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
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?
Company
Individual Assets (Loans,
Receivables) on Company’s
Balance Sheet
Rights to future cash flows
Future cash flows
Cash proceeds
today
“Excess” future
cash flows
Bond
Investors
Trust or SPV
Purchase bonds
(cash today)
Credit enhancement
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: 1985-1994
In 1985 the ABS Market was born, first with autos . . .
($ in Billions)
$90
$80
$70
$60
$50
$40
$30
$20
$10
$1.0
$9.8
$6.1
$5.7
$7.8
1985
1986
1987
1988
1989
$0
$12.6
1990
$24.9
$25.4
1992
1993
$17.1
1991
Auto
Source:
Thomson Financial Securities Data, Credit Suisse First Boston, Public/144A ABS Annual Issuance
$18.5
1994
I. THE EARLY YEARS: 1985-1994
…then with credit cards
($ in Billions)
$90
$80
$70
$60
$50
$40
$30
$22.6
$17.4
$19.6
$24.9
$25.4
1992
1993
$32.8
$21.9
$20
$2.3
$10
$11.0
$1.0
$9.8
$6.1
$6.9
$5.7
1985
1986
1987
1988
$0
Auto
Source:
$7.8
1989
$12.6
1990
$17.1
1991
Credit Cards
Thomson Financial Securities Data, Credit Suisse First Boston, Public/144A ABS Annual Issuance
$18.5
1994
I. THE EARLY YEARS: 1985-1994
Auto & Credit Cards - The Fundamental Structures
Autos:
Liquidating pool generally in existence at closing
$100
Average Life
(20 months)
$50
Expected Final
Callable
Legal Final
$0
0
12
24
Months
36
48
60
I. THE EARLY YEARS: 1985-1994
Auto & Credit Cards - The Fundamental Structures
Credit Cards:
Designed to accommodate short-lived assets
Future originations must meet established parameters
RECEIVABLES BALANCE
10
7
100
MINIMUM SELLER'S INTEREST
PEPCO FUTURE
REVOLVING PERIOD
STEP
DOWN
PERIOD
TERM
SERIES
200X-1
36
MONTH
60
I. THE EARLY YEARS: 1985-1994
Back to the Evolution of the Market
($ in Billions)
$90
$80
$70
$30.4
$60
$19.6
$50
$15.1
$13.8
$12.5
$40
$30
$8.8
$20
$22.6
$17.4
$19.6
$24.9
$25.4
1992
1993
$32.8
$21.9
$1.8
$2.3
$10
$11.0
$1.0
$9.8
$6.1
$6.9
$5.7
1985
1986
1987
1988
$0
Auto
Source:
$7.8
1989
$12.6
1990
Credit Cards
$17.1
1991
Other
Thomson Financial Securities Data, Credit Suisse First Boston, Public/144A ABS Annual Issuance
$18.5
1994
I. THE EARLY YEARS: 1985-1994
1985-1994: Top ABS Issuers
ISSUER
PRINCIPAL
(in millions)
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%
RANK
MARKET SHARE
Top 6 Totals
$155,459.5
43.8%
Industry Totals
$355,120.8
100.0%
Source: Domestic Public and 144A Asset Backed Issues, Thomson Financial Securities Data, CSFB.
I. THE EARLY YEARS: 1985-1994
Why Securitize?

Cheaper source of capital

Improved leverage

Perfect matched funding

Fund growth

Access new investors

Origination discipline
I. THE EARLY YEARS: 1985-1994
Why Invest in ABS?

Extremely high credit quality

Yield pick-up over corporates

Liquid market

Limited “event risk”

