for
companies in emergent markets to seize the opportunity through Structured
Finance. In summary, with the use of structured finance, many companies are
given an opportunity for new life that would not have been possible otherwise.
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- 4. CONCEPT OF A
STRUCTURE FINANCE
Structured finance is used (in the broadest term) to describe a sector of
finance that was created to help transfer risk using complex legal and
corporate entities. This risk transfer as applied to securitization of various
financial assets has helped to open up new sources of financing.
Structured finance transactions rely on the concept of a special purpose vehicle (SPV) to
provide improved predictability of outcome compared with a corporate credit in relation to
a number of risk factors.
The key feature that distinguishes structured finance transactions from a corporate credit is
the structural isolation or "de-linking" of an underlying pool of assets from the corporate
credit risk of the owner or "originator" of those assets. This is typically achieved in
structured finance by the sale of an identifiable and specific pool of the originator's assets
to an SPV so that neither the assets, nor their proceeds on realization, will be available for
distribution as part of the bankruptcy estate of the originator.
The separation of a pool of underlying assets from the corporate credit risk of the
originator is enhanced by using an SPV. Legal restrictions imposed on an SPV limit the
business activities it is allowed to undertake. Unlike the corporate owners of the
underlying pool of assets being securitized, SPVs are not intended to be operating
businesses.
Where an SPV has been restricted in its business activities and therefore has no (or a
known) credit history, this improves the certainty of outcome for a structured finance
transaction by reducing the risk of other creditors taking bankruptcy or other recovery
action against the SPV.
The SPV formation document, the documents relating to a particular transaction and the
associated legal opinions are key documents for an analyst in assessing the extent of the
separation of the assets from the bankruptcy risk of the originator, the benefits to any
particular structure in using an SPV and consequently, whether a particular transaction can
be classified as a structured finance transaction.
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- 5. DEFINING
STRUCTURE FINANCE
Structured finance can be attractive to a business that does not have much in the way
of material assets, but does have a strong client prospects and documented history of
monthly billing coupled with consistent pay histories of the customers. Investors are
often willing to lend money to corporations of this nature, and do so at a lower rate of
interest than a standard bank loan.
For the business that is looking to expand, and needs cash to do it, structured finance
may represent the most cost efficient way to manage the fund raising. Along with the
low amount of red tape involved with structure finance, this option also can move
very quickly, often much faster than obtaining a standard business loan.
When more conventional methods of obtaining a business loan are either undesirable
or not possible, there is always the option of structured finance. Structure finance
essentially is the process of making a loan based on a strong performance in cash flow
in the past. Rather than other assets being used as collateral, funds are advanced based
on the history that indicate a consistent flow of cash into the borrower’s business that
will allow for the timely and orderly repayment of the loan amount.
• Structured finance is also an excellent way for a company that is emerging from a
rough period to get the operating capital it needs to get back on its feet and begin to
grow once again.
• Structured finance are applied to eliminate the higher interest liabilities, effectively
exchanging them for lower interest and more manageable repayments, can be the
answer. While the traditional finance sector may be hesitant to loan funds to
companies emerging from this sort of situation, a structured finance scheme would
take into account the stable and consistent cash flow from customer orders and
consider the corporation a good risk.
Structured finance can be considered a mode of CDO, or collateralized debt
obligation. CDOs are basically a kind of structured credit product that is idea when
there is some transfer risk with a company, but there is also potential for growth.
Structured finance is ideal when the element of risk transfer makes an appeal to
conventional finance sources unproductive, unattractive, or simply impossible.
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- 6. distinctions within
structure finance
by Andreas (Andy) Jobst
of the Monetary and Capital Markets Department of (IMF)
• Structured finance encompasses all advanced private and public financial
arrangements that serve to efficiently refinance and hedge any profitable
economic activity beyond the scope of conventional forms of on-balance sheet
securities (debt, bonds, equity) in the effort to lower cost of capital and to mitigate
agency costs of market impediments on liquidity. In particular, most structured
investments (i) combine traditional asset classes with contingent claims, such as
risk transfer derivatives and/or derivative claims on commodities, currencies or
receivables from other reference assets, or (ii) replicate traditional asset classes
through synthetication.
• The premier form of structured finance is capital market-based risk transfer
(except loan sales, asset swaps and natural hedges through bond trading, whose
two major asset classes include asset securitization (which is mostly used for
funding purposes) and credit derivative transactions (as hedging instruments)
permit issuers to devise almost an infinite number of ways to combine various
asset classes in order to both transfer asset risk between banks, insurance
companies, other money managers and non-financial investors in order to achieve
greater transformation and diversification of risk.
• Structured finance are invoked by financial and non-financial institutions in both
banking and capital markets to establish forms of external finance are either (i)
unavailable (or depleted) for a particular financing need, or (ii) traditional sources
of funds, which are too expensive for issuers to mobilize sufficient fund for what
would otherwise be an unattractive investment based on the issuer’s desired cost
of capital.
