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Absolute prepayment rate, 89 Andacollo Gold Mine (market classes, Basel II capital require- Accelerated distribution percent- risk; operating risk), 274 ments, 294 age, 110 Annual percentage rate (APR), 86 correlation, 150 Accounting. See Capital; Operat- Anson, Mark J.P., 48 financing, 215 ing leases Application service providers gross amounts, 220–221 considerations. See Project (ASPs), 273 growth, support, 76 financing Arbitrage CDO, 120 managers, 122 equity method, 279 creation, 125 expectations, 62 Accreting swaps, 35–36 structure. See Synthetic arbi- pool, attributes, 85–87 ACE Guaranty Re, 106 trage CDO structure purchase, 172 ACG Trust III Arbitrage motivated CDOs, 124– remaining , 292 asset analysis, 351 127 revolving pool, 116 collateral pool characteristics, Argentina, methodology test, 312– risk 346–347 313 identification/isolation, 5 default events, 349 Armstrong, Don, 224 transfer, 13 issuer overview, 346 Arturo Merino Benitez Interna- securitization, entity reasons, lessee analysis, 351 tional Airport, 267 70–79 maintenance, 351–352 Asian financial crisis, 285 transfer, 5 parties, roles, 349–350 Asset-backed CP (ABCP), 14, transformation, 143 payment structure, 348–349 157–162 value, difference, 84 portfolio details, 350–351 characteristics, 158–160 Asset swaps, 45, 54–57. See also presale, 345–352 conduit, 158–159. See also Investors profile, 345–346 Synthetic ABCP conduit agreement, 56–57 rationale, 346 credit enhancement, 160–161 spread, 56 remarketing agent evaluation, 350 hypothetical structure, terms, 163 structural features (removal), strengths/concerns, 347 issuance, 158 swaptions (usage), 57 surveillance, 352 issue/structure, 159 structure package, dealer cre- transaction structure, 347–348 liquidity support, 160–161 ation, 56–57 Actual/360 day convention, 48 market, 173 At the money option, 40 Actual/360 day count, 30 structure, illustration, 161–162 Auto loans, 159 Adams, Phil, 4 usage, 156 ABS, loan rate, 86 Adjustable-rate residential mort- Asset-backed presale report. See auto-loan-backed deals, pre- gage loans, backing, 100 CNH Equipment Trust payments, 89–90 Adjusted discount rate. See Dis- 2006-A Available funds cap, inclusion, 100 count rate Asset-backed securities (ABSs), 9, AXA Re Finance, 106 Adjusted present value technique, 65, 119. See also Auto 225 loans; Fully funded ABS Back-up servicer. See CNH Equip- Advance rate, 83 CDS, 9 ment Trust 2006-A After-tax proceeds, estimation, 227 collateral, 71 requirement, 81 ALCO 1 COPYRIGHTEDdeal, 124 MATERIALBaker, Cynthia A., 303 CDO, 152 investment, diversification, 124 Balance sheet Limited, 151 issuance, 70 asset-liability management, 162– structure/tranching, 153 issuers, 67, 81 163 Ambac Assurance Corporation, 106 products, 151 capital management, 77–78 American option, 37 sector, 63 CDOs, 120, 124 American-type options, 42 securitizing, benefits, 79 structure. See Fully funded Amortization schedule, 83 structured finance, 339–343 synthetic balance sheet Amortizing structures, revolving usage, 89, 140 CDO structure structures (contrast), 82–83 Assets static synthetic CDO, 143 Amortizing swaps, 35–36, 97 analysis. See ACG Trust III

373

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Balance sheet (Cont.) Bear Steans Asset Backed Securi- relief, 147. See also Regula- treatment. See Securitized expo- ties 1 Trust 2005-HE5 tory capital relief sures Asset-Backed Certificates, requirements, 286, 287 variable synthetic CDO, 143 Series 2005-HE5 issue, reduction, 76 Balance test, 113 101–102 sources, 278 Bank for International Settlement Benchmark yield, 135 diversification, 77 (BIS), 287 Bermuda option, 37 Capitalization, avoidance, 213– definition. See Structured finance Bidding process, 243 214 Bankruptcy, definition, 46 Black, Fischer, 42 Capital-markets-provided rein- Bankruptcy remote entities, 72 Black-Scholes option pricing surance, purchase, 7 Bankruptcy-remote legal entity, 159 model, 42 Capped interest costs, 302. See also Banks Boggiano, Kenneth, 143 Uncapped interest costs balance sheet impact. See Origi- -insured security, 106–107 Caps, 43–44. See also Interest rate nating banks Bonds Captive finance companies, 13 capabilities, 286 basket, 168–169 Captive leasing, 216 debt-service LOC facility, 275 CLNs, term (reason), 183 Casecnan Water and Energy (coun- deposit-taking capabilities, 12 futures. See U.S. Treasury bonds terparty risk; construction lending, 12 insurance, 106–107 risk; political risk), 276 letter of credit, issuance, 106 issuance, 244, 251 Cash-and-carry trade, 26 loans, 119 principal, payment, 99 Cash collateral account (CCA). losses, 292 structure, 205 See CIT Equipment Col- savings product, offering, 7 turboing, 99 lateral 2006-VT1 Barajas, Dino, 20 Book earnings, leasing (impact), step-down feature. See CIT Barbour, Ian, 297, 301 216 Equipment Collateral Bargain purchase option, absence, Borderline cases/boundaries. See 2006-VT1 220 Structured finance Cash deal, 135 Bartlett, Beth, 4 Borod, Ronald, 4 Cash flow. See Leases Basel Committee, 286 Borrowers analysis, 116 Basel Committee on Banking bankruptcies, 91 arbitrage CDO, 124 Regulations and Supervi- equity, 84 CDOs, 119–120, 130 sory Practice, 287 Borrow-to-buy decisions, 232 structure, 122–123 Basel Committee on Banking Boundaries. See Structured finance distribution. See Principal cash Supervision, 296 Brazilian maxidevaluation (1999), flow Base lease term, 252 285 firmness, 16 Basel I, 288 Brealey, Richard, 229, 230 leasing, impact, 216 impact, 143 Bridge financing, 248–249 modeling. See CIT Equip- rules, 77 British Bankers Association, 45 ment Collateral 2006- shortcomings, 289 Broker-dealer VT1; CNH Equipment Basel II bond removal, 164 Trust 2006-A adoption, 291 payment difference, 165 payment structure, 80, 82 calculation method, 292 regulation, 177 probability adjustment. See capital requirements. See Assets Brokers, involvement, 242 Projected cash flows counterparty risk weights, 293 Brown, Joel W., 91 stream, 12 framework/securitization, 287 Build-own-transfer (BOT) stress, 80, 82 impact, 143. See also Credit power project, 275 waterfall, 107 derivatives; Securitization program, 272 Cash-generating assets, 5 rules, 288–293 project, 276 Cash inflow. See London Inter- Basel rules, 136 Business risk, 230 bank Offered Rate Base schedule, 110–111 Cash market instruments, pack- Basis risk, 98–102 Callable bonds, 9, 193 age, 28–30 Basis swaps, 36, 60 , 37 Cash outlay, 29 Basket CLN, 190 strike price, 40 Cash reserve accounts, 128 Basket default swaps, 45, 51–54. Cancelable operating lease, 214 Cash reserve funds, 112 See also Senior basket Capital Cash securitization, 65 default swaps; Subordi- base, erosion, 292 Cash-settled CLN, 183 nate basket default swaps budgeting Cash settlement, 50, 191 Basket TRS, 163–165 analysis, discount rate (usage), Charge-off rate (COR), 91–92 Bautista, Alberto J., 225 226 Cheapest-to-deliver asset, 139 BCP (market risk; currency risk; decisions, 230 Cheapest-to-deliver issue, 26 political risk; high pur- conservation. See Working capital existence, 50 chase price), 273 leases, 219 Chen, Ren-Raw, 48 Beacon model, 85 accounting, 220–222 Chew, William, 18–19, 21, 279 Beale, Chris, 17 raising, method, 8 Chicago Board of Trade (CBOT) constraints, 40

