“securitization: past, present and future” what it is. where it came from. where it’s going
DESCRIPTION
SECURITIZATION COLLOQUIUM. “Securitization: Past, Present and Future” What It Is. Where It Came From. Where It’s Going. Kellogg Graduate School of Management April 28, 2003. Joseph M. Donovan Managing Director and Group Head. Yes. Maybe. No. Autos Credit Cards Home Equities - PowerPoint PPT PresentationTRANSCRIPT
“Securitization: Past, Present and Future”What It Is. Where It Came From. Where It’s Going.
Kellogg Graduate School of ManagementApril 28, 2003
SECURITIZATION COLLOQUIUM
Joseph M. DonovanManaging Director and Group Head
WHAT IS AN ASSET BACKED SECURITY? A fixed income instrument designed to capture the cash flow
and credit attributes of a specific pool of assets (loans, receivables)
Enhanced to achieve high ratings or target a particular buyer Examples of Assets
Yes Autos Credit Cards Home Equities Equipment Leases Student Loans CBO/CLOs
Maybe Future Export
Rec.’s Tax Liens Disney Film
Library Bowie Bonds
No Secured Debt Commodity
Backed
WHAT IS AN ASSET BACKED SECURITY?
Rights to future cash flows
Future cash flows
Purchase bonds (cash today)“Excess” future
cash flows
Credit enhancement
Cash proceeds today Trust or SPV Bond
Investors
CompanyIndividual Assets (Loans,
Receivables) on Company’s Balance Sheet
WHAT IS AN ASSET BACKED SECURITY?Sources of Credit Enhancement
Internal– The assets– Excess interest– Spread or reserve accounts– Subordinated classes
External– Seller’s limited guaranty– Third-party LOC/surety bond
The Early Years:1985-1994
I. THE EARLY YEARS: 1985-1994In 1985 the ABS Market was born, first with autos . . .
AutoSource: Thomson Financial Securities Data, Credit Suisse First Boston, Public/144A ABS Annual
Issuance
$9.8 $6.1 $5.7 $7.8 $12.6 $17.1$24.9 $25.4
$18.5$1.0
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
($ in Billions)
I. THE EARLY YEARS: 1985-1994…then with credit cards
Credit CardsAuto
$9.8 $6.1 $5.7 $7.8 $12.6 $17.1$24.9 $25.4
$18.5
$17.4 $19.6 $32.8
$1.0
$2.3$6.9
$11.0
$22.6$21.9
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Source: Thomson Financial Securities Data, Credit Suisse First Boston, Public/144A ABS Annual Issuance
($ in Billions)
I. THE EARLY YEARS: 1985-1994Auto & Credit Cards - The Fundamental Structures
$0
$50
$100
0 12 24 36 48 60
Average Life(20 months)
Expected Final
Callable
Legal Final
Months
Autos:Liquidating pool generally in existence at closing
I. THE EARLY YEARS: 1985-1994Auto & Credit Cards - The Fundamental Structures
Credit Cards:Designed to accommodate short-lived assets
Future originations must meet established parameters
PEPCO FUTURETERM SERIES 200X-1REVOLVING PERIOD
MONTH
MINIMUM SELLER'S INTEREST100
107
STEP DOWN PERIOD
6036
RECEIVABLES BALANCE
I. THE EARLY YEARS: 1985-1994Back to the Evolution of the Market
$9.8 $6.1 $5.7 $7.8 $12.6 $17.1$24.9 $25.4
$18.5
$17.4 $19.6 $32.8
$12.5$15.1 $13.8
$19.6
$30.4
$1.0
$21.9$22.6
$11.0$6.9
$2.3$1.8
$8.8
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Credit CardsAuto OtherSource: Thomson Financial Securities Data, Credit Suisse First Boston, Public/144A ABS Annual
Issuance
($ in Billions)
I. THE EARLY YEARS: 1985-19941985-1994: Top ABS Issuers
Source: Domestic Public and 144A Asset Backed Issues, Thomson Financial Securities Data, CSFB.
