Stern School of Business

Structured Finance

Dr. Ian Giddy

New York University
 Structured Finance

What is Structured Finance?

Financing with Equity-Linked Securities and Structured
Notes

Financing with Asset-Backed Securities

Credit-Linked Structured Finance

Commercial MBS and Project Finance

Leveraged Finance

Mezzanine Finance

Copyright ©2008 Ian H Giddy

3
 On the Web: giddy.org

Copyright ©2008 Ian H Giddy

5
 Blackboard: Quizzes & Grades

Copyright ©2008 Ian H Giddy

6
 Fabozzi et al., Introduction to Structured Finance

Copyright ©2008 Ian H Giddy

7
 What is Structured Finance?

Financing techniques tailored to
special needs or constraints of
issuers or investors

Solving problems that are not easily
solved by conventional financing
techniques

Question: Why and when should
companies consider the use of
structured financing techniques?

Copyright ©2008 Ian H Giddy

8
 Other Kinds of Structured Finance

Copyright ©2008 Ian H Giddy

9
 Other Kinds of Structured Finance

Sale for $12 million

Purchase for $12 million +

Copyright ©2008 Ian H Giddy
10
 Mostly, Debt and Equity Suffice

Copyright ©2008 Ian H Giddy

11
 When Debt and Equity are Not Enough

Assets Liabilities

Value
Value Claims
Claimsonon
of
offuture
future the
thecash
cashflows
flows
cash
cashflows
flows

Copyright ©2008 Ian H Giddy

12
 Debt, Equity and More

Gartnaneane Wind Farm

Asset Detail: Financing Detail:

Wind Power 75% non-recourse senior
Equipment debt: Barclays Bank
Cost: €19m 5% non-recourse junior debt:
Capacity: 15MW Dolmen Butler Briscoe
PPA: Airtricity Energy 20% equity
Supply Limited.

Copyright ©2008 Ian H Giddy

13
 When Debt and Equity are Not Enough

Assets Liabilities
Debt
Contractual
Contractualint.
int.&&principal
principal
Value
Value No
Noupside
upside
of
offuture
future Senior
Seniorclaims
claims
Control
Controlvia
viarestrictions
cash
cashflows
flows restrictions
Equity
Residual
Residualpayments
payments
Upside
Upsideand
anddownside
downside
Residual
Residualclaims
claims
Voting
Votingcontrol
controlrights
rights
Copyright ©2008 Ian H Giddy
15
 When Debt and Equity are Not Enough

What if...
Assets Liabilities
Claims
Debt are inadequate?
Contractual
Contractualint.
int.&&principal
principal
Value
Value No
Noupside
upside
of
offuture
future Senior
Seniorclaims
claims
Control
Controlvia
viarestrictions
cash
cashflows
flows restrictions
Returns
Equity are inadequate?
Residual
Residualpayments
payments
Upside
Upsideand
anddownside
downside
Residual
Residualclaims
claims
Voting
Votingcontrol
controlrights
rights
Copyright ©2008 Ian H Giddy
16
 Claims are Inadequate

Copyright ©2008 Ian H Giddy

17
 CMBS

What’s special
about commercial
real estate
securitization?

How is a deal
structured?

Copyright ©2008 Ian H Giddy

18
 When Debt and Equity are Not Enough

Alternatives
Assets Liabilities
 Collateralized
Debt  Asset-securitized
Contractual  Project financing
Contractualint.
int.&&principal
principal
Value
Value No
Noupside
upside
of
offuture
future Senior
Seniorclaims
claims
Control
Controlvia
viarestrictions
cash
cashflows
flows restrictions  Preferred
Equity  Warrants
Residual  Convertible
Residualpayments
payments
Upside
Upsideand
anddownside
downside
Residual
Residualclaims
claims
Voting
Votingcontrol
controlrights
rights
Copyright ©2008 Ian H Giddy
19
 Returns are Inadequate

La Caixa Exchangeable Bond

EUR 847.6 million 0.25% 3-
year bonds guaranteed by La
Caixa, the biggest Spanish
savings bank