• Structured finance offers enormous flexibility in terms of maturity structure,
security design and asset types, which allows issuers to provide enhanced return at
a customized degree of diversification commensurate to an individual investor’s
appetite for risk.
Overview of risk transfer instruments(**)
** - From the Journal Derivatves & Hedge Fund,
Received(in revised form): 7th June, 2007
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- 7. Boundaries between
Conventional vs.
Structured Finance
The flexible nature of structured finance straddle the indistinct boundary between
traditional fixed income products, debentures and equity on one hand and derivative
transactions on the other hand. Notwithstanding the perceivable difficulties of
defining the distinctive nature of structured finance, functional and substantive
differences between structured and conventional forms of external finance seem to be
most instructive in the way they guide a critical differentiation.
The following definition reflects such a proposition if we compare two financial
arrangements that share the same objective:
a) Investment instruments are motivated by the same or similar financial objective from
both the issuer’s and the investor’s point of view, but they differ in legal form and
functional implementation. They also might require a different valuation due to a
varying or different transaction structure and/or security design.
b) Investment instruments are substantively equivalent (i.e. they are evaluated exactly the
same in line with an equilibrium price relation), but they differ in legal form and might
require a different valuation due to a varying or different transaction structure and/or
security design.
In the first case, pure credit derivatives are clear examples of structured products for
credit risk transfer, which allow very specific and capital-market priced credit risk
transfer. Credit insurance and syndicated loans share the same financial objective;
however, they do not constitute an arrangement to create a new risk-return profile
from existing reference assets. Another example in this vein would be the comparison
of MBS and Project finance-and-brief-style transactions. Although both refinancing
techniques convert a credit claim or a pool of claims into negotiable securities, they
represent two distinct forms of covered bonds obtained from securitizing the same
type of reference asset either off-balance sheet (asset-backed securitization) or on-
balance sheet (“Pfandbrief-style” securitization), or even through synthetic
securitization.
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- 8. (Boundaries between
Conventional vs.
Structured Finance (cont.)
In the second case, for instance, an Islamic loan becomes a structured finance
instrument whenever its formation through replication of conventional asset classes
involves a contingent claim. In Islamic finance traditional fixed income instruments
are replicated via more complex arrangements in order to establish compliance with
the religious prohibition on both interest earnings (riba), the exchange of money for
debt without an underlying asset transfer, and non-entrepreneurial investment.
Structured finance redresses these moral impediments to conventional forms of
external finance.
In review, Islamic banks use synthetic loans for debt-based bond finance, where the
borrower re-purchases, or acquires the option to re-purchase, own assets at a mark-up
in a sell-and-buyback transaction (on existing assets as a cost-plus sale (murabahah)
or future assets as project finance (istina)). The lender can refinance the selling price
and/or the indebtedness of the borrower via the issuance of commercial paper.
Alternatively, the ijarah principle prescribes an asset-based version of refinancing a
synthetic loan, where the lender securitizes the receivables from a temporary lease-
back agreement as quasi-interest income. The debt transaction underlying each of
these forms of refinancing reflects a put-call parity-based replication of interest
income, where the lender holds the ownership (stock S) of the notional loan amount
and writes a call option (C) to the borrower to acquire these funds at an agreed
premium payment subject to the promise of full payment of principal and mark-up
after time T (put option P). Both options have a strike price equal to the mark-up and
the notional loan amount. So the lender’s position at the time the synthetic loan is
made is S-C+P, which equals the present value of principal and interest repayment of
a conventional loan.
- From the Journal Derivatves & Hedge Fund,
Received(in revised form): 7th June, 2007
excerpts by Andreas (Andy) Jobst of the Monetary and
Capital Markets Department of (IMF) Washington, DC.
• Copyright ©2012
- 9. ANATOMY OF A
STRUCTURE FINANCE
An Overview
SPECIAL PURPOSE VEHICLE (SPV)
A SPV, also known as a special purpose entity (SPE), is a legal entity created for the
client (known as the sponsor or originator) by transferring assets to the SPV, to carry
out specific purpose or circumscribed activity, or a series of such transactions.
• Companies use securitization as an investment instrument through creating another
corporation or legal entity known as Special Purpose Vehicle (SPV) that is a subsidiary to
the originating company. The originating company then transfers the assets to the SPV,
which issues securities that are collateralized by the assets with the proceeds transferred back
to the originating company.
• SPVs have no purpose other than the transaction(s) for which they were created, and they
can make no substantive decisions. The attributes of SPVs can be best described into five
categories; (1) finance-ability (2) credit enhancement (3) securities and agreements (4)
sources of funds and (5) sovereign support.