ISSUERPRINCIPAL (in millions) RANK MARKET SHARE
GMAC $37,928.7 1 10.7%
Chrysler $35,876.7 2 10.1%
Citibank $28,656.8 3 8.1%
Household International $18,571.5 4 5.2%
Ford Motor Credit $17,328.6 5 4.9%
MBNA $17,097.2 6 4.8%
Top 6 Totals $155,459.5 43.8%
Industry Totals $355,120.8 100.0%
I. THE EARLY YEARS: 1985-1994Why Securitize?
Cheaper source of capital
Improved leverage
Perfect matched funding
Fund growth
Access new investors
Origination discipline
I. THE EARLY YEARS: 1985-1994Why Invest in ABS?
Extremely high credit quality
Yield pick-up over corporates
Liquid market
Limited “event risk”
Asset diversification
Relatively predictable cashflow
The Middle Years:1995-1997a.k.a. “The Gain on Sale” Years
$285.8
$219.7
$169.4
$115.6$81.7
$64.7$56.1$54.1$47.8$27.7$14.4$9.1$10.0$1.2
$0
$50
$100
$150
$200
$250
$300
$350
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
35%
CAGR
I. THE GAIN ON SALE YEARSPublic/144A ABS Annual Issuance, 1985-1998($ in Billions)
Source: Thomson Financial Securities Data.
I. THE GAIN ON SALE YEARSPublic/144A ABS Annual Issuance, 1994-1998
Source: Thomson Financial Securities Data.
$40.2$32.8
$47.3 $49.4 $41.0 $43.1$16.5$22.3
$47.3 $79.0$99.5
$13.9
$17.0
$37.6
$63.1
$103.0
$18.5 $29.1 $35.0 $36.6$0
$50
$100
$150
$200
$250
$300
1994 1995 1996 1997 1998
Autos Credit Cards HEL/MH Other
($ in Billions)
I. THE GAIN ON SALE YEARS1995-1997: Selected ABS Issuers
Source: Domestic Public and 144A Asset Backed Issues, Thomson Financial Securities Data, Bloomberg.
ISSUERPRINCIPAL (in millions) RANK MARKET SHARE
Green Tree $24,306.7 1 5.5%
MBNA $18,365.8 4 4.1%
Chrysler $16,919.8 6 3.8%
SallieMae $16,713.4 7 3.8%
Money Store $16,254.7 8 3.7%
Advanta $11,470.2 9 2.6%
Ford Motor Credit $11,167.0 10 2.5%
ContiMortgage $10,550.6 11 2.4%
Olympic/Arcadia $7,683.4 13 1.7%
GMAC $7,520.4 14 1.7%
United Companies $6,817.5 15 1.5%
AMRESCO $4,101.5 21 0.9%
Industry Totals $445,135.4 100.0%
The Later Years:1998-2002Maturity/Stability
I. THE LATER YEARSPublic/144A ABS Annual Issuance, 1985-2002
Source: Thomson Financial Securities Data, Credit Suisse First Boston
($ in Billions)
I. THE LATER YEARSPublic/144A ABS Annual Issuance, 1998-2002
Source: Thomson Financial Securities Data, Credit Suisse First Boston
$78.3$43.0 $40.6$57.0 $68.0 $70.3$97.8 $86.0$86.0
$105.7$160.6
$10.2 $10.3$16.1
$12.5
$26.2
$40.4 $62.4
$64.1$51.0
$50.6
$47.2 $30.4
$41.2$52.5
$62.2
$29.6 $32.9 $61.5 $61.9$0
$50
$100
$150
$200$250
$300
$350
$400
$450
$500
1998 1999 2000 2001 2002
Autos Credit Cards HEL/MH Student Loans CDOs Other
($ in Billions)
I. THE LATER YEARS1998-2002: Top 10 ABS Issuers
Source: Domestic Public and 144A Asset Backed Issues (excluding CDO’s), Thomson Financial Securities Data.
ISSUERPRINCIPAL (in millions) RANK MARKET SHARE
GMAC $98,011.2 1 6.5%
Ford Motor Credit $56,804.1 2 3.8%
Citigroup $48,452.6 3 3.2%
JP Morgan Chase $44,230.4 4 2.9%
MSDW (Discover) $44,086.0 5 2.9%
MBNA $39,972.6 6 2.7%
Lehman $33,757.1 7 2.2%
Daimler/Chrysler $32,484.0 8 2.2%
Conseco (Green Tree) $32,070.7 9 2.1%
Capital One $26,974.9 10 1.8%
Top 10 Totals $456,843.6 30.4%
Industry Totals $1,504,848.7 100.0%
2002: Enron“SPE” is not a 4-Letter Word
II. The Present
II. THE PRESENTCumulative Public ABS Issuance
Source: Thomson Financial Securities Data.