Asset diversification

Relatively predictable cashflow
The Middle Years:
1995-1997
a.k.a. “The Gain on Sale” Years
I. THE GAIN ON SALE YEARS
Public/144A ABS Annual Issuance, 1985-1998
($ in Billions)
$350
$285.8
$300
$250
$219.7
$200
$169.4
$150
$115.6
$100
$47.8 $54.1 $56.1
$50
$0
$1.2
1985
$10.0
$9.1
$14.4
1986
1987
1988
$64.7
$81.7
$27.7
1989
1990
Source: Thomson Financial Securities Data.
1991
1992
1993
1994
1995
1996
1997
1998
I. THE GAIN ON SALE YEARS
Public/144A ABS Annual Issuance, 1994-1998
($ in Billions)
$300
$250
$103.0
$200
$63.1
$37.6
$150
$0
$99.5
$17.0
$22.3
$47.3
$47.3
$49.4
$41.0
$43.1
$18.5
$29.1
$35.0
$36.6
$40.2
1994
1995
1996
1997
1998
$100
$50
$79.0
$13.9
$16.5
$32.8
Autos
Credit Cards
Source: Thomson Financial Securities Data.
HEL/MH
Other
I. THE GAIN ON SALE YEARS
1995-1997: Selected ABS Issuers
ISSUER
PRINCIPAL
(in millions)
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
$445,135.4
RANK
MARKET SHARE
100.0%
Source: Domestic Public and 144A Asset Backed Issues, Thomson Financial Securities Data, Bloomberg.
The Later Years:
1998-2002
Maturity/Stability
I. THE LATER YEARS
Public/144A ABS Annual Issuance, 1985-2002
($ in Billions)
$500
$448.1
$450
$400
$336.0
$350
$285.8
$300
$250
$288.1
$219.7
$200
$169.4
$150
$115.6
$100
$50
$351.6
$14.4
$1.2 $10.0 $9.1
$27.7
$64.7
$47.8 $54.1 $56.1
$81.7
$0
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Total ABS
Source: Thomson Financial Securities Data, Credit Suisse First Boston
I. THE LATER YEARS
Public/144A ABS Annual Issuance, 1998-2002
($ in Billions)
$500
$450
$62.2
$400
$50.6
$350
$300
$41.2
$250
$64.1
$200
$150
$100
$50
$0
$30.4
$47.2
$40.4
$10.2
$62.4
$10.3
$97.8
$86.0
$16.1
$86.0
$52.5
$26.2
$51.0
$12.5
$160.6
$105.7
$57.0
$68.0
$70.3
$43.0
$29.6
$40.6
$32.9
$61.5
$61.9
$78.3
1998
1999
2000
2001
2002
Autos
Credit Cards
HEL/MH
Student Loans
Source: Thomson Financial Securities Data, Credit Suisse First Boston
CDOs
Other
I. THE LATER YEARS
1998-2002: Top 10 ABS Issuers
PRINCIPAL
(in millions)
ISSUER
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
Industry Totals
Source:
$456,843.6
30.4%
$1,504,848.7
100.0%
Domestic Public and 144A Asset Backed Issues (excluding CDO’s), Thomson Financial Securities Data.
2002: Enron
“SPE” is not a 4-Letter Word
II. The Present
II. THE PRESENT
Cumulative Public ABS Issuance
($ in Billions)
$2,500
$2,000
$2 Trillion
$1,500
$1,000
$1 Trillion
$500
$500 Billion
$100 Billion
$0
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Public/144A/CDOs
Source:
Thomson Financial Securities Data.
II. THE PRESENT
Cumulative Public ABS Issuance
($ in Billions)
$2,500
$2,000
$2 Trillion
$1,500
$1,000
$1 Trillion
Europe
$500
$500 Billion
$100 Billion
$0
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Public/144A/CDOs
Source:
Thomson Financial Securities Data.
Europe
II. THE PRESENT
Relative Market Size
($ in Billions)
$800
$755
$700
$609
$600
$551
$529
$500
$448
$408
$400
$330
$300
$268
$352
$326
$263
$258
$143
$131
$235
$221
$196
$200
$100
$341
$311
$197
$137
$86
$62
$50
$43
$35
$63
$76
$55
$0
1998
1999
ABS
Source:
MBS
2000
CMBS
Thomson Financial Securities Data.
Investment Grade Corporate
2001
High Yield
2002
Equity
$58
II. THE PRESENT
Relative Market Size
($ in Billions)
$800
$755
$700
$609
$600
$551
$529
$500
$448
$408
$400
$300
$352
$326
$268$263
$200
$341
$311
$330
$258
$137
$100
$62 $50
$43
$131
$86
$63 $55
$76
$35
$0
1998
Source:
CMBS
MBS
ABS
1999
Thomson Financial Securities Data.
2000
Investment Grade
Corporate
2001
2002
High Yield
$58
II. THE PRESENT
ABCP Overview
($ in Billions)
$800
$745 $726
$700
$642
$600
$517
$500
56%
49%
42%
35%
$382
$400
$300
$256
$200
$147
28%
21%
14%
$101
$100
$38
$49
$59
$60
7%
$71
$0
0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Asset Backed CP Outstandings
Source:
Federal Reserve.
ABCP as a % of Total Outstandings
II. THE PRESENT
ABCP Overview
($ in Billions)
1,000
Total Unsecured CP
800
600
ABCP
400
200
0
1992
1993
1994
1995
1996
ABCP
Source:
Federal Reserve.
1997
1998
1999
Total Unsecured
2000
2001
2002
III. The Future
III. THE FUTURE
CSFB’s 2003 Projected ABS Issuance
ASSET CLASS
2002 ACTUAL
2003 PROJECTED
% CHANGE
$70.3
$75.0
6.7%
78.3
80.0
2.2%
156.0
160.0
2.6%
4.6
3.0
-34.8%
26.2
30.0
14.5%
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%
Credit Card
Auto
Home Equity and Related
Manufactured Housing
Student Loan
Equipment
Source:
Credit Suisse First Boston.
III. THE FUTURE
Observation # 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 FUTURE
Observation # 1:
But not without problems…








Access
Amresco
Autobond Acceptance
CFS
Cityscape
Conseco
ContiFinancial
FirstPlus
To name a few