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Chicago Board of Trade (Cont.) enhancement, 359–360 sponsor motivation, 124–127 Treasury bond futures con- default events, 362 structures. See Partially tract, trading, 25–26 discount rate, 356 funded synthetic CDO Choudhry, Moorad, 4, 48 excess spread, 360 structure; Synthetic arbi- Cilia, Joseph, 194 expected initial annual excess trage CDO structure; CIT Equipment Collateral 2006- spread, 360 Synthetic CDOs VT1 interest allocation, 361 structuring, benefit, 139 annual pool review, 369 legal structure, 358 usage, 11 cash flow modeling, 370 loan attributes, 359 yield spreads, 151 CCA, 369–370 loss Collateralized funded synthetic step-down feature, 366 allocation, 362 MBS, 299 changes, 366 estimate, 359 Collateralized loan obligations collateral recognition, 363 (CLOs), 119, 124 analysis, 368–369 named back-up servicer, 361 Collections. See CIT Equipment comparison, 368 operational review, 362–363 Collateral 2006-VT1 collections/servicing, 372 payment Commercial letter of credit, 106 credit priority, shift, 356 Commercial MBS (CMBS), 9, analysis, 369 waterfall, 361–362 63, 119 enhancement, 369 portfolio performance, 358 (CP), 155–157. cumulative net loss trigger, 371 prefunding account, 361 See also Asset-backed CP delinquency, 370 principal allocation, 361 interest, 159 expected ratings, 365 reserve account, 360 investors, 248 floors, 371 step-down trigger, 356 issue, 157 initial credit enhancement, 366 securitization history, 358 proceeds, 171 legal structure, 367 strengths/concerns, 355 market, 156 loss stress scenarios results, 361 rate, 97 estimate, 369 structural considerations, 361– usage, 155, 174 performance, 370 362 Committee on Bankruptcy and net loss trigger, 371 structured finance, asset-backed Corporate Reorganizations, operations review, 371–372 presale report, 355–363 Association of the Bar of the payment priority, 370–371 summary, 355 City of New York, 2, 3 performance analytics, 365 transaction, parties (involve- Committee on the Global Finan- portfolio performance, 367 ment), 356 cial System (BIS), 2 securitization history/perfor- CNH Global N.V., 357 Commodity Futures Trading Com- mance, 367–368 Collars, 44 mission (CFTC), 21 segment overview/originations, Collateral Commodity price volatility, 285 371–372 analysis, 82 Commodity pricing risk, 285 sequential trigger levels, 366 credit quality, 80–81 Common stockholders, equity, 288 static pool review, 369 description, 82–87 Competition trends, 116 strengths/concerns, 365 diversification score, 129 Compliance tests, 127–131 stress scenarios results, 370 pool, characteristics. See ACG results, 128 structural considerations, 370– Trust III Concentration risk, 79 371 Collateralized bond obligations Conditional default rate (CDR), 91 structured finance, asset-backed (CBOs), 119 Conditional prepayment rate presale report, 365–372 collateral managers, 127 (CPR), 89 summary, 365 portfolios, reduction, 127 Conditional sale leases, 208 transaction, parties, 366 Collateralized debt obligations Conduits underwriting, 372 (CDOs), 119, 297. See CP issuance, 171 CIT Financial USA, Inc., 366–367 also Arbitrage motivated program types, 159–160 CIT Group, Inc., 366 CDOs; Balance sheet; Confidence level, 292 Citibank Credit Card Issuance Cash flow; Portfolio; Constant maturity swap, 35 Trust, 96 Unfunded CDO Constant Maturity Treasury rate, 201 prospectus supplement, 98 analysis, factors, 150–151 Constant maturity Treasury swap, Claremont Finance, 161–162 CDO-type products, 151 35 CNH Capital America LLC, 357 creation, 66 Construction CNH Equipment Trust 2006-A diversity score value, 150 financing, 252–253 annual static pool review, 359 family, 120 phase. See Project financing cash flow modeling, 360–361 flowchart, 121 risk, 261 changes, 356 interest rate swap agreement, impact. See Project financing collateral 125 Contractors, involvement, 242 analysis, 358 manager, 126 Contract rate, 85–86 attributes, 359 originator, equity retention Contracts, risk/reward character- credit (considerations), 138 istics, 38 analysis, 359–360 portfolio, credit quality, 122 Conventional CP programs, 157

