Introduction to Structured Finance

<p>Preface vii</p>
<p>About the Authors xiii</p>
<p>CHAPTER 1 Introduction 1</p>
<p>Definition of Structured Finance 1</p>
<p>Other Definitions of Structured Finance 2</p>
<p>Case Study: How Enron Has Affected the Boundaries of Structured Finance 15</p>
<p>Conclusions 22</p>
<p>CHAPTER 2 Interest Rate Derivatives 23</p>
<p>Interest Rate Forward and Futures Contracts 23</p>
<p>Futures Contracts 24</p>
<p>Interest Rate Swaps 26</p>
<p>Options 36</p>
<p>Caps and Floors 43</p>
<p>CHAPTER 3 Credit Derivatives 45</p>
<p>Documentation and Credit Derivative Terms 45</p>
<p>Credit Default Swaps 48</p>
<p>Credit Default Swap Index 50</p>
<p>Basket Default Swaps 51</p>
<p>Asset Swaps 54</p>
<p>Total Return Swaps 57</p>
<p>Economics of a Total Return Swap 58</p>
<p>CHAPTER 4 Basic Principles of Securitization 65</p>
<p>What Is a Securitized Transaction? 66</p>
<p>Illustration of a Securitization 67</p>
<p>Reasons Why Entities Securitize Assets 70</p>
<p>Benefits of Securitization to Investors 79</p>
<p>What Rating Agencies Look at in Rating Asset–Backed Securities 79</p>
<p>Description of the Collateral 82</p>
<p>Prepayments Measures 87</p>
<p>Defaults and Delinquencies 90</p>
<p>CHAPTER 5 Securitization Structures 95</p>
<p>Use of Interest Rate Derivatives in Securitization Transactions 95</p>
<p>Credit Enhancement 104</p>
<p>More Detailed Illustration of a Securitization 113</p>
<p>CHAPTER 6 Cash Flow Collateralized Debt Obligations 119</p>
<p>Family of CDOs 120</p>
<p>Basic Structure of a Cash Flow CDO 122</p>
<p>CDOs and Sponsor Motivation 124</p>
<p>Compliance Tests 127</p>
<p>CHAPTER 7 Synthetic Collateralized Debt Obligation Structures 133</p>
<p>Motivations for Synthetic CDOs 134</p>
<p>Mechanics 136</p>
<p>Funding Mechanics 138</p>
<p>Investor Risks in Synthetic Transactions 140</p>
<p>Variations in Synthetic CDOs 141</p>
<p>The Single–Tranche Synthetic CDO 147</p>
<p>Summary of the Advantages of Synthetic Structures 149</p>
<p>Factors to Consider in CDO Analysis 150</p>
<p>Case Study 151</p>
<p>CHAPTER 8 Securitized and Synthetic Funding Structures 155</p>
<p>Commerical Paper 155</p>
<p>Asset–Backed Commercial Paper 157</p>
<p>Synthetic Funding Structures 162</p>
<p>CHAPTER 9 Credit–Linked Notes 181</p>
<p>Description of CLNs 181</p>
<p>Illustration of a CLN 182</p>
<p>Investor Motivation 182</p>
<p>Settlement 182</p>
<p>Forms of Credit Linking 184</p>
<p>The First–to–Default Credit–Linked Note 190</p>
<p>CHAPTER 10 Structured Notes 193</p>
<p>Structured Notes Defined 194</p>
<p>Motivation for Investors and Issuers 196</p>
<p>Issuance Form and Issuers 197</p>
<p>Creating Structured Notes 198</p>
<p>Examples of Structured Notes 199</p>
<p>CHAPTER 11 Large Ticket Leasing: Leasing Fundamentals 207</p>
<p>How Leasing Works 207</p>
<p>Types of Equipment Leases 208</p>
<p>Full Payout Leases versus Operating Leases 211</p>
<p>Reasons for Leasing 211</p>
<p>Types of Lessors 216</p>
<p>Lease Brokers and Financial Advisers 217</p>
<p>Lease Programs 217</p>
<p>Financial Reporting of Lease Transactions by Lessees 218</p>
<p>Federal Income Tax Requirements for True Lease Transactions 222</p>
<p>Synthetic Leases 224</p>
<p>Valuing a Lease: The Lease or Borrow–to–Buy Decision 225</p>
<p>CHAPTER 12 Leveraged Lease Fundamentals 237</p>
<p>Parties to a Leveraged Lease 239</p>
<p>Structure of a Leveraged Lease 243</p>
<p>Closing the Transaction 245</p>
<p>Cash Flows During the Lease 246</p>
<p>Debt For Leveraged Leases 247</p>
<p>Facility Leases 249</p>
<p>Construction Financing 252</p>
<p>Credit Exposure of Equity Participants 253</p>
<p>Tax Indemnification for Future Changes in Tax Law 253</p>
<p>Need for a Financial Adviser 254</p>
<p>The Steps in Structuring, Negotiating, and Closing a Leveraged Lease 256</p>
<p>CHAPTER 13 Project Financing 259</p>
<p>What Is Project Financing? 260</p>
<p>Reasons for Jointly Owned or Sponsored Projects 262</p>
<p>Credit Exposures in a Project Financing 262</p>
<p>Key Elements of a Successful Project Financing 264</p>
<p>Causes for Project Failures 265</p>
<p>Credit Impact Objective 277</p>
<p>Accounting Considerations 279</p>
<p>Meeting Internal Return Objectives 282</p>
<p>Other Benefits of a Project Financing 282</p>
<p>Tax Considerations 283</p>
<p>Disincentives to Project Financing 283</p>
<p>Recent Trends 284</p>
<p>APPENDIX A The Basel II Framework and Securitization 287</p>
<p>Basel Rules 288</p>
<p>Impact on Securitization and Credit Derivatives 293</p>
<p>APPENDIX B Synthetic Securitization: Case of Mortgage–Backed Securities 297</p>
<p>Transaction Description 297</p>
<p>Deal Structures 298</p>
<p>Investor Considerations 301</p>
<p>APPENDIX C Home Run! A Case Study of Financing the New Stadium for the St. Louis Cardinals 303<br />Cynthia A. Baker and J. Paul Forrester</p>
<p>APPENDIX D Municipal Future–Flow Bonds in Mexico: Lessons for Emerging Economies 309<br />James Leigland</p>
<p>APPENDIX E Crown Castle Towers LLC, Senior Secured Tower Revenue Notes, Series 2005–1 321<br />Taimur Jamil</p>
<p>APPENDIX F MVL FIlm Finance LLC 335<br />Olga Filipenko</p>
<p>APPENDIX G Presale: Honda Auto Receivables 2006–1 Owner Trust 339<br />Amanda M. Soriano and Nadine E. Gunter</p>
<p>APPENDIX H Presale: ACG Trust III 345<br />Anthony Nocera, Ted Burbage, Philip Baggaley, and Michael K. Vernier</p>
<p>APPENDIX I CNH Equipment Trust 2006–A 355<br />Du Trieu, Bradley Sohl, Joseph S. Tuczak, and Peter Manofsky</p>
<p>APPENDIX J CIT Equipment Collateral 2006–VT1 365<br />Brigid E. Fitzgerald, John Bella, and Peter Manofsky</p>
<p>INDEX 373</p>