• Morgan Stearns principally employs SPVS as a financial corporation, set up for a specific
purpose; including the structured investment vehicle (SIV) and their attributes are important
benefits in the financial and legal risk considerations
The Insfrastructure strategy for a Client’s SPV are:
• To underwrite and conduct a Securitization in the issuance of financial conduit endorsed by
client’s Values and supplemented CDO or ABS, as determined by the designated Risk
Management underwriter and equivalent to a value that would meet the total amount of the
funding.
• Arrange an Extraordinaire Financing that will facilitate capital funds to formulate a Debt
Restructure and/or Recapitalization of the investments provided to the client for the project
that will result in optimizing the values and net worth of the company.
• In that the funds are generated under an investment structure and provided to the client’s
project under an intercreditor finance. In essence, setting up a credit facility internally in a
jurisdiction beyond the client’s base of operation, whether to formulate a Debt Restructure
and/or Recapitalization of the investments that will result in optimizing the values and net
worth of the company.
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- 10. ANATOMY OF A
STRUCTURE FINANCE
(cont.)
Who will form the SPV? Morgan Stearns Corporation who will charter and accredited
a legal entity, under a corporate name normally similar to the company ; for the
principal purposes of a prescribed use of consolidate specific assets of the company
and enhance these assets to support the objectives of establishing the financial ability
in a broader Global capital market through proper securities and agreements.
What are the Pre-requisite in forming the SPV? There are no pre-requisites required
by the client in the process of chartering and accrediting the SPV for Structure
Finance, other than the full cooperation to the SFA by providing the essential
underwriting documents required during the securitization and placement of the
capital market investments in accordance with the terms and conditions offered by the
Proffer.
Are there a requirement for fee? The fees for setting up a SPV, executing the
securitization and financing agenda normally in the range of 1/10th of 1 basis point,
normally in the range of $82,000 up to $175,000; which is itemized and deferred to be
paid at closing and covered by the funding. The fees cover retainers and registry
cost derived by the CMT’s Auditor; Fund Administration; Securitization (Legal)
Counsel; Capital Market Underwriters.
**NOTE - The client is normally required to appropriate the factual budget towards
logistical cost and expenses referred as “out of pocket costs; normally that are
unavoidable and are unable to defer till closing , such as the corporate charter filings
and other logistics such as clerical and professional preparation of the Investment
Recommendation (prospectus) documentation and submissions.
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- 11. ANATOMY OF A
STRUCTURE FINANCE
(cont.)
An Overview
SECURITIZATION
Securitization is the method utilized by participants of structured finance to
create the pools of assets that are used in the creation of the end product
financial instruments. In essence, securitization takes place to make the
illiquid assets of the firm available for investment.
The assets are pooled to make the securitization large enough to be
economical and to diversify risk. The SPV takes title to the assets and the
cash-flows are “passed through” to the investors in the form of an asset
backed security.
Through a combination of fixed income asset, they are enhanced through
ABS arranged by the SFA in conjunction with the CDO Manager and
Securitization underwriter, selected to produce a Financial Conduit. The SFA
undertakes the task of structuring it into an SPV.
Goal of engaging a securitization partly, and aimed at creating a synthetic
asset, specifically tailored to set attractive values for investors by increasing
a level of interest by broadening our investment outreach beyond the
company’s fund sources, and access these funds into an investment to meet
the capital needs of the client.
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- 12. ANATOMY OF A
STRUCTURE FINANCE
(cont.)
Why do Structure Finance Need Securitization?
[The need for cash to grow and expand the business. By aising equity and borrowing through debt
is difficult, expensive and can distort the financial leverage of a company. Equity and bonds are
two sources of “on-balance sheet” financing]
• Securitization, on the other hand, is an “off-balance-sheet” source of funds.
According to the FASB, rules governing securitization pool of Assets Rating
Agency (assuming all conditions are met) cash and proceeds from the sale of
assets are added to assets, while the transferred asset itself is taken off the
balance sheet.
• ABS offer increased liquidity through a broader market.
What is the form of Pooled Assets?
• CMBS - A CMBS involves the issue of mortgage-backed assets by an issuer
(typically a Special Purpose Company), the return on which is determined by reference
to the performance of a portfolio of corporate loans or other similar debt obligations.
The credit exposure – and return – is Synthetically created by the issuer executing a
credit default swap with a counterparty. These instruments are used in a variety of
trading strategies to hedge risk and to give investors exposure to the credit markets
without having to buy the underlying assets of the company. One of the great
attractions for arrangers of a synthetic CDOs is the ability to issue assets and/or
securities without actually owning any assets to back those securities.
Essentially, they are able to look at investor demand and appetite for particular
levels of risk and return, and create a synthetic asset, specifically tailored to meet
investor demand. Based on these values, we look at a type of structured credit
product which is attracting an increasing level of interest from arrangers and
investors alike.