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376 Index

Conventional linked notes, S&P Credit default swaps (CDSs), 45, credit enhancement, 332 linked notes (contrast), 205 48–50. See also Asset- investment grad tenants, non- Conversion factor, 289 backed securities; Single investment grade tenants multiplication, 26 reference name (contrast), 326 Converted price, 26 index, 50–51 land designation, 326 Convertible bonds, 193 mechanics, 50 legal structure, 327–328 Core capital, 288 market practice, 49 manager/servicer, 332 -backed CDOs, 119 mechanics, illustration, 49 Moody’s review, 330–332 Corporate , 72 settlement, 48–49 net cash flow, geographic con- Corporate credit quality, 116 usage, 136, 298 centration, 325 Corporate finance, blending. See Credit dependent market interest opinion, 321–322 Project finance rate risk, 62 organizational structure, 328 Corporate names, credit deriva- Credit derivatives, 45 payment priority, 330 tives, 9 Basel II, impact, 293–296 portfolio overview, 324–327 Correlation. See Assets CLN, 183 ratings, 332 Corridors. See Interest rate contracts, protection. See Ref- repayment summary, 329 Cost overruns, risk, 265 erence assets representations/warranties, 332 Counterparty documentation, 45–48 revenue composition, 325 creditworthiness, 16–17 funded/unfunded variants, 181 strengths/concerns, 322 default, risk, 103 terms, 45–48 structure, 332 exposure, degree, 149 usage, degree, 149 structured finance, pre-sale risk, 24, 103–104 Credit enhancement, 71, 104– report, 321–334 exposure, 95 113. See also Asset- tenants, revenue composition, usage, 28 backed CP; CIT Equip- 325 term, usage, 27 ment Collateral 2006- tower site type, net cash flow, Country risk, 265 VT1; External credit 327 enhancements; Internal transaction interest, 182 credit enhancements overview, 323–330 payment, 41 features, 313–314 summary, 333 rate, resetting, 201 type/amount, 107 Culp, Christopher L., 282 reset usage, 127–128 Cumulative default rate (CDX), 91 date, 202 Credit-enhancing, cost, 105 Currency risk, 14, 261 formula, 202 Credit independent market risk, Curtailment, 83 Coverage tests, 129–131 62 Customization factors, 199 Credit Credit-linked notes (CLNs), 45, Custom lease, 217 analysis. See CIT Equipment 138, 181. See also First- Collateral 2006-VT1 to-default CLN Daimler-Chrysler Financial, 156 capacity, preservation, 213– Bloomberg screen, 185–189 Dattatreya, Ravi, 195 214 description, 181–182 Davis, Henry A., 226 cycle, 135 development, progression, 191 Day-count convention, 48 events, 46–48 diagram, 184 Dayton Mining Corporation, ISDA definition, 190 illustration, 182 income statements, 274 nonoccurrence, 11 investor motivation, 182 Dealer-issued paper, 157 exposures. See Project financing issue, 134 Deal overcollateralization, 111 facilities, setup, 20 settlement, 182–184, 191 Deal sponsor, detriment, 15 impact objective. See Project tranched series, 299 Dean, Steve R., 215 financing usage. See Single reference name Debt insurance, 6 Credit risk arrangements, 239 linking absence, 253 investors, location, 254 forms, 184–190 requirements, 149 leverage, increase, 262 type, 188 transfer, 147 repayment, 66 losses, 293 Credit-risky bonds, 57–58 securities, 194 performance, 107 purchase, 55 service. See Indenture trustees protection, 108 Credit-supported CP, 156 payment, 244 quality. See Collateral Credit watch, 128 solicitation lists, preparation, replacement, 10 Creditworthiness. See Counter- 256 ratings. See Project finance party Debt-placement memos, drafts, reserves, 293 Cross-border tax-advantaged secu- 256 score, 85 ritization, 9 Debt service coverage ratio scores, calculation, 85 Cross collateralization, 111 (DSCR), 84 support, providing, 263 Cross default, 46 Debt-to-equity ratio, 222 Credit card receivable ABS, monthly Cross-support provision, 111 Defaulted reference entity, pay- payment rate, 92–93 Crown Castle Towers LLC out, 52 Credit card revenues, 12 cash flow analysis, 330–332 Default proability, reduction, 191

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Defaults, 90–93 Dual-indexed floaters, 201 usage. See Leases determination, 75 Dymond, Christopher, 18, 21–22 Eurodollar CD, 25 events, 115. See also ACG futures, 25 Trust III; CNH Equip- Earnings before interest, taxes, value, 25 ment Trust 2006-A depreciation, and amorti- European call option, fair price measures, 91–92 zation (EBITDA), 273 (computation), 42 probability. See Probability of Easements, 250 European option, 37 default EBITDA. See Earnings before European-type options, 42 rates, 150 interest, taxes, deprecia- Excess cash, investment, 160 rates, 80 tion, and amortization Excess spread, 87, 128. See also risk, levels, 81 Economic capital relief, 77 CNH Equipment Trust Default swaps. See Basket default Economic efficiency, 108 2006-A swaps; Credit default swaps; Economic goals, 262 accounts, 112 Nth-to-default swaps Economic life, 227 self-insurance, 112 riskiness, comparison, 53–54 Economic losses, coverage, 292 Exchange-rate instrument, 289 Deleveraged floaters, 200 Economic obsolescence, 215 Exchange-traded options, OTC Delinquencies, 90–93 Effective date, 30 options (contrast), 39–40 measures, 90–91 Emerging economies Exercise price, 37 test, 113 municipal future-flow bonds, Exotic options, 39 Delinquent loan, 90 applicability, 317–319 Expected initial annual excess Deliverable basket, 26 Emerging economies, lessons, 309 spread. See CNH Equip- Deliverable obligations, 49–50 Emerging Issues Task Force (EITF) ment Trust 2006-A Delivery date, 23 Issue 90-15, 280 Expected loss (EL), 291. See also Depletion deductions, 283 Issues 04-7, 281 Unexpected loss Depreciation Emerging market-backed CDOs, 119 calculation, 302 deductions, 227, 283 Emerging market bonds, 119 Expiration date, 37 schedule, 227 Emperica model, 85 Export credit agencies (ECAs), 273 Deregulation, 284 Energy trading business, skepti- Exposure-at-default (EAD), 292 Derivatives. See Interest rate cism (increase), 16 Extendible bond, grant ability, 193 market, categorization, 5 Engineering phase. See Project Extendible swap, 35 Derivative securities, categoriza- financing External credit enhancements, tion, 6 Enhance Re, 106 105–106 Derivative-type payoffs, 195 Enron DeSear, Edward, 4 bankruptcy protection, 18–19 Fabozzi, Frank J., 4, 48, 95, Development Bank of Singapore impact. See Project finance 127, 239, 254, 260, 262, (DBS), 152–154 case study. See Structured 264–265, 277, 282 Development bonds, role. See finance Facility leases, 218, 249–253 South Africa Equipment Facility support agreements, 250 Dill, David A., 225 disposal, 214–215 purpose, 249 Direct cash flows. See Leasing risk, 214 Failure to pay, 46 assumption, 229 leases, types, 208–211 Fair Isaacs model, 85 Direct leases, 237 leveraged leases, 210, 238 Federal Deposit Insurance Cor- Direct paper, 157 portability, inability, 249 poration (FDIC), 290 Disclosure, increase, 20–21 tax-oriented leasing, 216 Federal Energy Regulatory Com- Discount rate. See CNH Equip- Equity mission (FERC), 21 ment Trust 2006-A commitment letter, 256 Federal Home Loan Bank (FHLB), adjustment, 229, 233 contributions, payment, 251 194 usage, 225 cycle, 135 System, 203 assumption, 226 lists, preparation, 256 Federal income tax requirements. increase, 226 piece, retention, 138 See True lease transactions usage. See Capital placement memos, prepara- Federal National Mortgage Asso- Distribution waterfall, 104 tion, 256 ciation (FNMA), 175 Diversity score value. See Collat- tranches, 127 Federal Reserve Bank of Chi- eralized debt obligations Equity-linked structured notes, cago, report, 194 Dividends-received credits, 283 204–206 Feldman, Roger, 16–19, 21 Dollar-based PPAs, 271 Equity participants FERC. See Federal Energy Regu- Dollar LIBOR, 25 benefit, 240 latory Commission Dollar net interest, present value, 74 credit exposure, 253 FGIC. See Financial Guaranty Dollar net interest spread, receipt impact. See Owner trust Insurance Corporation (assumption), 74 involvement, 239–240 FHLB. See Federal Home Loan Domestic leasing companies, 248 loan participants, conflicts of Bank Drax, UK (market risk; high interest, 242 Fiberoptic Link Around the Globe leverage/purchase price), Equivalent loans, 229 (FLAG) (market risk; high 268–269 concept, 231–233 leverage), 273–274

