Post on 10-Apr-2018
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Copyright 2001 Ian H. Giddy The Securitization Process3globalsecuritization.com
Asset-Backed Securities
qThe basic idea
qWhats needed?
qThe techniqueqApplications
qTypical sequence
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Copyright 2001 Ian H. Giddy The Securitization Process5globalsecuritization.com
What is the Technique for CreatingAsset-Backed Securities?
q A lender originates loans, such as to ahomeowner or corporation.
q The securitization structure is added. The bank orfirm sells or assigns certain assets, such asconsumer receivables, to a special purposevehicle.
q The structure is legally insulated from
managementq Credit enhancement and rating agency reviews
q The SPV issues debt, dividing up the benefits(and risks) among investors on a pro-rata basis
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SPONSORINGCOMPANY
SPECIALPURPOSEVEHICLE
ACCOUNTSRECEIVABLE
ACCOUNTSRECEIVABLE
ISSUESASSET-BACKEDCERTIFICATES
SALE ORASSIGNMENT
Securitization: The Basic Structure
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The Process
Is the company
ready?
Is the company
ready?
Are the assetssuitable?
Are the assetssuitable?
What pool?
What pool?
What legal
structure?
What legal
structure?
What credit
enhancement?
What credit
enhancement?
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q Does the originator currently face a high cost offunding assets that would be recognized as sound,cash-generating assets if taken in isolation?
q Does it have a regulatory or capital constraint that
makes freeing up the balance sheet important?q Does it have data about the assets (required by rating
agencies and financial guarantors)?
q Does it have the servicing process and systems thatcan meet the more demanding standards of the asset-
backed market?q Is the originator willing to undertake a complex, time-
consuming transaction to obtain a broader, potentiallycheaper, ongoing source of funding?
Is the Company Ready for ABS?
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In short, the assets themselves must be sufficiently strong to support
a high credit rating without the backing of the originating lender.
The Pool of Assets Should Have:
Are the Assets Suitable?
n Volume which is sufficiently large and homogenous to facilitatestatistical analysis
n
A stable history of rates, defaults, delinquencies, prepayments and soforth
n Sufficient diversification--for example, geographic and socio- economic--to reduce vulnerability to economic stresses
n Basic lenders credit quality standards that are capable of being evaluatedand approved by rating agencies and specialized financial guaranty
companies
n Assets must be transferable and unencumbered
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Copyright 2001 Ian H. Giddy The Securitization Process12globalsecuritization.com
What is the Technique for CreatingAsset-Backed Securities?
q A lender originates loans, such as to ahomeowner or corporation.
q The securitization structure is added. The bank orfirm sells or assigns certain assets, such asconsumer receivables, to a special purposevehicle.
q The structure is legally insulated frommanagement
q Credit enhancement and rating agency reviews
q The SPV issues debt, dividing up the benefits(and risks) among investors on a pro-rata basis
IMP
LEMENT
ATION
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Finance Company LimitedFinance Company Limited
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Case Study: The Company(Finance Company Limited)
qFinance company whose growth is
constrained
qHas pool of automobile receivables
qHas track record
qPlans to use this as an ongoing source offinancing
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Securitize the assets
Form of transfer
of asset
Form of credit
enhancement
Form of
transformation of
cash flows
Form of cash flow
allocation
Decisions
Form of special
purpose vehicle
Key Decisions
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Finance Co. Ltd(Seller)
Finance Co.s
Customers
Hire-Purchase
Agreement
Case Study: Initial Exchanges
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Finance Co. Ltd(Seller)
FCL 1997-A(Special Purpose Co.)
InvestorsProceeds Proceeds
Finance Co.s
Customers
Hire-Purchase
Agreement
Case Study: Initial Exchanges
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Finance Co. Ltd(Seller)
FCL 1997-A(Special Purpose Co.)
Investors
Servicing Agreement
Proceeds
Sale of Assets
Proceeds
Asset-Backed
Securities
TrusteeTrust
Agreement
Finance Co.s
Customers
Hire-Purchase
Agreement
Case Study: Initial Exchanges
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Finance Co. Ltd(Seller)
FCL 1997-A(Special Purpose Co.)