$0
$500
$1,000
$1,500
$2,000
$2,500
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Public/144A/CDOs
$1 Trillion
$500 Billion
$100 Billion
$2 Trillion
($ in Billions)
PAST
10 YE
ARS: 2
3%
CAGR
$0
$500
$1,000
$1,500
$2,000
$2,500
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Public/144A/CDOs Europe
II. THE PRESENTCumulative Public ABS Issuance
Source: Thomson Financial Securities Data.
Europe
($ in Billions)
$1 Trillion
$500 Billion
$100 Billion
$2 Trillion
II. THE PRESENTRelative Market Size($ in Billions)
Source: Thomson Financial Securities Data.
$268 $263
$326$352
$448
$330
$258
$137
$529
$755
$62 $50 $43 $63 $55
$311$341
$408
$609
$551
$131$86
$35$76 $58
$143$196
$221 $235$197
$0
$100
$200
$300
$400
$500
$600
$700
$800
1998 1999 2000 2001 2002
ABS MBS CMBS Investment Grade Corporate High Yield Equity
II. THE PRESENTRelative Market Size($ in Billions)
Source: Thomson Financial Securities Data.
$268
$330
$62
$311
$131
$263 $258
$50
$341
$86
$326
$137
$43
$408
$35
$352
$529
$63
$609
$76
$448
$755
$55
$551
$58
$0
$100
$200
$300
$400
$500
$600
$700
$800
ABS MBS CMBS Investment GradeCorporate
High Yield
1998 1999 2000 2001 2002
II. THE PRESENTABCP Overview
$101$147
$256
$642
$745 $726
$517
$382
$38 $49 $59 $60 $71
$0
$100
$200
$300
$400
$500
$600
$700
$800
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 20020%
7%
14%
21%
28%
35%
42%
49%
56%
Asset Backed CP Outstandings ABCP as a % of Total Outstandings
($ in Billions)
Source: Federal Reserve.
II. THE PRESENTABCP Overview($ in Billions)
Source: Federal Reserve.
0
200
400
600
800
1,000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
ABCP Total Unsecured
Total Unsecured CP
ABCP
III. The Future
III. THE FUTURECSFB’s 2003 Projected ABS Issuance
ASSET CLASS 2002 ACTUAL 2003 PROJECTED % CHANGE
Credit Card $70.3 $75.0 6.7%
Auto 78.3 80.0 2.2%
Home Equity and Related 156.0 160.0 2.6%
Manufactured Housing 4.6 3.0 -34.8%
Student Loan 26.2 30.0 14.5%
Equipment 5.3 7.0 32.1%
CDOs 50.6 50.0 -1.2%
Other 56.9 55.0 -3.3%
Total Public/144A $448 $460 2.7%
Source: Credit Suisse First Boston.
III. THE FUTUREObservation # 1:Securitization has permanently changed the dynamics of consumer and commercial lending…
Lowered/eliminated barriers to entry– Access to capital/cost of capital– Ratings– Size/balance sheet– Experience
Resulted in increased competition– Price – Credit
Two value added components remain – Origination– Servicing
III. THE FUTUREObservation # 1:But not without problems…
Access Amresco Autobond Acceptance CFS Cityscape Conseco ContiFinancial FirstPlus
First Alliance IMC Mortgage Jayhawk Acceptance NAL Financial Group National Century NextCard Southern Pacific UCFC
To name a few
III. THE FUTURE
1987 2001
Credit card industry $80 bil $490 bil
Top 10 market share 40% 85%
% securitized <1% 50%
Observation # 2:Everybody’s doing “it”!
III. THE FUTUREObservation # 2:Everybody’s doing “it”!
Source: Thomson Financial Securities Data, Credit Suisse First Boston. Includes retail and wholesale issuance.
($ in Billions)
TOP 5 AUTO ISSUERS 2002 ISSUANCE
Ford $12.5
GMAC 11.7
DaimlerChrysler 7.9
AmeriCredit 6.0
WFS 5.0
III. THE FUTURE
TOP 5 HOME EQUITY ISSUERS 2002 ISSUANCE PARENT COMPANY
GMAC-RFC $20.0 GM
Countrywide 18.4 Countrywide
EquiCredit 14.2 Bank of America
New Century 10.4 New Century
Option One 9.4 H&R Block
Observation # 2:Everybody’s doing “it”!
Source: Credit Suisse First Boston.