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FICO scores, 85 FLAG. See Fiberoptic Link Around Futures Fifth-to-default swap, 54 the Globe contracts, 23–26 Financial Accounting Standards Flexible Treasury futures options, 40 classification. See Interest rate Board (FASB) Floating cash flow, definition, 10 options, 40 Interpretation (FIN), 46 Floating LIBOR-based rate, 55 price, 24 Statement No. 13, 213, 218 Floating-rate bond, 29 usage, 219 Floating-rate bondholders, 127 Gainor, Edward, 4 Financial Accounting Standards Floating-rate cash flows, 95–96 Gallogy, Brian P., 4 (FAS) No. 13, 220, 222 Floating-rate payer, 60 GE Commercial Equipment Financ- Financial advisers, 217 Floors, 43–44. See also CIT Equip- ing LLC, Series 2003-1, 99 cost effectiveness, 254–255 ment Collateral 2006-VT1 Geertsema, Paul, 4 necessity, 254–256 Ford Motor Credit Company, 156 Generally accepted accounting Financial Guaranty Insurance Foreign banks, 248 principles (GAAP), 19, 72 Corporation (FGIC), 106 Foreign tax credits, 283 disclosures, 281 Financial innovation, 285 Forrester, J. Paul, 4, 282, 303 guidance, 279 Financial insolvency. See Govern- Forward contracts, 23. See also General Motors Acceptance Cor- ment Interest rate poration, 156 Financial institutions, balance sheet package, 28 Generic synthetic CDO structure, risk, 65 Forward price, 24 136 Financial instruments, inclusion, 10 Forward-start swap, 30 German Bunds (Pfandbriefe), 145 Financial reporting. See Leases Fowkes, David, 224 series, 175 purposes, earnings (accelera- Franks, Julian R., 229 Gold, Barry, 17, 20 tion), 72–76 Free cash flow Gold, Barry P., 4 Financial Security Assurance (FSA), recurrence, 16 Golden Claw 106 sources, 18–19 costs, 173 Financial structures, complexity, 18 Free excess spread, 87 funding, 172 Financing Full payout leases, operating Goodman, Laurie S., 127 agreement, 245 leases (contrast), 211 Goodwill, absence, 288 providing, method, 10 Full-payout-type leases, 216 Government transaction, 5 Fully funded ABS, 11 financial insolvency, 266 First-loss capital piece, retention, Fully funded CDO, 145 financing, 248 78–79 structures, 134 guarantor, 242 First-loss piece, 136 Fully funded debt-service reserves, interference, 266 retention, 77 285 Government National Mortgage First loss position, 59 Fully funded MBS, 11 Association (GNMA), 175 First-to-default basket swap, 52 Fully funded synthetic balance Government-obligation ratings. First-to-default CLN (FtD CLN), sheet CDO structure, 145 See Mexico 190–192 Fully funded synthetic CDO, 190 Griffiths, Jeffrey J., 4 structure, 192 Fully synthetic CDO, 146 Gross WAC, 86 synthetic credit entity creation, unfunded structure, 141 Gross weighted average contract 192 Fully unfunded CDO, 145–146 rate, 86 First-to-default swap, 54 Funded synthetic MBS, 299–301. Grow, Brian D., 95 Fishbeck, Paul S., 215 See also Partially funded Guarantee, issuance, 106 FitchRatings, 79 synthetic MBS; Unfunded Guaranteed investment contract Fixed-income asset, price, 62 synthetic MBS (GIC), 174 , 195 Funded TRS contracts, usage, 175 account, 299 Fixed-income instrument, 41 Funding usage, 152 Fixed-income security, 42 costs, reduction, 32 European market definition, 299 Fixed interest payments, 30 potential, 70–72 Guarantors, 239. See also Gov- Fixed-rate bonds, ownership, 56 leg, 60 ernment Fixed-rate credit-risky bond, 54 mechanics. See Synthetic CDOs involvement, 242 Fixed-rate financing, 34 mix, diversification, 76 Guideline lease, 209 Fixed-rate interest, 31 obtaining, 76 Guidera, James, 21 Fixed-rate investors, 35 sources, diversification, 72 Fixed-rate mortgages, 110 structures. See Securitized Hedge fund interests, 164 Fixed-rate payer, 27 funding structures; Syn- Hell or high water clause, 245 terms, 31 thetic funding structures Hieber Machine Shop Company, Fixed-rate receiver, 27–28 TRS trade, 166–167 226–232, 234 terms, 31 usage, 76–77 High-risk lending, 264 Fixed-rate renewal Future-flow credit card securities, 7 High-yield bond offering, 276 lease terms, 249 Future-flow financings, ratings. High-yield corporate bonds, 119 terms, 249 See Mexico bond defaults, 127 Fixed-rate security, creation. See Future-flow securitization, 310– sector, 63 Synthetic fixed-rate security 311 Hodges, Stewart D., 229

