Supplemental Slides

1
Supplemental Slides
2
Superior Ratings Transition Rates
Moodys Global Structured Finance Annual Ratings
ABS Transition Matrices (1983-2004 average)

r
Corporate Finance Rating Transition Rates
(1983-2004 average)

• 98.97 of triple-A ABSs remain triple-A compared
  to only 91.68 for corporates

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Creating a Valid Structure

• OBJECTIVES
• Create a structure that is de-linked from the
  bankruptcy risk of the seller/servicer (remove
  event risk)
• Establish a security interest in the assets and
  proceeds
• METHODS
• Originator sells receivables into a
  bankruptcy-remote trust in a true sale
• True sale an arms-length transaction without
  recourse
• Trust has independent Board of Directors and
  nominal capitalization
• Seller/servicer receives a market fee to service
  the receivables
• Investors receive bankruptcy-remote and
  nonconsolidation legal opinions

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Types of Credit Enhancement

• Subordination Trust assigns priority to cash
  flow allocation. Junior classes called
  subordinate, and superior classes senior
• Overcollateralization Trust has an excess of
  collateral over bonds issued
• Excess Spread Margin by which the yield on the
  pool exceeds the pool expenses
• Turboing Excess spread reduces pool balance
  instead of paying it out to seller. Accelerates
  the reduction of senior classes over the subs.
  The subordinate classes grow proportionally to
  the transaction because seniors reducing more
  rapidly, thus increasing credit enhancement
• Cash reserve account An account available for
  needed liquidity and to absorb losses

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Credit Enhancement Snapshot
Asset Pool 1.2 billion
Triple-A Class A Notes 0.900 billion
Single-A Class B Notes 0.2 billion
Overcollateralization 0.1 billion

• Other Types of Credit Enhancement
• Surety bonds
• Third-party or parent guarantee
• Excess Spread
• Letter of Credit

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How Excess Spread Is Credit Enhancement
Excess spread Yield minus expenses

• Cash flow is king
• Excess spread is available to absorb credit
  losses
• Waterfall states that trust must retain excess
  spread if needed in the transaction / cannot pay
  to servicer unless all required principal and
  interest payments are current