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- 13. ANATOMY OF A
STRUCTURE FINANCE
(cont.)
What is the impact of Securitization on the Capital Market?
• Securitization reduces transaction costs in the capital market by creating a
market for financial claims, which otherwise, would have remained illiquid, (i.e.
limited trading).
• Securitization saves intermediation costs, since the specialized intermediary
costs are service related and generally lower.
• Securitization promotes saving since it offers a security to investors with
guaranteed interest or payments and an assurance of credit quality and safety
nets in the form of trustees.
• Securitization leads to diversification of risk since it pools several financial
assets with differing features together and offer them to investors. When the
ownership of the asset becomes spread among a wide base of investors, it
becomes diffused, thus reducing the inherent risk in financial transactions.
• Securitization promotes the idea of capitalists being trustees of resources and not
owning them. Just as financial assets can be securitized, physical assets can also
be securitized, which means that an entity can make use of physical resources
without actually owning them.
The benefits of Securitization in the Capital Markets have led to an increase in the
volume and value traded of ABS on the capital market. In year 1995, the value of
ABS deals amounted to $ 316.3 billion, which increased greatly to $ 1,4 trillion in
the third quarter of year 2011.
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- 15. ANATOMY OF A
STRUCTURE FINANCE
(cont.)
An Overview
STRUCTURED FINANCE ADMINISTRATOR(s)
There are two administrators in the Structure Finance transaction - the STRUCTURE
FINANCE ADMINISTRATOR (SFA) and the FUND ADMINISTRATOR.
The role of the Structure Finance Administrator (SFA) -
• The SFA (Morgan Stearns) acts as the Secretary to the SPV; and coordinates with the
implementation of the SF strategy throughout every key aspect of the infrastructure
from concept to closing. SFA also entails assembling and engaging all Capital Market
Team (CMT) Advisors into the Structure Finance Agenda in accordance with the terms
and conditions of the funding.
• The Fund Administrator is best described as the Custodian of all Investment Funds and
keeps the funds in line between the SPV and Parent company and also ensure the funds
are in keeping with the region’s regulatory laws.
The Importance to employ the services of A STRUCTURED FINANCE
ADMINISTRATOR in the process of arranging ABS
The traditional role of a SFA is to avoid the difficulties which arise in a direct investor-
borrower relation (the company and investors). The difficulties could be one or more of the
following:
• Transactional Difficulty: An average small investor usually has a small amount of
money to lend, whereas the company's needs could be massive. The intermediary bank
pools the funds from small investors to meet the typical needs of the company.
• Informational Difficulty: An average small investor would not be aware of the
borrower company or would not know how to appraise or manage the loan. The
intermediary fills up this gap.
• Perceived Risk: Investors usually perceive banks to be of a lesser risk compared to
investing directly in a company, though in reality, the financial risk of the company is
transposed on the bank. However, the bank is a pool of several such individual risks,
and hence, the investors' preference of a bank to the borrower company is reasonable.
• Copyright ©2012
- 16. ANATOMY OF A
STRUCTURE FINANCE
(cont.)
How are CMT Advisors determined and recommended that and designated
by the SF Administrator?
It is among a key responsibility of the SF Administrator to carefully weighed
to essential needs of a client’s Structure Financing and determined that which
Accredited Financial Firm will compliment financial strategy and select
localized advisor for legal and Funds. Thus the recommendations are
considered an essential component in the development and realization of the
landscape of all Structured Financing plans. All CMT Consultants are
carefully selected due to their qualifications and expertise in the areas of their
assignment.
How and when will a client come to contact or who will introduce the
CMTs?
The SF Administrator undertakes all selected CMT Consultants, normally
recommended during the TRC Steering reviews of a client’s finance request;
involved in the structuring and fulfillment of the SF agenda on behalf of its
Client. Although they are recommended during the Proffer; they are
activated and confirmed and synchronized into the SF Agenda, immediately
after the execution of the Engagement accords and charter of the SPV.
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- 17. An Overall Scope of
Structure Finance
Conclusion
• Structured finance is a large, diverse and growing market. And it is
generally profitable, with leading banks generating returns on capital of
25% and better. However, there is wide variation in profitability, both
between products and between deals within a product. This variation in
profitability is caused, in part, by the opacity of (risk adjusted)
profitability and, in part, by the disproportionate share of economic
profit captured by SF originators (ie.Morgan Stearns).
• These two facts make structured finance a smart business. Winning
tactics and selecting the right deals in which to participate are all about
expertise – in structuring deals for clients and in measuring the risks
those deals entail.
• Strong distribution is also essential, to maximise the profitability of
individual deals and to increase capital velocity and origination capacity.
For clients who can maintain or build the required smarts, structured
finance will remain a profitable business.
• Copyright ©2012