Línea base de los indicadores de gestión y desempeño

(The solid lines in the diagram depict cash flows while the broken lines indicate legal contractual relationships.)

Purchases mortgage loans

Investors

Issuer Subsidiary (Covered

bond guarantor) Grants intercompany loan

Covered bond guarantee Transfers mortgage loans

Structured covered bonds, like covered bonds, are full recourse instruments to the issuer, but investors also benefit from a security interest over a cover pool of assets. Nevertheless, even with the structural provisions borrowed from the securitisation market, structured covered bonds differ quite considerably from securitisation transactions. In pure securitisation transactions only the cash flows from the assets serve to repay the securitisation bonds. However, investors in structured covered bonds continue to have direct or indirect recourse to the originator, while only upon default of the originator is the collateral used to repay the structured covered bonds (Poulain and Verbeek, 2003:2).

Structured covered bond issuers are exposed to cash flow mismatches that arise because asset pools are mainly composed of amortising mortgage loans, while the bonds have bullet maturities, i.e. no principal is amortised over the life of the bond and the full principal amount is payable at maturity of the bond. The cash flow mismatch exposes issuers to re-investment risk, which may impair their ability to repay investors. This risk is somewhat mitigated by the flexibility allowed in most structures to have substitution assets that can be included in the cover pool. However, adding new loans to the asset pool exposes investors to a change in asset pool characteristics and hence risk characteristics. Overcollateralisation, i.e. an excess of eligible assets over liabilities, as credit enhancement is thus commonly used to provide protection against losses that may exceed the net interest margin on the pool, which is the first layer of protection (Poulain and Verbeek, 2003:5).

7.4 Credit Card Securitisation

Credit cards and auto loans form the two pillars of the asset-backed securities market (Kothari, 2003:330). The first credit card asset-backed securities were issued in 1987 to diversify sources of bank funding and to free up regulatory capital (Dean and Murphy, 2001:3). Credit card securitisation is also the primary funding source for specialised credit card banks and allows these banks to raise funds more cheaply than what would otherwise have been possible. Although credit card receivables are short-term assets, the receivables are revolved into the creation of fresh receivables on a steady basis, resulting in a steady stream of cash flows, thereby making these receivables ideal assets for securitisation. Credit card companies earn high interest from credit cards, and constantly monitor the conduct of cardholders. A credit card company can immediately block a card in case of delinquencies. Relative to any other type of consumer lender, the credit card lender has a better understanding of a borrower’s creditworthiness and greater flexibility in responding to changes in cardholder behaviour as they occur (Deutsche Bank, 2001, cited in Kothari, 2003:331).

A credit card pool, unlike an amortising asset pool such as auto loans, is a revolving pool of assets. Repayments by cardholders may be replaced by new charges and the credit limit may continually be utilised to the maximum limit. A credit card securitisation mirrors the revolving nature of the underlying asset pool (DiMartino and Kane, 2001:33). As with the securitisation of other assets, the goal in credit card securitisation is to transfer the receivables generated from the credit card accounts to a bankruptcy-remote SPV that functions as the issuer of the credit card asset-backed securities. The originator remains the owner of the credit card accounts, but initially transfers the outstanding receivables to the SPV and pledges to transfer any future receivables generated by the accounts, which the SPV typically purchases at par (Dean and Murphy, 2001:3). The SPV acquires a beneficial interest in the receivables, but the relevant credit card accounts are not assigned to the SPV (Kerschkamp, 2002:3). Each month, receivables are repaid and repayments are replaced by new receivables, enabling the issuer SPV in the securitisation transaction to maintain a level pool balance, assuming active utilisation of the accounts in the receivables pool (DiMartino and Kane, 2001:33). Usage of a revolving structure gives the originator medium-term to long-term financing and provides investors with a predictable schedule of interest and principal payments.

A typical credit card securitisation structure has three different cash flow periods – revolving, amortisation, and early amortisation. Each period performs a distinct function and allocates cash flows differently (Dean and Murphy, 2001:6). All collections on the receivables are split into finance charge income and principal repayments. Each of the three periods treats finance charge income in the same manner. Monthly finance charges are used to pay servicing fees, cover receivables defaults, pay the interest coupon to investors, and release any excess spread to the originator as profit extraction. Principal collections, however, are allocated differently during each of the periods as discussed below.

− Revolving Period: During the revolving period, monthly principal collections are used to purchase new receivables generated by the designated credit card accounts. The revolving period continues for a predetermined period, which can range from two to 15 years. Investors only receive interest payments during this period.

− Amortisation Period: At the end of the revolving period, the principal amortisation period begins. Three different amortisation structures have been used in credit card securitisations: a pass- through structure, a controlled amortisation structure, and a bullet payment structure (Fabozzi, 1996:317).

In the pass-through structure, the principal cash flows from the credit card accounts are paid to investors on a pro rata basis.

In the case of controlled amortisation structure, which typically runs for 12 months, principal collections are no longer reinvested in receivables, but are paid to investors in 12 equal instalments. The payments will be sized at exactly one-twelfth of the invested amount so investors can be repaid on a predetermined schedule.