Exchangeable into Endesa
shares.
On June 3, 2003, Caja de Ahorros y Pensiones de
On June 3, 2003, Caja de Ahorros y Pensiones de
Barcelona,“La Caixa,” notified the Spanish National
Barcelona,“La Caixa,” notified the Spanish National
Securities Market Commission that, through Caixa
Securities Market Commission that, through Caixa
Finance, B.V., it had issued bonds exchangeable for
Finance, B.V., it had issued bonds exchangeable for
shares of ENDESA, S.A., with the guarantee of “La
shares of ENDESA, S.A., with the guarantee of “La
Caixa” and for placement on the European
Caixa” and for placement on the European
Institutional Market,except in Spain. The underlying
Institutional Market,except in Spain. The underlying
securities in the issue are 52,975,235 shares of ENDESA,
securities in the issue are 52,975,235 shares of ENDESA,
S.A. The bonds mature at three years, and holders
S.A. The bonds mature at three years, and holders
can exercise the exchange option on or after August
can exercise the exchange option on or after August
11, 2003 and up to 9 days before maturity. The
11, 2003 and up to 9 days before maturity. The
exchange price is e16 per share, with the issuer
exchange price is e16 per share, with the issuer
reserving the option to deliver an equivalent cash
reserving the option to deliver an equivalent cash
amount instead of shares of ENDESA, S.A.
amount instead of shares of ENDESA, S.A.

Copyright ©2008 Ian H Giddy

20
 Structuring LBOs

July, 2005 Apax Partners’ Funds and Texas
The EURO1.4 billion deal, expected to
Pacific group to acquire control of Tim Hellas come after the August hiatus, will finance
Telecommunications S.A. in a 1.1 billion Euro the purchase of a controlling stake in the
transaction Greek mobile-phone services provider by
a pair of private equity firms, is being
structured not as a bank deal-as one

The purchase price for TIM’s shareholding in TIM might expect in a European leveraged
Hellas is €1,114.1 million, equivalent to buyout-but as an all-bond transaction,
approximately €16.43 per share, representing a according to market sources. The only
premium of 17.6% to TIM Hellas’ six month average precedent in Europe was a
ADR price based on the current exchange rate. groundbreaking transaction this March,

Following completion of the acquisition of TIM’s when Cablecom GmbH-another LBO
situation-refinanced all of its bank debt
shareholding, it is intended that the remaining with senior secured high-yield notes.
shares of TIM Hellas will be acquired at the same Deutsche Bank and JPMorgan Securities
price of approximately €16.43 per share, through a are leading the TIM Hellas deal, which will
cash merger under Greek law. include senior secured, senior

The management team was led by Mr. Kominakis subordinated and payment-in-kind notes.
in establishing TIM Hellas as a standalone Greek
company. JPMorgan, Citigroup and Deutsche
Bank are acting as financial advisors to Apax
Partners and Texas Pacific Group. Debt financing €1.1
was provided by JPMorgan and Deutsche Bank.
billion

Copyright ©2008 Ian H Giddy

21
 Mezzanine for Emerging Markets

Goal: achieve higher return without burdening the
company or infringing on owner’s/sponsor’s control

Methods: lower interest rate plus participation in
the company’s equity or performance

Warrants

Payment linked to turnover

Payment linked to EBIT

Payment linked to after-tax profit

May have a floor or a cap

Copyright ©2008 Ian H Giddy

22
 Project Finance

Understanding stand-
alone, non-recourse,
project-payment debt
servicing

Application in Latin
America

Copyright ©2008 Ian H Giddy

23
 What Suits Photronics?

Assets Liabilities
 Collateralized
Debt  Asset-securitized
 Project financing

 Preferred
Equity  Warrants
 Convertible

Copyright ©2008 Ian H Giddy

24
 What Kind of Financing for Photronics?

Investing $100-150m in
Singapore

Stock price weak

Debt costly

Copyright ©2008 Ian H Giddy

25
 What Suits Photronics?

Source: morningstar.com
Copyright ©2008 Ian H Giddy
26
 Photronics Debt (From SEC Filing)
NOTE 4 - LONG-TERM DEBT
On April 15, 2003, the Company sold $150.0 million, 2.25% convertible
subordinated notes due 2008 in a private offering pursuant to SEC Rule 144A.
Those notes are convertible into the Company's common stock at a conversion
price of $15.89 per share. Net proceeds from the issuance amounted to
approximately $145.2 million. On June 2, 2003, a portion of the net proceeds was
used to redeem the $62.1 million of the Company's outstanding 6% convertible
subordinated notes due 2004. Pursuant to the terms of the related indenture, the
6% convertible subordinated notes were redeemed at 100.8571% of the principal
amount plus accrued interest of $1.9 million for an aggregate redemption price of
$64.5 million, including a premium of $0.5 million. An early extinguishment charge
of $0.9 million was incurred on the redemption of the 6% convertible subordinated
notes. This charge included the aforementioned $0.5 million premium and $0.4
million of unamortized deferred financing costs which were expensed at the time
of redemption.
The Company's $100 million revolving credit facility, which expires in July
2005, was amended April 9, 2003 to relax certain financial covenants and
definitions as a result of the Company's March 2003 consolidation plan and April
2003 issuance of $150.0 million convertible subordinated notes.