Investors
Servicing Agreement
Proceeds
Sale of Assets
Proceeds
Asset-Backed
Securities
Rating Agency
Top Rating
TrusteeTrust
Agreement
Finance Co.s
Customers
Hire-Purchase
Agreement
Case Study: Initial Exchanges
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Copyright 2001 Ian H. Giddy The Securitization Process20globalsecuritization.com
Finance Co. Ltd(Seller)
FCL 1997-A(Special Purpose Co.)
Investors
Financial Guarantee
Provider
Monthly HP
Payments
Guarantee
Responsibilities
TrusteeTrustee
Responsibilities
Monthly ABS
Payments
Servicing Fees
Finance Co.s
Customers
Hire-Purchase
Payments
Case Study: Ongoing Payments
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Getting a Rating: The Risks
q Credit risks
q Liquidity risk
q Servicer performance risk
q Swap counterparty riskq Guarantor risk
q Legal risks
q Sovereign risk
q Interest rate and currency risks
q Prepayment risks
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Copyright 2001 Ian H. Giddy The Securitization Process22globalsecuritization.com
SPONSORINGCOMPANY
SPECIAL
PURPOSEVEHICLE
ACCOUNTSRECEIVABLE
ACCOUNTSRECEIVABLE
ISSUESASSET-BACKEDCERTIFICATES
SALE ORASSIGNMENT
CREDIT
ENHANCEMENT
CREDIT
ENHANCEMENT
SOVEREIGN
PROTECTIONS
SOVEREIGN
PROTECTIONS
INTEREST RATE/
CURRENCY
HEDGES
INTEREST RATE/
CURRENCY
HEDGES
CASH FLOW
REALLOCATION
CASH FLOW
REALLOCATION
Risk-Management Techniques in ABS
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Copyright 2001 Ian H. Giddy The Securitization Process23globalsecuritization.com
Finance Co. Ltd(Seller)
FCL 1997-A(Special Purpose Co.)
Investors
Financial Guarantee
Provider
(if required)
Servicing Agreement
Proceeds
Sale of Assets
Proceeds
Asset-Backed
Securities
Guarantee
Agreement
Rating Agency
Top Rating
TrusteeTrust
Agreement
Finance Co.s
Customers
Hire-Purchase
Agreement
Credit Enhancement: Guarantee Method
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Copyright 2001 Ian H. Giddy The Securitization Process24globalsecuritization.com
Finance Co. Ltd(Seller)
FCL 1997-A(Special Purpose Co.)
Senior
Proceeds
Sale of Assets
Rating Agency
Top Rating
Credit Enhancement:An Alternative Approach
Subordinated
More Subordinated
Lower Rating
No Rating
Financial Guarantee
Provider
(if required)GuaranteeAgreement
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The Rating Processand Credit Enhancement
Prof. Ian Giddy
Stern School of BusinessNew York University
Asset-Backed Securities
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Copyright 2001 Ian H. Giddy The Securitization Process26globalsecuritization.com
Rating Agencies
Why bother with a rating?
q Compare equivalent credit risks acrossdifferent kinds of debt: corporate, sovereign,
ABSq Compare alternatives across different ratings
levels
q Obtain a relative as well as an absolutemeasure of credit risk
q Be reasonably sure of a market to sell thesecurity.
n Moodys
n Standard & Poors
n Fitch
n Moodys
n Standard & Poors
n
Fitch
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Default Matrix
Source: Fitch, Bank CLOs
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Rating Reports: Who Pays for Them?