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Honda Auto Receivables 2006-1 volatility, 286 usage. See Mortgage-backed Owner Trust, 339–343 Interest rate swaps, 26–36, 95– securities Hostalier, Katie, 297, 301 98. See also Nongeneric Investment bank, losses, 176 Hybrid capital instruments, 288 interest rate swaps Investment characteristics, 69 Hybrid instruments, 181–182 agreement. See Collateralized Investment companies, positions debt obligations (holding), 177 Ijarah principle, 8 application, 32–35 Investment-grade corporate bonds, Illiquid assets, reorganization, 8–9 comparison. See Total return 119 Implied repo rate, 26 swaps Investors Income distribution, 123 diagram, 27 location. See Debt mechanism contract, 268 market quotes, 30–32 motivation. See Credit-linked Indemnities. See Lessees perspective, 28 notes; Structured notes Indenture trustees terminology/conventions, 30–32 reports, 123 debt service, 251 terms, 33 risks. See Synthetic transactions duties, assumption, 242 usage, 200. See also Inverse securitization, benefits, 79 funds, receipt, 241 floaters structured asset swap, 55–56 involvement, 241–242 Interest swaps, structuring, 127 Issuer Independent power projects (IPPs), Interim lease term, 251 cash flow, 66 271 Intermediate-term preferred stock, credit-related performance, 183 Indexed inverse floater, 203 288 Istina (future assets), 8 Index swaps, 45 Internal assessment approach, 295 Industry trends, 116 Internal credit enhancements, Japanese equities, U.S. investor Infrastructure requirements, 284 105, 107–112 exposure (desire), 196 Initial credit enhancement. See Internal rate of return (IRR) pro- Japanese stock market index, CIT Equipment Collat- gram, usage, 234 payoff (linkage), 196 eral 2006-VT1 Internal ratings based (IRB) Jobst, Andreas, 4 Initial public offering (IPO), 269 approach, 290, 292–294 Jointly owned projects, reasons, 262 Institutional investors, 69, 248 Internal ratings based (IRB) borrowing, 210 banks, 295–296 Kahn, Nasir, 224 inclusion, 278 Internal ratings based (IRB) for- KeyCorp Student Loan Trust interest rates, facing, 196 mula, calculation, 292 2003-A, 97–98 needs, 279 Internal ratings based (IRB) Kotecha, Mahesh K., 106 Insurance, 285 framework, 291 Kravitt, Jason, 4 risk, 261 Internal return objectives, meet- Insurance wraps, 128 ing. See Project financing Large ticket leasing, 207 Inter-company loans, 178–179 Internal Revenue Code (IRC) Leased facility, title (conveyance), Interest guidelines, 208–209 251 allocation. See CNH Equip- requirements, 222 Leases. See Conditional sale ment Trust 2006-A Internal Revenue Service (IRS) leases; Facility leases; deductions, 283 adverse ruling, 224 Leveraged leases; Nontax- floating rate, 247 leasing transaction, knowl- oriented leases; Synthetic payment, 33 edge, 209–210 leases; Tax-oriented true Interest coverage (IC) Revenue Rulings, 223 leases ratio, 130–131 rules, 242 accounting. See Capital; Oper- tests, 130–131 Section 467 limitations, 247 ating leases trigger, 131 tax requirements, 238 agreements, 215 Interest-only spread, 73 true-lease requirements, 251 signing, 242, 250 Interest-only strip, value, 75 International Swap and Deriva- alternatives, comparison, 233– Interest rate tives Association (ISDA), 234 caps, 102–103 45–46 brokers, 217 corridors, 102–103 1999 ISDA Credit Derivatives capitalization, 218 derivatives, 23, 98 Definitions, 46 avoidance, 213–214 proceeds, 99–100 Restructuring Supplement, 47 cash flows, 246–247 usage. See Securitization 2003 ISDA classification, 219 environment, 196 Definitions, 47 commencement, 244, 251 forward contracts, 23–24 agreement, 155 commitments, 221 futures contracts, classifica- Credit Derivatives Definitions, contrast. See Full payout leases; tion, 24–25 description, 140–141 Single-investor leases level, usage, 10 Internet service providers (ISPs), equivalent loans, 231 options. See Over-the-counter 273 usage, 232 interest rate options Intrinsic value, 40 expenses, 220 risk, 14 Inverse floaters, 201–204 financing, side effects, 225 structured notes, 199–204 creation process, interest rate losses, allowances, 288 variation, 264 swaps (usage), 203–204 NPV, 230, 234

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Leases (Cont.) closing costs, 238 Long futures position, 24 obligations, 219–220 contrast. See Single-investor Long put position, 38 payments, 220 leases Long-term contract, 278 minimum, 221 debt, 247–249 Long-term financing, 217 programs, 217–218 documents, 245–246 Long-term take-out financing, 264 qualifications, 223 financing, critical path chart, 258 Loss absorption, 288 receivables, securitization, 237 flowchart, 244, 250 Loss-given-default (LGD), 292 transactions fundamentals, 237 Loss rate, 81 lessee financial reporting, leverage, 211 Loss severity 218–222 parties, involvement, 239–242 measures, 92 residual value, 225 structure, 243–245 rate, 82 types. See Equipment structuring/negotiating/clos- Lower-cost funding, 157 valuation, 225–235 ing, steps, 256–258 LTV. See Loan-to-value approach, alternative, 234–235 transaction, 242 Lucas, Douglas, 4, 127 worksheet, 231 closing, 245–246 value, 230 true lease status, 210, 238 Maharastra State Electricity Board Leasing LIFFE. See London International (MSEB), 269–270 arrangement, 233 Financial Futures Exchange Managed static synthetic CDO, 143 description, 222 Limited-use property, 249 Managed synthetic CDO, 141 cost, factor, 212 Lindenberg, Jonathan, 16–18 Managed variable synthetic CDO, direct cash flow, 225–229, 233 Liquidation 143 valuation, 229–231 proceeds, 109 Management, restrictions. See worksheet, 228 rate, 92 Leasing fundamentals, 207 Liquidity Mandatory convertible debt secu- impact. See Book earnings; facility, 302 rities, 288 Cash flow fortification, 16 Manufacturers, involvement, 242 industry, growth, 217 provider, 161, 302 Manufacturers suggested retail management, restrictions, 215– support. See Asset-backed CP price (MSRP), 84 216 Loans Margin requirements, 37 process, explanation, 207–208 agreement provision, 112 Marked-to-market, 24 reasons, 211–216 concentrations, 81 Market risk, 261 Leigland, James, 309 concept. See Equivalent loans impact. See Project financing Lenders, involvement, 240 losses, allowances, 288 Market value, equilibrium (maxi- Lessees, 207 originator, 68 mization), 225 analysis. See ACG Trust III participants Market value CDO, 120 financial adviser, equity loca- conflicts of interest. See Mark-to-market, 56 tion, 254 Equity participants value, 289 indemnities, 246 involvement, 240 Master lease, 217–218 involvement, 239 payments, determination, 231 Maturity lease payments, 226 proceeds, payment, 251 date, shortening, 193 Lessors risk weight, 294 mismatches, reduction, 76 economic result, achievement, true sale, 161 profile factor. See Structured 238 usage. See Nonperforming loans notes right, 241 Loan-to-value (LTV) ratio, 83–84 structure, terms, 12–13 at risk situation, 242 Local currency financing, 286 McCann, Karen, 194 SPE, 280 Lockout period, 83 McIsaac, Glenn, 17 tax benefits, 211 London Interbank Offered Rate Medium-term note (MTN), 160, 197 type, 216 (LIBOR). See Dollar LIBOR; difference, 197–198 Letter of credit (LOC), 106. See Straight LIBOR distribution, 198 also Commercial letter of fixed spread, 299 program, usage, 198 credit; Standby letter of LIBOR-based funding, 163 usage, 174 credit access, 158 Meiou Wan (counterparty risk; issuance. See Banks LIBOR-based rate. See Float- political risk), 272–273 paper, 156 ing LIBOR-based rate Mexico. See Municipal future- usage, 160 LIBOR-flat funding, 163 flow bonds Leverage, impact. See Project payment, 96 applicability, 311–312 financing positive spread, 139 financial crisis, 309–310 Leveraged debt prime bank rate, 27 future-flow financings, ratings, forgiveness, 253 repo market, difference, 139 314 private placement, arrange- usage, 55 future-flow model, variations, ment, 255 London International Financial 315–316 Leveraged floaters, 200. See also Futures Exchange (LIFFE), 25 government-obligation ratings, Deleveraged floaters Long call position, 38 314 Leveraged leases Long-dated assets, usage, 160 issues, 314