Source: photronics.com
Copyright ©2008 Ian H Giddy
27
 Source: photronics.com
Copyright ©2008 Ian H Giddy
28
 Source: photronics.com
Copyright ©2008 Ian H Giddy
29
 Costs of Issuance

Source: photronics.com
Copyright ©2008 Ian H Giddy
30
 Effective Cost Analysis

Debt

Equity

Mezzanine and hybrids

Structured notes fully hedged cost

Cost of securitized debt

Cost of capital leases

Copyright ©2008 Ian H Giddy

32
 The Cost of Capital
Choice Cost
1. Equity Cost of equity
- Retained earnings - depends upon riskiness of the stock
- New stock issues - will be affected by level of interest rates
- Warrants
Cost of equity = riskless rate + beta * risk premium

2. Debt Cost of debt

- Bank borrowing - depends upon default risk of the firm
- Bond issues - will be affected by level of interest rates
- provides a tax advantage because interest is tax-deductible
Cost of debt = Borrowing rate (1 - tax rate)

Debt + equity = Cost of capital = Weighted average of cost of equity and

Capital cost of debt; weights based upon market value.
Cost of capital = kd [D/(D+E)] + ke [E/(D+E)]

Copyright ©2008 Ian H Giddy

33
 Estimating the Cost of Debt

If the firm has bonds outstanding, and the bonds are traded, the
yield to maturity on a long-term, straight (no special features) bond
can be used as the interest rate.

If the firm is rated, use the rating and a typical default spread on
bonds with that rating to estimate the cost of debt.

If the firm is not rated,

and it has recently borrowed long term from a bank, use the
interest rate on the borrowing or

estimate a synthetic rating for the company, and use the
synthetic rating to arrive at a default spread and a cost of debt

The cost of debt has to be estimated in the same currency as the
cost of equity and the cash flows in the valuation.

Copyright ©2008 Ian H Giddy

34
 Ratings and Spreads

Source: bondsonline.com
Copyright ©2008 Ian H Giddy
35
 Spreads Over Time

Source: bondmarkets.com, Research Quarterly

Copyright ©2008 Ian H Giddy

36
 Cost of Debt, Based on Bond Yield and Tax Rate

Source: advfn.com

Source: investinginbonds.com

Copyright ©2008 Ian H Giddy

37
 The expert:
John Cleese in “Fierce Creatures”

The Cost of Equity

Standard approach to estimating cost of equity:
Cost of Equity = Rf + Equity Beta * (E(Rm) - Rf)
where,
Rf = Riskfree rate 20%
E(Rm) = Expected Return on the Market Index (Diversified
Portfolio) ROI

In practice,

Long term government bond rates are used as risk free rates

Historical risk premiums are used for the risk premium

Betas are estimated by regressing stock returns against market

returns

There are additional discounts for:

Private companies

Minority investors

Sovereign risks

Copyright ©2008 Ian H Giddy

38
 Estimating Expected Return on Equity: An Example

IBM’s Beta = 1.63

Riskfree Rate = 4.50% IBM
(Long term Government
Bond rate)

Risk Premium = 5.80%
(Approximate historical
Source: biz.yahoo.com
premium)
Expected Return on Equity Arithmetic Average returns Risk Premium
= 4.50%+1.63(5.80%) 1928-2004
Stocks
11.81%
T.Bills T.Bonds
3.88% 5.27%
Stocks - T.Bills Stocks - T.Bonds
7.92% 6.53%
1964-2004 11.81% 5.99% 7.47% 5.82% 4.34%
=13.95% 1994-2004 12.70% 4.10% 6.88% 8.60% 5.82%

Source: damodaran.com

Copyright ©2008 Ian H Giddy

39
 Motorola WACC

MOTOROLA

Assumptions
Bond rating A
Risk free govt bond 4.10%
Spread 1.12%
Tax rate 35%
MOT beta 1.6
SP 500 long run return 12%

Actual Alternative
Cost of debt 3.39% 12% 25%
Amount $ 5.30 billion

Cost of equity 16.7% 88% 75%

Amount 38.6 billion

Total D+E $ 43.90

Cost of Capital 15.13% 13.40%

Note:
"Value" of MOT as perp 20.82 $ 23.50
Diff $ 2.68
"Value" of growth potential 17.78

Source: Motorola_WACC.xls

Copyright ©2008 Ian H Giddy

40
 Minimize the Cost of Capital by Changing the Debt Ratio?

The first step in reducing the cost of capital is to change the mix of
debt and equity used to finance the firm.