Under a bullet payment or controlled accumulation structure, the monthly principal repayments are deposited into an interest-bearing trust account where it is held until the maturity date of the asset-backed securities. Because interest earned would likely be less than the bond coupon, a reserve account funded from excess spread prior to the commencement of the accumulation period is used to cater for the interest shortfall. At the end of the accumulation period investors are repaid their principal in a single payment on the maturity date.

− Early Amortisation: Severe asset deterioration, problems with the originator or servicer, or certain legal troubles can trigger early or rapid amortisation at any point in the transaction, whether it is revolving or amortising. In such a case, the transaction begins to repay investors immediately with all principal repayments directed to senior investors first. Principal distributions will be made to subordinate investors only after senior investors have been fully repaid.

A credit card securitisation structure may also make use of a liquidity facility, which will provide liquidity in the event that the outstanding balances in the accounts increase significantly above historically observed levels, such as during the Christmas season (Kerschkamp, 2002:4).

7.5 Auto Loan Securitisation

Auto loans were one of the earliest products in the securitisation market. In 1985, Chrysler Financial issued the first public securitisation of its auto loan portfolio (DiMartino and Kane, 2001:4). Many investors originally supported auto loans as a result of the security interest in hard collateral, in contrast to unsecured obligations such as credit cards, and collateral remains a positive aspect of this asset class. The nature of the obligation is also a positive attribute. A vehicle ranks highly in the consumer hierarchy of needs, and many people will make their monthly vehicle loan payment a priority, as consumers need vehicles to get to work and for basic transportation. Further benefits of

auto loans include large and diversified pools, a stable track record with low losses, and stable and consistent prepayment speeds with little volatility (DiMartino and Kane, 2001:11).

An auto loan securitisation is straightforward. An originator of a pool of auto loans sells the receivables, consisting of the rights to receive proceeds and the rights to retain possession of the vehicles, into a bankruptcy-remote SPV. An auto loan can be a simple interest loan payable over a predetermined time frame, or a balloon loan. A balloon loan poses substantial risk at maturity (Mrazek and Neiliwocki, 2002:5). This tail-end risk results from the borrower’s option to return the related vehicle to the originator rather than purchase it for the lump sum balloon amount. The vehicle then has to be sold in the used vehicle market to realise the balloon amount. Any shortfall in proceeds is passed through to the securitisation structure as a loss. Most transactions have, as credit enhancement, a cash reserve account that is either pre-funded by the originator or funded from excess spread until the required level is reached.

Auto loans typically pay monthly over a period of 36 to 60 months. Investors are paid by way of a pass-through structure or a pay-through structure. In the pass-through structure, the cash flows mirror the cash flows of the underlying loans and are paid pro rata to all classes of securities. In the pay-through structure, the cash flows are time-tranched and reallocated amongst senior and subordinated investors. This structure has a series of classes in staggered maturity (DiMartino and Kane, 2001:14). There is typically a short-term money market class, and a one-year, a two-year, etc. class. Investors are repaid sequentially in the order of maturity and seniority.

Auto leases are different from auto loans. In a typical consumer auto lease transaction, the lessor purchases a vehicle from a manufacturer or dealer and leases it to the consumer. The lessee pays the lessor for the right to use the vehicle during the term of the lease. Leases usually incorporate a residual value, which is determined at the inception of the lease contract and represents an estimate of the leased vehicle’s resale value at the end of the lease. At the maturity of the lease, the lessee effectively has a call option to purchase the vehicle for the stated residual value. Otherwise, the lessee will return the vehicle and the lessor takes possession and assumes responsibility for disposing of the vehicle and the residual value realisation (Chou et al., 2000:3). Leasing is an important part of the vehicle finance market, but the securitisation of auto leases has been somewhat limited. Historically, three issues have hampered the securitisation of auto leases, namely vehicle ownership, residual value risk, and conflicting tax and accounting goals of originators (Chou et al., 2000:4).

Vehicle Ownership: The largest hurdle in securitising auto leases relates to the difficulty in effecting a

true sale of the assets to be securitised. In the securitisation of auto loans, which are considered to be financial assets, transfer of the ownership of the loans is achieved by selling them to the SPV issuing the asset-backed securities. The SPV then has ownership of the loans resulting in the isolation of the loans from the bankruptcy estate of the originator. However, in the case of auto lease securitisations, both the vehicle and the lease contract constitute the asset sold to the SPV. Thus the asset is not considered financial, and the vehicle must be registered in the name of the owner. Without formal legal transfer of ownership of the vehicle from the lessor to the SPV through re-registering, the risk that such a transfer does not constitute a true sale remains high.

To overcome vehicle ownership problems, the origination, or registering SPV, structure was developed. In this structure the registering SPV, not the lessor, purchases the lease contracts and leased vehicles directly from the supplier. The registering SPV, instead of the lessor, is listed on the title certificate. The registering SPV then transfers to the lessor a beneficial interest, also referred to as an undivided trust interest (UTI), in all the vehicles and leases owned by the registering SPV. The holder of the beneficial interest, namely the lessor, obtains the economic value for tax purposes and can therefore depreciate the assets, but does not obtain the ownership of the assets of the registering SPV from an accounting perspective.