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Index 381

Meyers, Stewart, 229 national government, role, 319 SPV issuance, 77 Mezzanine compliance tests, fail- over-borrowing, 316 Notional amount, 27. See also ure, 123 stakeholder scrutiny, absence, Swaps Mezzanine notes, 136 316–317 calculation, 43–44, 48 Modified Accelerated Cost Recov- transaction costs, 316 Notional coupon, 25 ery System (MACRS), 237 Murabahah (existing assets), 8 Nth reference entity, payout, 52 MACRS-accelerated deprecia- MVL Film Finance LLC Nth-to-default swaps, 51–52 tion deductions, 253 company background, 336 tax benefits, 238 film slate, 336 Obligation acceleration, 46 tax depreciation, 251 opinion, 335 Obsolescence. See Economic deductions, 240, 253 quantitative analysis, 337 obsolescence; Technologi- Modified modified restructuring, 48 rating summary, 336–337 cal obsolescence Monetary obligations, payment, structured finance, new issue risk, 214–215 250 report, 335 OECD bank Money, borrowing (after-tax cost), structure summary, 338 counterparty status, 135 234 transaction structure, 336–337 requirement, 149 Monthly payment rate (MPR), Myers, Stewart C., 225, 230 risk arrangement, 147 92–93. See also Credit swaps card receivable ABS National Irrigation Administra- counterparty status, 143 Moody’s Investor Service, 3, 79 tion (NIA), 276 setup, 143 report, 91 Nationally Recognized Statisti- OECD countries, 288 Morel, Raymond, 95 cal Rating Organization Off-balance-sheet Mortgage-backed securities (NRSRO), 295 financing, 218 (MBSs). See Commercial Net excess spread, 87 instruments, 287 MBS: Partially funded Net interest margin (NIM), 103 items, 289 synthetic MBS; Fully securities, 112 leases, 224–225 funded MBS; Funded syn- Net interest spread, 73 term, usage, 22 thetic MBS; Unfunded Net lease, 208. See also Triple- treatment, 17, 224 synthetic MBS net lease Office of the Comptroller of the case study, 297 Net loss trigger. See CIT Equip- Currency (OCC), 290 deals. See Residential MBS ment Collateral 2006-VT1 Office of Thrift Supervision deal structures, 298–301 Net operating income (NOI), 84 (OTS), 90, 290 investor considerations, 301–302 Net present value (NPV), 226. Offshore lease, 218 market, inverse floaters (usage), See also Leases Offshore SPV, CP issuance, 176 202 lease valuation model, 235 Offshore synthetic funding products, 151 Net WAC, 87 structures, 173–176 transaction, description, 297–298 rate, 112 vehicle, 174–175 usage, 140 Nevitt, Peter K., 239, 254, 260, Offtaker failure, 266 Mortgage Bankers Association 262, 264–265, 277, 282 On-balance-sheet financing, 16 (MBA), 90 New Electricity Trading Arrange- Operating costs, payment, 263 Mortgage deals, interest mecha- ments (NETA), 268 Operating leases nism (shift), 109–111 New issue report. See MVL Film accounting, 219–220 Multicurrency financing, 248 Finance LLC contrast. See Full payout Multiple step-up note, 200 Noncapital startup expenses, 283 leases Multi-SPV synthetic conduit fund- Non-financial companies, 156 Operating liabilities, 13 ing structure, 175–176 Nongeneric interest rate swaps, Operating risk, 261 Municipal Bond Insurance Asso- 35–36 impact. See Project financing ciation (MBIA), 106 Nonleveraged leases, 237 Operations review. See CIT Equip- Municipal bond issues. See Mexico Nonperforming loans, usage, 302 ment Collateral 2006-VT1 Municipal bond markets, basics, Nonrecourse, term (usage), 22 OPIC, 270 319–320 Nonrecourse entity, 18 Options, 36–43 Municipal future-flow bonds. See Nontax-oriented leases, 208– contrast. See Exchange-traded South Africa 209, 212 options Municipal future-flow bonds Nontax-oriented true leases, tax- intrinsic value, 40 (Mexico), 309 oriented true leases (con- premium, 37 applicability. See Emerging trast), 222 price, 37 economies North American Investment Grade risk/return characteristics, 38–39 conclusions, 319–320 Index, 50 time to expiration, 41 costs/risks, 316–317 Notes time value, 41 enhancement costs, 316 benchmarking, 114 valuation, 40–42 funds, flow, 313 futures. See U.S. Treasury notes Options on physicals. See Physi- local government, role, 319 futures cals model, variations, 315–316 interest, fees, 141 Originating banks, balance sheet moral hazard, 316–317 issuance, 244 impact, 76 Index Page 382 Thursday, August 24, 2006 3:02 PM