Debt is always cheaper than equity, partly because it lenders bear
less risk and partly because of the tax advantage associated with
debt.

But taking on debt increases the risk (and the cost) of both debt (by
increasing the probability of bankruptcy) and equity (by making
earnings to equity investors more volatile).

The net effect will determine whether the cost of capital will
increase or decrease if the firm takes on more or less debt.

WACC

DEBT
RATIO
Copyright ©2008 Ian H Giddy
41
 Deal Analysis:
The International Bond Market

Source: ft.com
Copyright ©2008 Ian H Giddy
43
 A Day in the Life of the Eurobond Market

Examine the deals

Which were structured financing?

Why were each done in that particular form?

What determines the pricing?

What is the effective cost of financing to the different
companies?

Copyright ©2008 Ian H Giddy

44
 A Day in the Life...

Copyright ©2008 Ian H Giddy

45
 Effective Cost Analysis

Asset-backed securities: off-balance sheet financing
creates effective lower debt cost

Bonds with warrants: option plus bondMarui

Marui

Convertible bonds: option embedded in bond

Battle Mountaingold

Index-linked Eurobonds: derivative hedges the linkage

Credit Agricole Indosuez

Swapped Eurobonds: nominal rate +/- swap cost

Copyright ©2008 Ian H Giddy

46
 Example: Celworks

Proceeds Proceeds
Celworks Trust
Celworks Investors
(Special Purpose Co.)
Sale of Assets Asset-Backed
Securities

Class Rating Cost

Class Rating Cost
A1,A2,A-x AAA 5%
Senior BBB 8% B AA 5.5%
Subordinated B 11% C A 7%
Issuer balance NR 18%

Copyright ©2008 Ian H Giddy

47
 Bond with Warrants

Bond with warrants

Ex-Warrant Bond Warrants

Discounted bond value Option value

Copyright ©2008 Ian H Giddy

48
 Bond Value

Bond with Warrants

Price 100
Years 2
Coupon 2.125
FV 100
Yield 9.00%

PV of bond $87.91

Paid for option $12.09

Copyright ©2008 Ian H Giddy

49
 Marui Warrant Bond

Nomura Equity
Nomura Marui
Derivatives

Bond Equity warrant

Investors traders

Copyright ©2008 Ian H Giddy

50
 Hedge Fund Linked

Principal
Repayment

100

Hedge Fund Performance

Copyright ©2008 Ian H Giddy
52
 Structured Notes

Bundling and unbundling basic instruments

Exploiting market imperfections (sometimes temporary)

Creating value added for investor and issuer by tailoring
securities to their particular needs

Key: For the innovation to work, it must provide value added to

both issuer and investor.

Copyright ©2008 Ian H Giddy

53
 Even IBM Does It

Copyright ©2008 Ian H Giddy

54
 Medium-Term Notes: Anatomy of a Deal

Copyright ©2008 Ian H Giddy

55
 Anatomy of a Deal

Issuer:

Looking for large amounts of floating-rate USD and DEM
funding for its loan porfolio.

Wants low-cost funds: target CP-.10

Is not too concerned about specific timing of issue, amount
or maturity

Is willing to consider hybrid structures.

Copyright ©2008 Ian H Giddy

56
 Anatomy of a Deal
Investor:

Has distinctive preference for high grade investments

Looking for investments that will improve portfolio returns
relative to relevant indexes

Invests in both floating rate and fixed rate sterling and dollar
securities

Can buy options to hedge portfolio but cannot sell options

Copyright ©2008 Ian H Giddy

57
 Anatomy of a Deal
Intermediary:

Has experience and technical and legal background in
structure finance

Has active swap and option trading and positioning capabilities

Has clients looking for caps and other forms of interest rate
protection.