q General reports on a sector, like CLOs
q Pre-sale report on an individual CLO, oncerisks have been evaluated but final terms and
credit enhancement have not yet beenfinanized
q Final deal report
q Periodic updates
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ABS: Factors Agencies Examine
qAsset portfolio analysis
q Legal structure of the transaction
qQuality of the originator/servicerqThe trustee
qThe cash flow structure
qThe counterparties
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Rating Agencies: Business Analysis
q Organization and management structure
q Financial performance
q Business strategy and planning processes
q Controls and procedures
q Asset origination and credit assessmentprocedures
q Quality of its loan documentationq Credit administation and debt recovery
procedures
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Credit Enhancement
qSenior/Sub or overcollateralization
qReserve and liquidity accounts and lines
qExcess cash flowqThird-party guarantees
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The Result: Bond Credit Ratings
MoodysStandard &Poors Interpretation
AaaAa
AAAAA
High-quality debt instruments
ABaa
ABBB
Strong to adequate ability topay principal and interest
BaBCaaCaC
BBBCCCCCC
Ability to pay interest andprincipal speculative
D In default
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Credit enhancement
Third party
credit enhancement
Legal structure based
credit risk reduction
Legal insulation from originator default
Legal insulation from servicer default
Pre-securitization
risk reduction
Internal
credit enhancement
Originators credit underwriting standards
Screening of assets to be included in the portfolio
Diversification of the portfolio
Credit quality of
deal participants
Originator/Seller/Servicer
Trustee, swap counterparties
Guarantors
Direct recourse
Senior/subordination or overcollateralization
Reserve or spread accounts
Cash collateralized accounts
Financial guarantees
Integrity of
cash flow structure
Cash flow sufficiency and mismatches
Safeguards and agreements such as swaps or caps
Rating
Typical Rating Analysis
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Credit Enhancement
qOvercollateralization
qSenior/Sub or
qReserve and liquidity accounts and linesqExcess cash flow
qThird-party guarantees
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COLLATERAL POOL
SENIOR
ASSET-BACKED
SECURITIES
OVER-COLLATERALEQUITY ABS
(owned by seller)
SPECIAL-PURPOSE VEHICLE
Over-Collateralization Method
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Example of Senior/Sub Structure
Class Rating Subordination
A1,A2,A-x AAA 28%
B AA 22%
C A 16.5%
D BBB 12%
E BB 8.5%
F B 5.5%
Issuer balance NR 0%
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Det er mi nat ion of st ruct ur e
Inform at ion Mem orandum
Com m en cem en t of d ocum ent at ion
Det ai led cash fl ow anal ysi s
Pr ep ar at ion for rat ing pr ocess
Res ul t of cash f low anal ysi s
Det er m in at io n of el igi bl e rec ei vab les
Ap p r oa ch r at i n g a ge nc i es a nd i n t ro d uc t i on o f t he st r u ct u r e e nv is ag ed
Found i ng of t he SPV
I n it i at i o n o f st o ck e xc h an ge ap p r ov al p r oc es s (i n c as e o f a B on d i s su a nc e)
D ra ft o f Of f er i n g Ci r cu l ar ( in ca se of a B on d is su an ce )
Co m m en t s o f th e Ra ti n g a gen ci es (Ra ti ng c on fi r m at i on )
Det er m in at ion of f un di ng s tr at egy
P ub l i ca t i on of Of f er i n g Ci r c ul a r ( i n c as e o f a B on d i ss ua nc e)
M ar ket i ng ( in cas e of a B on d i ss uan ce)
Com pl et ion of docum ent at ion
P ur c ha se of r ec ei va bl es an d i ss ua nc e o f se cu ri t i es
1
2
3
months
4
5
6
7
This schedule serves as an indication only and may
vary from transaction to transaction.
Possible Time Frame
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One Banks Assessment
qThe implementation of a transactionusually takes between two and six
months, provided all necessary data
and information is readily available.
qThis time frame does not take intoaccount the rating process.
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Select securi t izat ion counsel and accountants
Consid er t ax, accounting and securi t izat ion object ives
Discuss dat a f ields required for l oan data f i le
Define data to be audited by accountants
Begin dr af t ing Pr ivate Placement M emor andum (PPM)
Begin draft ing legal documents
Assem ble prel iminary pool and create ini t ial data tape
Consider prel iminary bond struct ure
Select r at in g agencies
Perform int egri ty check on data tape (cracking the tape)
If new c lient , thiswo uld followscreening ofcorpo ration and loanpool for suitability
If its a publicoffering, need apub lic Prospec tus orProspectusSupp lement.
A d iscussion w ith rat ingag enc y be nec essary forselec tion o f lega l structureand poo l selec tion if its anew typ e o f ABS.
Data from c omp anies c ome in
many different forms.
