Capital Market Access: Financial Guaranty Enhancement

1
Capital Market Access Financial Guaranty
Enhancement

• PRESENTATION
• THE FINANCIAL INNOVATIONS ROUNDTABLE
• SOUTHERN NEW HAMPSHIRE UNIVERSITY
• MANCHESTER, NH
• CHARLES TANSEY
• WAYNE MARSDEN
• GREG STANTON
• November 8, 2002

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Capital Market Access Financial Guaranty
Enhancement

• Goal
• Broaden the secondary market for pooled community
  development (CD) assets to replenish capital and
  fund additional CD loans.
• Objectives
• Create a structure to facilitate 3rd party credit
  enhancement.
• Underwrite an insured asset-backed
  securitization.
• Demonstrate potential for new financial guaranty
  insurance company or capacity, dedicated to the
  CD sector.

3
Capital Market Access Financial Guaranty
Enhancement

• General Approach
• Do not reinvent the wheel!
• Teamwork.
• Complement current pooled transactions.
• Structure an issue of significant size.
• Model for future transactions.
• Benefit all qualified originators/sellers
• Satisfy Current future investor needs.

4
Capital Market Access Financial Guaranty
Enhancement

• Game Plan
• 1st Client Communtiy Reinvestment Fund (CRF),
  Minneapolis, MN June 2003 Series.
• Why?
• CRF, Founded in 1988 has
• Knowledge of loan originators and investors
• 14 Issues CRF Revenue Bond and Note Program
• 74.6 Million Affordable Housing Issue in
  2001.
• Some investors are reaching exposure limits.

5
Capital Market Access Financial Guaranty
Enhancement

• Proposed 1ST Transaction
• June 2003 insured CRF revenue notes, series 1.
• Issuer will be bankruptcy remote LLC, with
  proceeds being used to purchase CD loans to
  replenish capital and permit additional CD loans.
• Par 25 Million (Minimum).
• Structure Senior, Junior, Subordinate
  Tranches.
• Weighted Average Maturity 3-5 years.
• Rating A or higher
• Asset Type Various CD loan types.

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Capital Market Access Financial Guaranty
Enhancement

• Loan Originators/Sellers

LOAN SALES
Sponsor / Master Servicer
CD LOAN POOL
Special Purpose Limited Liability Company
CERTIFICATES
PREMIUM
INVESTED
Senior Holders Junior Holders
Subordinate Holders
INSURANCE POLICY
Financial Guarantor
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Capital Market Access Financial Guaranty
Enhancement

• CD Loans General Characteristics
• Must be performing.
• Loans may be prepaid without penalty.
• Original sizes 100,000 to 3 million.
• Borrowers must be in business for 2 years, 1 year
  of profitable operations, positive net worth,
  etc.
• Must have complete loan file (loan docs,
  financials, amortization schedules, security
  docs, guarantees, assignments, insurance
  policies, etc.

8
Capital Market Access Financial Guaranty
Enhancement

• Standard Collateral Security Protections
• Over-collateralization.
• Excess interest spread account.
• Debt service reserve fund (cash deposit)
• External credit support Financial guaranty
  insurance on senior tranche.
• CRFS Bond Underwriter
• U.S. Bancorp Piper Jaffray Inc.

9
Capital Market Access Financial Guaranty
Enhancement

• Credit Underwriting
• Performed by CRF, F.I. Roundtable Taskforce
  Consultants, Financial Guarantor Rating
  Agencies.
• Structure.
• Loan pool quality assessment loss modeling.
• Originator/ servicer review
• Borrower sectors, trends analysis
• Legal documents reviews
• Market Analysis
• Final Structural Evaluations Including cash flow
  simulations, rating agency loss levels, loss
  curves/timing.

10
Capital Market Access Financial Guaranty
Enhancement

• LONG TERM OBJECTIVE
• Demonstrate potential of forming a CD-dedicated
  financial guaranty insurance company.
• Research conducted on the first transaction will
  show
• Market rates and issue pricing.
• Financial guaranty insurance premiums.
• Financial guarantor rating agency structure
  underwriting standards.

11
Capital Market Access Financial Guaranty
Enhancement

• Long Term Objective Continued
• Input research data into a comprehensive
  (financial guaranty) insurance company (a)
  Business, (b) Financial Aid, (c) Profitability
  Model.
• Output will demonstrate benefits to originators
• Low cost, funding alternative.
• Facilitates entry into the capital markets.
• Provides many with first-time access.
• A very large (perhaps unlimited) funding source.
• New products to meet emerging future needs.

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Capital Market Access Financial Guaranty
Enhancement

• Long Term Objective Continued
• Output will also demonstrate benefits to
  potential investors
• Attractive returns.
• Annuity-like income stream.
• Low risk.
• Public purpose.

13
Capital Market Access Financial Guaranty
Enhancement

• NEXT STEPS FIRST TRANSACTION JUNE 2003
• Complete needs analysis.
• Update structure.
• Meet financial guarantors/ rating agencies.
• Underwriter/ banker selection.
• Bond counsel selection.
• CRF to warehouse loans.
• Model pooled loan portfolio.
• Obtain commitments.
• Sale to investors.

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Capital Market Access Financial Guaranty
Enhancement

• NEXT STEPS
• For the creation of a dedicated financial
  guaranty insurance company.
• Seek additional funding to develop concept
• Needs analysis
• Business plan
• Financial model
• Investor identification
• Corporate organization
• Private placement memorandum