Copyright ©2008 Ian H Giddy

58
 The Deal
1 Initiate medium term note programme for the borrower,
allowing for a variety of currencies, maturities and
special structures
2 Structuring a MTN in such a way as to meet the
investor’s needs and constraints
3 Line up all potential counterparties and negociate
numbers acceptable to all sides
4 Upon issuer’s and investor’s approval, place the
securities
5 For the issuer, swap and strip the issue into the form of
funding that he requires
6 Offer a degree of liquidity to the issuer by standing
willing to buy back the securities at a later date.
Copyright ©2008 Ian H Giddy
59
 The Issue

Issuer: Deutsche Bank AG

Amount: US$ 40 Million

Coupon:
First three years: semi-annual
LIBOR + 3/8% p.a., paid semi-annually
Last 5 years: 8.35%

Price: 100

Maturity: February 10, 2000

Call: Issuer may redeem the notes in full at par on February 10, 1995

Fees: 30 bp

Arranger: Credit Swiss First Boston

Copyright ©2008 Ian H Giddy

60
 The Parties in the Deal

SCOTTISH
DEUTSCHE
LIFE

CSFB

Copyright ©2008 Ian H Giddy

61
 The Deal in Detail
Deutsche sells 3-year
floating rate note paying SCOTTISH
DEUTSCHE LIBOR - 3/8%
LIFE
For an additional 3/4% p.a.,
For 1% p.a., Deutsche buys three-
Deutsche sells year put option on 5-year
CSFB a swaption fixed-rate 8.35% note to
(the right to pay SL in 3 years
fixed 8.35% for 5
years in 3 years)
CSFB sells the swaption to a
corporate client seeking to
CSFB hedge its funding cost CLIENT
against a rate rise
Copyright ©2008 Ian H Giddy
65
 What’s Really Going On?
Note:

Issuer has agreed to pay an above-market rate on both the floating
rate note and the fixed rate bond segment of the issue
FRN portion: .75 % above normal cost
Fixed portion: .50% above normal cost

Issuer has in effect purchased the right to pay a fixed rate of 8.35%
on a five-year bond to be issued in three years time.

Copyright ©2008 Ian H Giddy

66
 Stern School of Business

Implications of the Credit Crunch

Dr. Ian Giddy

New York University
 Anatomy of a Crunch

Corporate Finance – and Leveraged Buyouts

Mortgage Finance – and Subprime Loans

Structured Finance – and Credit Derivatives

Copyright ©2008 Ian H Giddy

69
 US Defaults on High Yield Bonds Have Been Low…

Copyright ©2008 Ian H Giddy

70
 …Leading to Increased Corporate Leverage…

Copyright ©2008 Ian H Giddy

71
 …Especially Leveraged Loans…

Copyright ©2008 Ian H Giddy

72
 …But Defaults are Rising…

Copyright ©2008 Ian H Giddy

73
 …and Moody’s Forecasts Worse to Come…

Source: moodys.com

Copyright ©2008 Ian H Giddy

74
 …Based on Widening Corporate Bond Spreads …

Copyright ©2008 Ian H Giddy

75
 …Along with Corporate Loan Spreads…

Copyright ©2008 Ian H Giddy

76
 …and Credit Protection Spreads: Even More

Copyright ©2008 Ian H Giddy

77
 Result: LBO Financing Down, Pricing Up

US leveraged loan market continued to slump in the fourth quarter of 2007 amid
growing economic concerns and an increasingly large leveraged loan supply
overhang. Deal postponements, facility downsizing, the re-emergence of covenants,
greater upward pricing pressure and higher OIDs.

There was a noted absence of PIK toggle, delayed draw and covenant-lite and
second-lien facilities.

Copyright ©2008 Ian H Giddy

78
 Let’s Review Some Sectors

Mortgage-Backed Securities

RMBS, including Subprime

Asset-Backed Commercial Paper

Structured Investment Vehicles

When Triple-A goes Bad

Copyright ©2008 Ian H Giddy

79
 The US MBS Market

Copyright ©2008 Ian H Giddy

80
 What is a “Subprime” Mortgage?

Subprime lending is the practice of
making loans to borrowers who do not
qualify for the best market interest
rates because of their deficient credit
history.