The Securitization Process - 1One Banks List
Any info used in the PPMor in the poo l ana lysis mustbe audited.
A private placement for a client who has doneprevious securitizations
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Model cash f low and bond structure
Prepare rat ing agency presentat ion
Select t rustee/ backup servicer
Recon ci le discrepancies wit h accountants
Distr ib ute rat ing agency p resentat ions
M eet with rat ing agenci es
Determine pending loan closings
Select r at in g agencies and sign engagement lett ers
Optim ize loan pool and revise bond str uctur e
Rating agency borr ower visi t s ( i f necessary)
Ratin g agency due di l igence ( i f necessary)
Com plete loan closings and f inal ize loan pool
Obtain pr el iminary subordination levels from rat i ng agencies
Most investment banksac tive in ABS havede velop ed mod ellingsoftware
Invariab ly, with the am ount o finforma tion be supp lied bythe issuer via the ta pe, the rewill be mistakes/discrepanciesto resolve, mostly with regardto loan d ata thats beenprovided.
During this process, theissue r is still origina tingcollateral going into thedea l. The ba nk has tode c ide wha t else itwa nt to include, andhas to esta blish a cut-off date .
Which asset shouldnot go into the po ol?Its not necessarilyba d c ollate ral, but itmay still hurt theove ra ll p rofile o f thepool
The Securitization Process - 2One Banks List
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Market tr ansaction t o sub-bond b uyers ( i f necessary)
Tie out col lateral cash f low with accountants
Final subordinati on levels from rat ing agencies
Final ize bond str uctur e based on f in al loan pool and sub-levels
Tie out bond cash f lows wit h accountants
Final ize PPM and legal documents
Arrange distr ib ut ion by other banks
Final ize internal m arketing mat erial
Issuer pr esentat ion t o salesforce
Print r ed herri ng PPM and distr ibut e to investors
Market tr ansaction t o investor s
Price bonds and execute Bond Purchase Agreement
Print final PPM
CLOSE TRANSACTION
Alternative would befor originator to keepsub tranc he
The c olla tera l ca shflows in ag grega te a restruc tured to p aybond s. The bond s arethen sold b ased on thelikelihood that thebond s will rec eive
those p aym ents at ac ertain period in time.Therefore, the cashflows tha t pa y thebo nds are what theinvesto r is purchasing.The b ond cash flowc harac teristics arepresented in thep rospec tus to investorsand if they arent tiedout , there is a hugelega l liab ility for theunderwriter and issuerif they aren t correc t.
This is the agreeme nt to purc hase the b ond s from
the SPV b y the investor or investment banks
The Securitization Process - 3One Banks List
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Asset-Backed Securities:Legal and Regulatory Issues
Prof. Ian Giddy
Stern School of BusinessNew York University
Asset-Backed Securities
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Asset-Backed Securities:Legal and Regulatory Aspects
q Legal
uThe Transfer
uThe Special-Purpose Vehicle
qTaxation
qAccounting Treatment
qBank Regulatory Treatment
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Legal Aspects
qGoal: Credit quality must be solelybased on the quality of the assets and
the credit enhancement backing the
obligation, without any regard to theoriginator's own creditworthiness
qOtherwise, quality of the ABS issue
would be dependent on the originator'scredit, and the whole rationale of theasset-backed security would be
undermined.
LEGAL
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Three conditions enable the separationof the assets and the originator
q The transfer must be a true sale, or its legalequivalent. If originator is only pledging theassets to secure a debt, this would beregarded as collaterized financing in which
the originator would stay directly indebted tothe investor.
q The assets must be owned by a special-purpose corporation, whose ownership of the
sold assets is likely to survive bankruptcy ofthe seller.
q The special-purpose vehicle that owns theassets must be independent
LEGAL
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Form of transfer
of asset
True Sale
Assignment
The Form of Transfer: True Sale?