First Alliance
IMC Mortgage
Jayhawk Acceptance
NAL Financial Group
National Century
NextCard
Southern Pacific
UCFC
III. THE FUTURE
Observation # 2:
Everybody’s doing “it”!
Credit card industry
1987
2001
$80 bil
$490 bil
Top 10 market share
40%
85%
% securitized
<1%
50%
III. THE FUTURE
Observation # 2:
Everybody’s doing “it”!
($ in Billions)
TOP 5 AUTO ISSUERS
Ford
2002 ISSUANCE
$12.5
GMAC
11.7
DaimlerChrysler
7.9
AmeriCredit
6.0
WFS
5.0
Source:
Thomson Financial Securities Data, Credit Suisse First Boston. Includes retail and wholesale issuance.
III. THE FUTURE
Observation # 2:
Everybody’s doing “it”!
($ in Billions)
TOP 5 HOME EQUITY ISSUERS
GMAC-RFC
2002 ISSUANCE
$20.0
PARENT COMPANY
GM
Countrywide
18.4
Countrywide
EquiCredit
14.2
Bank of America
New Century
10.4
New Century
Option One
Source:
9.4
Credit Suisse First Boston.
H&R Block
III. THE FUTURE
Observation # 3:
The equity market (and Congress) may not understand “gain on sale
accounting” or SPE’s but the debt market understands securitization

Structures are proven and accepted

Significant downside protection vs. secured debt

Large, healthy investor base
III. THE FUTURE
Observation # 3: Stability for Borrowers
175
7.00%
2-Year Treasury Yield
150
6.00%
5.00%
A2 Industrial
100
4.00%
75
3.00%
50
2.00%
A2 Financial
25
0
Jan-00
1.00%
Jun-00
Credit Card (5-yr)
Source:
Nov-00
Apr-01
Auto (2-yr)
Sep-01
Home Equity (5-yr)
Bloomberg, Credit Suisse First Boston.
Feb-02
A2 Financial
Jun-02
Nov-02
A2 Industrial
0.00%
Apr-03
2-yr Treasury
2-Year Treasury Yield
Spread (BPs)
125
III. THE FUTURE
Observation # 3:
Unsecured Spread (BPs)
Ford Unsecured vs. Secured Spreads
700
70
600
60
500
50
5-Year Unsecured
Ford Spreads
400
40
300
30
200
20
100
10
2-Year “AAA” Ford ABS Spreads
0
Mar-01
0
May-01
Jul-01
Source:
Credit Suisse First Boston.
Sep-01
Nov-01
Jan-02
Mar-02
May-02
Jul-02
Sep-02
Nov-02
Jan-03
Mar-03
III. THE FUTURE
Observation # 3:
Household Unsecured vs. Secured Spreads
600
500
Spread (BPs)
400
10-Year Unsecured
Household Spreads
300
HSBC Merger
Announcement
200
“AAA” Household
Home Equity
Spreads
100
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
Source:
Credit Suisse First Boston.
III. THE FUTURE
Observation # 4:
Tiering, Tiering and More Tiering
3-YR Triple-A Credit Card Spread Comparison (spread to 1ML)
80
70
Providian
Spread to 1ML (bps)
60
50
40
Metris
30
20
Metris
Providian
Metris
10
0
1/9/01
Metris
Providian
Chase
Chase
4/13/01
Source:
7/16/01
Chase
10/18/01
Credit Suisse First Boston.
1/20/02
4/24/02
Chase
7/27/02
Chase Chase Chase
10/29/02
1/31/03
III. THE FUTURE
Observation # 5:
Securitization creates inherent stability and liquidity for certain borrowers

International Harvester / Navistar

Chrysler / DCX

Tyco / CIT

Conseco / Green Tree

Mexico / Emerging Markets
III. THE FUTURE
Observation # 6:
Securitization’s effect on the buyside will continue to grow

Dedicated investors

New investors
– CBOs
– ABCP

CBOs as an asset gathering tool
III. THE FUTURE
Observation # 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
Observation # 6:
CBO/CLO Annual Issuance 1996 – 2002 ($ in billions)
$100
$2.1
$80
$51.8
$2.7
$1.3
$4.1
Other
ABS/Structured Finance CDO
Balance Sheet CLO
Investment Grade CBO
High Yield CLO
High Yield CBO
$10.8
$60
$22.2
$6.3
$17.0
$8.0
$40
$0.3
$$17.8
$20
$12.6
$12.8
$3.2
$4.4
$13.2
$20.5
$12.7
$18.7
$4.6
$22.0
$8.3
$16.9
$22.0
$6.0
$14.8
$13.7
$12.7
$13.2
$0
$7.2
$3.7
$14.3
$1.3
1996
Source:
1997
1998
Credit Suisse First Boston.
1999
2000
2001
2002
III. THE FUTURE
Observation # 7:
Commoditization and disintermediation of commercial banks will
continue, particularly with any secured loan products

The Virtual Bank
Residential Mortgages
Consumer Loans
Commercial Mortgages
Small Business Loans
Senior Unsecured Loans
Mezzanine/Venture Capital
MBS
ABS
CMBS/Conduits
SBA/SBL/Franchise
CLOs
CBOs
Regulatory Capital Arbitrage
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