"Subprime borrowers typically have
weakened credit histories that include
payment deliquencies, and possibly
more severe problems such as
charge-offs, judgments, and Rapid growth of
subprime mortgages
bankruptcies. They may also display
took place in 2005-
reduced repayment capacity as 2007
measured by credit scores, debt-to-
income ratios, or other criteria that
may encompass borrowers with
incomplete credit histories." (US
Treasury definition)
Copyright ©2008 Ian H Giddy
81
 Sub-merging

Copyright ©2008 Ian H Giddy

82
 Subprime Down

Copyright ©2008 Ian H Giddy

83
 Subprime -- Falling While Rising

Copyright ©2008 Ian H Giddy

84
 Subprime Disaster is ARM

Copyright ©2008 Ian H Giddy

85
 Classic ABCP: Trade Receivable-Backed Commercial Paper
Corporation A
Corporation B
Corporation C
Trade
receivables Trade
receivables Trade
receivables

Pool A
Pool B
Pool C

Credit
Fees Fees Liquidity
enhancement SPECIAL PURPOSE VEHICLE
facility
facility “CONDUIT” provider
provider
Payments on Nominal
Fees maturing ABCP dividends

Sponsor/
INVESTORS Legal owner
administrator

Copyright ©2008 Ian H Giddy

87
 Another Kind of ABCP

Single-seller arbitrage conduit

Bank or Funds Manager

Loans or
bonds

Conduit

Loans or Commercial
bonds paper Profit from spread

Copyright ©2008 Ian H Giddy

88
 Asset-Backed Commercial Paper: A Market in Shock

Copyright ©2008 Ian H Giddy

89
 What is a Structured Investment Vehicle (SIV)?

An SIV is a bank-sponsored SPV that
borrows money mainly using
ABS commercial paper, which it traditionally
issues close to the interest rate of
and CP LIBOR. It then uses the money to
MBS and purchase bonds - effectively lending it
MTNs out much as a bank would provide
loans. The bonds usually selected by
an SIV are predominantly (70-80%)
Aaa/AAA rated ABS and MBS. The SIV
Sub debt is effectively providing the funds for
mortgages, credit cards, student loans
Capital
and similar products.

An SIV would typically earn around
0.25% more on the bonds than it has to
pay to the CP. This difference
represents the profit for the SIV which
will be paid to the capital note holders
and the investment manager
Copyright ©2008 Ian H Giddy
90
 A Risky Funding Structure

The short-term securities that an SIV issues often contain two tiers of
liabilities, junior and senior, with a leverage ratio in the range of 10 to 15
times. The senior debt is invariably rated AAA/Aaa/AAA and A-1+/P-1/F1
(usually two rating agencies are chosen), while the junior debt may or may
not be rated. When it is rated it is usually in the BBB area. There may be a
mezzanine tranche rated A by rating agencies.

The senior debt is a combination of medium term note (MTN) issuance
and commercial paper (CP) issuance. The junior debt is traditionally
puttable rolling 10 year bonds, however shorter maturities and bullet notes
are becoming more common.

In order to support the high senior rating, SIVs are also obliged to obtain
liquidity facilities from banks to partially cover some of the senior issuance.
This helps to protect the investors from the risks of , for example if the SIV
is unable to refinance debt coming due in say the CP coming due in the
capital markets

The current situation is that they have not been able to refinance their
commercial paper – by mid-2007 spreads widened by 100bps and liquidity
evaporated – so the banks have had to absorb much of their losses, and
the SIVs’ AAA debt may be downgraded.

Copyright ©2008 Ian H Giddy

91
 SIV CP Funding Evaporates…

Copyright ©2008 Ian H Giddy

92
 … as Net Asset Value Deteriorates…

Copyright ©2008 Ian H Giddy

93
 … and Banks are Hit

Copyright ©2008 Ian H Giddy

94
 Structured Finance: When Triple-A Goes Bad

Credit Monoline
AAA protection
Bank Insurer
(with
LBO Credit SPV Tranches
protection
and Assets of
subprime
CDOs
Loans)

Equity

Copyright ©2008 Ian H Giddy

95
 Delinquencies, Defaults, Downgrades

Ratings on Global SF CDOs with RMBS exposure: lots
of downgrades

Mezzanine SF CDOs with large exposure to 2005-2007
vintage US subprime RMBS experienced severe rating
downgrades based on actual credit deterioration of
underlying collateral.

Copyright ©2008 Ian H Giddy

96
 The Sum of All Fears

Leveraged Loans

Mortgage-Backed Securities

RMBS, including Subprime

CMBS

Consumer Finance ABS

Asset-Backed Commercial Paper

Structured Investment Vehicles

When Triple-A goes Bad

Copyright ©2008 Ian H Giddy

98
 Contact Information

Ian H. Giddy
NYU Stern School of Business
Tel. 646-808-0746
[email protected]
http://giddy.org

Copyright ©2008 Ian H Giddy

100