Collateral
LEGAL
Alternative:
Credit swap
(Synthetic ABS)
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What Makes it a Sale?
q The form and treatment of the transaction
q The nature and extent of the benefitstransferred
q
The irrevocability of the transferq The level and timing of the purchase price,
q Who possesses the documents
q Notification when the assets are sold
LEGAL
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Asset Securitization
CHASE (SPONSOR)
SPECIALPURPOSEVEHICLE
CREDIT CARDRECEIVABLES
ISSUESASSET-BACKEDCERTIFICATES
SALE ORASSIGNMENT
CREDIT CARDRECEIVABLES
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The Alternative: Synthetic ABSLE
GAL
HVB (Originator)
SPECIALPURPOSEVEHICLE
REFERENCE
POOL OF LOANS
(Stay on
balance sheet)
ISSUESASSET-BACKEDCERTIFICATES
CREDIT SWAPAGREEMENT
TOP QUALITYINVESTMENTS
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Accounting Treatment
qSale versus financing
qConsolidation
q
Accounting for loan servicing
ACCOUN
TING
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FASB Sale Treatment
qThe transferor relinquishes control ofthe future economic benefits embodied
in the assets being transferred
qThe SPV cannot require the transferor
to repurchase the assets except
pusuant to certain recourse provisions
qThe transferor's obligation under anyrecourse provision are confined and can
be reasonably estimated
ACCOUN
TING
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Bank Regulationand Capital Requirements
q Goal: Ensure that the substance and not theform of the asset transfer is what governscapital requirements.
The regulatory authorities may assess capital orreserve requirements as if the financing wasa secured borrowing:uWhere the transfer leaves the bank open to
recourse deemed risky by the authorities,
uOr where there is potential for a "moral hazard"whereby a bank may shore up potential or actuallosses in the sold assets to protect its name evenwhen not legally required to do so.
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Basel 2 and ABS
qOriginating banks (clean break)
q Investing banks (use of ratings)
q
Sponsor banks (for ABS conduits)qSynthetic securitization (degree of risk
transference)
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Basel 2 for Investing Banks
AAA to AA- 20%
A+ to A- 50%
BBB+ to BBB- 100%BB+ to BB- 150%
B+ and below Deducted from capital
Source: Basel Committee on BankingSupervision, January 2001
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Example:Ford Credit Owner Trust 1999-A
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Ford Structure
Ford Ford Motor Credit
Ford Credit Auto
Rec. Two LP
Ford Credit Auto
Owner Trust
Receivables
Class A-1 to A6Class B
Class C
Class D
Class A-5 and A-6
Class D
Sale
Sale
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Ford Structure: Waterfall
Receivables Class A-1 to A6
Class B
Class C
Class D
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Ford Structure: Default or Loss?
Receivables
Class A-1 to A6
Class B
Class C
Class D
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Paydown: Soft Bullet Structure
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InvestorsSingaDBS Bank
Seller/Servicer
Example: DBS Singa Deal
Loan portfolio US$ FRN
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General Re
Investors
Hong Kong
SARRes Mort. Ltd
Dah Sing
Seller/Servicer
Dah Sing/Hong Kong SAR
ASIA Ltd
CapMac
Mortgageportfolio US$ FRN
CurrencySwaps
FinancialGuarantees
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Atherton Capital(Seller)
Atherton FLF 1998-A(Special Purpose Co.)
Investors
Servicing Agreement
Proceeds
Sale of Assets
Proceeds
Asset-Backed
Securities
Mellon Mortgage
(Servicer)
Franchisees
(Borrowers)
Loan
Agreement
Franchise Loan Securitization
Servicing Advisor
Loan
Payments
Class Rating Subordination
A1,A2,A-x AAA 28%
B AA 22%
C A 16.5%
D BBB 12%
E BB 8.5%
F B 5.5%
Issuer balance NR 0%
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Films (Finance for an ItalianLibrary of Movies)
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Highly rated
U.S. oil buyer
Noteholders
Oil Trading Co.
(Cayman Is. SPV)
YPF
(Argentinianoil producer)
Oil (under
sales agreement) Notes
Oil
(under purchase
agreement)
Trust
US$
US$
US$
Fixed
debt payments
Future-Flow Financing:Offshore Purchase Agreement
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Asiansecuritization.com
Ian H. Giddy
Stern School of Business
New York University
44 West 4th Street, New York, NY 10012, USA
Tel 212-998-0426
ian.giddy@nyu.eduhttp://giddy.org