382 Index

Originator. See Loans coverage, 285 currency risk, impact, 271– losses, 176 impact. See Project financing 272, 273 Overcollateralization (OC), 107, Pool-specific credit enhancement, definition, 260–262 111–112, 128 160 disincentives, 283–284 ratio, 129–130 facility, size, 160 elements, 264–265 tests, 129–130 Portfolio engineering phase, 263 trigger, 130 administrator, 128 failures, causes, 265–276 usage, 160 assets, final period, 122 internal return objectives, Over-the-counter (OTC) interest CDOs, 45 meeting, 282 rate options, 42–43 holdings, 196 leverage, impact, 268–269, Over-the-counter (OTC) options size, 148 273–274 contrast. See Exchange-traded Power purchase agreement (PPA), market risk, impact, 266–272, options 269–270. See also Dollar- 273–274 market, 39, 42–43 based PPAs operating risk, impact, 274 Over-the-road vehicles, tax-ori- Prefunding account. See CNH operations, specifications, 263 ented TRAC lease (usage), Equipment Trust 2006-A political risk, impact, 269– 208 Prepayment, 73, 83 273, 275–276 Owner agent, trust indenture/ measures, 87–90 purchase price, impact, 268– mortgage, 250 rate, 87 269, 273 Owner trustees speed, 87 risk periods, lenders (impact), duties, assumption, 242 Pre-sale report. See Crown Castle 264 involvement, 240–241 Towers LLC risk phases, 263 Owner trust (establishment), equity Pretax monthly income, 84 startup phase, 263 participant (impact), 244 Pretax residual, estimation, 227 tax considerations, 283 Price-volatility characteristics, 69 trends, 284–288 Pacific Gas & Electric, bankruptcy, Primary beneficiary (PB), 280–281 usage, 282 16 Prime credit, 85 Project operating expenses, 278 Packagers, involvement, 242 Principal amortization period, 83 Prospectus supplement, 96–97 Paiton Energy (market risk; coun- Principal cash flow, distribution, Protection buyer, 48 terparty risk; currency risk; 123 payment, 49 political risk), 271–272 Principal loss test, 113 Public debt markets, 248 Pan-European synthetic CMBS Principal repayment date, sched- Public financial arrangements, 9 generic structure, 300 uling, 73 Purchase Company (PC), 165 Par asset swap, 56 Private financial arrangements, 9 Purchase price Park Place Securities, Inc., Asset- Privatization, 284 impact. See Project financing Backed Pass Through Probability of default (PD), 291, payment, 244 Certificates, Series 2004- 292 Putable bonds, 193 WCW2, 102–103 Proceeds, usage, 98–102 Putable swap, 35 Partially funded CDO, 141–142 Profit-sharing plans, 247 Partially funded structure, 134 Program-wide credit enhance- Qualifying noncumulative perpet- Partially funded structured finance ment, 160 ual preferred stock, 288 transactions, usage, 11 Project debt, liability, 277 Quality tests, 128–129 Partially funded synthetic CDO Projected cash flows, probability structure, 144 adjustment, 226 Ramp-up period, 122, 149 Partially funded synthetic MBS, Project finance, 259. See also RAM Re, 106 301 Structured project finance Range notes, 201 Participation agreement, 245, 251 corporate finance, blending, Rating asset-backed securities, execution, 250 285 rating agencies assess- Partnership and agency agree- credit ratings, 278 ment, 79–82 ment, execution, 250 Enron, impact, 16–17 Rating factors, 129 test, 130 Project financing, 259 Ratings-based approach, 295 Payment-to-income (PTI) ratio, 84 accounting considerations, Rating trigger, 104 Payment waterfall. See CNH 279–282 Real estate investment trust (REIT) Equipment Trust 2006-A benefits, 282–283 debt, 119 Peng, Scott Y., 195 challenge, 261 Real estate leases, 159 Pension plans, 247 construction Recovery costs, 302 Perpetual preferred stock, 288 phase, 263 Recovery rates, 151 Personal risk sensitivity, 14 risk, impact, 276 Recovery value, 183 Pfandbriefe. See German Bunds counterparty risk, impact, Redemption date, extension, 193 Physicals, options, 39–40 271–273, 275–276 Reference assets, 57, 133 Physical settlement, 183, 191 credit exposures, 262–264 basket, 190 Plain vanilla financial transaction, credit impact objective, 277– credit exposure, diversifica- 6 279 tion, 192 Political risk Index Page 383 Thursday, August 24, 2006 3:02 PM

Index 383

Reference assets (Cont.) Revolving structures, contrast. Segment overview/originations. credit derivative contract pro- See Amortizing structures See CIT Equipment Col- tection, 136 Risk. See Counterparty; Interest lateral 2006-VT1 credit performance, 140 rate Self-supporting project financ- mix, 192 management, 78–79 ings, 261 ownership, 59 partitioning, 9 Seller, 36–37, 42. See also Swaps Referenced notes phases. See Project financing quality, 80, 81 purchase, 172 tolerance, increase/decrease, Senior basket default swaps, 53, TRS funding structures, com- 284–285 54 bination, 177–179 transfer, 5 Senior bond classes, 69 Reference entity, 53 weighting, determination, 294 cash flow characteristics, 111 bond issue, 49 Risk-based capital requirements, Senior compliance tests, failure, credit rating, 186 106 123 obligation, 46 Risk/return customization factor, Senior interest, 110 Reference interest rate, 202 199 Senior percentage, definition, 109– Reference portfolio, 136 Risk/reward profile, 148 110 Reference rate, 27, 43 Risk-weighted assets, 143 Senior prepayment percentage, 110 basis, 95–96 assumption, 78 Senior/subordinate bond classes, Regional Electricity Companies value, 288 112 (RECs), 268 Risk-weighted reference portfo- Senior-subordinated structure, Regulatory capital, 287 lio, 145 108–111 relief, 77 Rode, David C., 215 usage, 109–111 Regulatory issues, 116. See also Russian default (1998), 285 Senior-subordinate structure, 69–70 Structured finance Senior tranches, 123 Regulatory risk, 261 Sale-and-leaseback transactions, 218 Sequential trigger levels. See CIT Reinvestment period, 122–123 Scaling factor, application, 291 Equipment Collateral 2006- Remarketing agent evaluation. Scholes, Myron, 42 VT1 See ACG Trust III Secondary market, liquidity, 77 Service debt, 263 Rental payments, 247 Second-to-default basket swap, 52 Servicer, quality, 80, 81 balance, 246 Second-to-default swap, 52 Servicing. See CIT Equipment Rent obligations, payment, 250 Secured loans, lessee issuance, 229 Collateral 2006-VT1 Repackaging structures, 119 Securities and Exchange Com- fee, 73, 141 Repudiation/moratorium, 46 mission (SEC) involvement, 68 Research and development tax registration, 156 Setting date, 30 deductions, 283 Rule 144a, 278 Settlement, 23. See also Credit- Reserve account step-down trig- ruling, 278 linked notes ger. See CNH Equipment Securitization, 13–14, 284. See period, 43 Trust 2006-A also Basel II; Synthetic process, 183 Reserve funds, 112–113 securitization Shifting interest structure, 109 Reset date, 30 banks, motivation, 76–79 Short call position, 38 Residential MBS (RMBS), 9, Basel II, impact, 293–296 Short futures, 24 119, 297 benefits. See Investors Short position, 24 deal, 124 entity reasons. See Assets Short put position, 38–39 Residential mortgage loans, 100 history/performance. See CIT Short-term lending, 264 Residual value, 209, 211 Equipment Collateral 2006- Short-term risk-free interest rate, 41 guarantee, 220 VT1 Silver, Andrew A., 4 Restructuring illustration, 67–70 definition. See Structured finance controversy, 47 detail, 113–117 Simulation modeling, 151 occurrence, 46–47 market, 294 Single-investor leases, leveraged Retractable bond, granting abil- principles, 65 leases (contrast), 210–211 ity, 193 process, 70 Single-investor lessor, impact, 237 Return on equity (ROE) structure, 69, 95 Single-investor nonleveraged leases, improvement, 78 techniques, usage, 10 238 increase, 76 transactions, interest rate deriv- Single monthly mortality (SMM) ratios, 158 atives (usage), 95–104 rate, 88–90 Revenue Securitized assets, 66 calculation, 88 guarantees, 285 Securitized exposures, balance Single-name CDS, 48, 50–51 payment, 244 sheet treatment, 11 Single reference name Revenue Procedure 75-21 Securitized funding structures, 155 CLN, 190 controversy, 242 Securitized transaction, definition, credit default swap, 190 useful life tests, 249 66–67 Single step-up notes, 200 Revenue Ruling 55-540, 222–223 Security agreement, signing, 244 Single tranche, issuance, 148 Reverse inquiry, 197 Security interests, 19 Single-tranche synthetic CDO, Revolving period, 122 147–148 Index Page 384 Thursday, August 24, 2006 3:02 PM