($ in Billions)
III. THE FUTURE
Structures are proven and accepted
Significant downside protection vs. secured debt
Large, healthy investor base
Observation # 3:The equity market (and Congress) may not understand “gain on sale accounting” or SPE’s but the debt market understands securitization
0
25
50
75
100
125
150
175
J an-00 J un-00 Nov-00 Apr-01 Sep-01 Feb-02 J un-02 Nov-02 Apr-03
Spre
ad (B
Ps)
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
2-Year Treasury Yield
Credit Card (5-yr) Auto (2-yr) Home Equity (5-yr) A2 Financial A2 Industrial 2-yr Treasury
III. THE FUTURE
Source: Bloomberg, Credit Suisse First Boston.
Observation # 3: Stability for Borrowers
2-Year Treasury Yield
A2 Financial
A2 Industrial
III. THE FUTUREObservation # 3:Ford Unsecured vs. Secured Spreads
0
100
200
300
400
500
600
700
Mar-01 May-01 Jul-01 Sep-01 Nov-01 Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03
Uns
ecur
ed S
prea
d (B
Ps)
0
10
20
30
40
50
60
70
Secured Spread (BPs)
5-Year Unsecured Ford Spreads
2-Year “AAA” Ford ABS Spreads
Source: Credit Suisse First Boston.
III. THE FUTUREObservation # 3:Household Unsecured vs. Secured Spreads
-
100
200
300
400
500
600
Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jul-01 Aug-01 Sep-01 Oct-01 Dec-01 Jan-02 Feb-02 Mar-02 May-02 Jun-02 Jul-02 Aug-02 Oct-02 Nov-02
Spr
ead
(BP
s)
10-Year Unsecured Household Spreads
“AAA” Household Home Equity Spreads
Source: Credit Suisse First Boston.
HSBC Merger Announcement
III. THE FUTURE
Source: Credit Suisse First Boston.
3-YR Triple-A Credit Card Spread Comparison (spread to 1ML)
Observation # 4:Tiering, Tiering and More Tiering
Chase ChaseChase Chase Chase ChaseChase
0
10
20
30
40
50
60
70
80
1/9/01 4/13/01 7/16/01 10/18/01 1/20/02 4/24/02 7/27/02 10/29/02 1/31/03
Providian
MetrisMetris
MetrisProvidian
ProvidianMetrisSp
read
to
1ML
(bps
)
III. THE FUTURE
International Harvester / Navistar
Chrysler / DCX
Tyco / CIT
Conseco / Green Tree
Mexico / Emerging Markets
Observation # 5:Securitization creates inherent stability and liquidity for certain borrowers
III. THE FUTUREObservation # 6:
Dedicated investors
New investors– CBOs– ABCP
CBOs as an asset gathering tool
Observation # 6:Securitization’s effect on the buyside will continue to grow
III. THE FUTUREObservation # 6:Securitization’s effect on the buyside will continue to grow
Indeed, CBOs have become so key to the junk market that companies planning offerings frequently tailor the securities to the tastes of the CBOs. “It’s the sell side and buy side working together to try and make a more efficient market…”
- Wall Street Journal - 5/24/99
The rise of CBO has made a huge difference for the junk market. “The enormous amount of CBO activity has been a key factor in absorbing new supply” of junk issues…
Wall Street Journal - 5/24/99
III. THE FUTURE
$13.7$1.3
$4.4
$18.7
$16.9 $12.7
$14.3
$3.2
$12.6$8.0
$12.7$8.3
$3.7
$17.8
$51.8
$22.2
$17.0
$4.6
$7.2
$-
$1.3$10.8
$14.8
$22.0$0.3
$2.1
$2.7 $4.1
$6.3$6.0
$13.2$20.5 $22.0
$13.2
$12.8
$0
$20
$40
$60
$80
$100
1996 1997 1998 1999 2000 2001 2002
OtherABS/Structured Finance CDOBalance Sheet CLOInvestment Grade CBOHigh Yield CLOHigh Yield CBO
Observation # 6:CBO/CLO Annual Issuance 1996 – 2002 ($ in billions)
Source: Credit Suisse First Boston.
III. THE FUTURE
Residential Mortgages MBSConsumer Loans ABS
Commercial Mortgages CMBS/ConduitsSmall Business Loans SBA/SBL/Franchise
Senior Unsecured Loans CLOsMezzanine/Venture Capital CBOs
Regulatory Capital Arbitrage
The Virtual Bank
Observation # 7:Commoditization and disintermediation of commercial banks will continue, particularly with any secured loan products
IN CONCLUSION
Securitization has become a permanent financing alternative with implications not only for the cost of capital but also for how certain types of assets will be originated and serviced in the future.
Thank You