384 Index

Single trustees, assumption, 242 Strike rate, 36 Super-secured creditor, 14 South Africa, municipal future- Structured Asset Investment Loan Super-senior CDS, 301 flow bonds, 317–319 Trust Mortgage Pass- Super-senior credit swap cost, 135 credit ratings, 318 Through Certificates, Series Super-senior swap, 134 development bonds, role, 318– 2005-4 issue, 100–101 Super senior tranche, 152 319 Structured credit product, 120 Supervisory-formula approach, 295 legal framework, 318 Structured finance Supplementary capital, 288 revenue, 318 asset-backed presale report. Supplier financing, 248 Sovereign risk, 265 See CIT Equipment Col- Surety bond, 160 Spark spread, 285 lateral 2006-VT1; CNH Swaps. See Interest rate swaps Special purpose entity (SPE), 9, Equipment Trust 2006-A buyer, 58 14, 18, 279 benefits, 12–13 interpretation, 26–30 Special purpose vehicle (SPV), 2 BIS definition, 2 notional amount, 30 assets, 75–76 borderline cases, 6–8 payments, timing, 55 exposure, 95 boundaries, 6–8 premium, 49 form, 190 expansion, 7 seller, 58 involvement, 298 boundaries, Enron (impact, tenor, aggregate payout, 52 issuance, 158 case study), 15–22 type, 27 issuer, 299 background, 16 Swaptions, 36 reference, 68 company responses, 20 usage. See Asset swaps securities, issuance, 100 lessons, 21–22 Synthetic ABCP conduit, 165–173 transference, 114 regulatory issues, 21 hypothetical deal, 172 true sale, 136 conceptual definitions, 5, 8–9 Synthetic arbitrage CDO struc- usage, 259 definition, 1–2 ture, 142 Sponsored projects, reasons, 262 alternatives, 2–15 Synthetic CDOs, 45, 120. See also Sponsoring entities, creditworthi- broadening, arguments, 15 Fully synthetic CDO; Single- ness, 260 instruments/techniques, usage, tranche synthetic CDO Sponsor motivation. See Collat- 9–12 delinking, 134 eralized debt obligations legal/ethical boundaries, 15–16 funding mechanics, 138–140 Spot power prices, decrease, 16 new issue report. See MVL mechanics, 136–138 Squeeze, term (usage), 26 Film Finance LLC case study, 153–154 St. Louis Cardinals pre-sale report. See Crown motivations, 134–135 final structure, transaction, 304 Castle Towers LLC structures, 133. See also Fully lease structure, transaction, 306 Silver definition, 3–4 funded synthetic balance securitization, 305 success, 15 sheet CDO structure; Par- stadium financing, 303–308 survey questions, 4–5 tially funded synthetic CDO Standard lease, 217 usage, timing/location, 12 structure Standard & Poor’s 500 (S&P500), Structured finance-backed CDOs, case study, 151–154 206 119 flowchart, 137 stock market index, 204 Structured investment vehicle tranching, case study, 153 Standard & Poor’s (S&P), 79 (SIV), 159–160 variations, 141–147 portfolio, 278 Structured notes, 193. See also Synthetic fixed-rate security, cre- requirement, 129 Equity-linked structured ation, 32–35 Standby letter of credit, 106 notes; Interest rate struc- Synthetic floating-rate bonds, 55 Startup phase. See Project financ- tured notes Synthetic floating-rate security, ing creation, 198–199 creation, 32–35 Static pool definition, 194–196 Synthetic funding structures, 155, information, 82 examples, 199–206 162–179. See also Offshore review. See CIT Equipment Col- instrument, form, 198 synthetic funding structures lateral 2006-VT1; CNH investor motivation, 196–197 Synthetic leases, 224–225 Equipment Trust 2006-A issuance form, 197–198 Synthetic MBS, 297. See also term, usage, 82 issuers, 197–198 Funded synthetic MBS; Par- Static synthetic balance sheet maturity profile factor, 198 tially funded synthetic MBS; CDOs, 146 rules busters, 196 Unfunded synthetic MBS Stein, Craig, 143 Structured project finance, 17–18 deals, 301 Step-down provisions, 112 Student Loan Marketing Associ- generic structure, 300 Step-up notes, 200–201 ation, 200–201 market, 298 Straight LIBOR, 59 Sub-LIBOR payment, 135 Synthetic securitization, 65, 297 Stress scenarios, results. See CIT Subordinate basket default swaps, deal structures, 298–301 Equipment Collateral 52–53, 54 investor considerations, 301–302 2006-VT1; CNH Equip- Subordinate bond classes, 69 structure, 133 ment Trust 2006-A Subordinate/equity tranche, 126 transaction, description, 297–298 Stress testing, 82 Subordinate interest, 109 Synthetic structures, advantages, Strike price, 37, 41, 43 Subordination, level, 109 149–150 Index Page 385 Thursday, August 24, 2006 3:02 PM

Index 385

Synthetic transactions, 5, 149 approach, 164 Unfunded TRS, 57 investor risks, 140–141 basket value, 170–171 Universal Information Technology counterparty, 164 (UIT) Company, 204–206 Take-and-pay contract, 278 diagram, 59 U.S. dollar-denominated bonds, Take-or-pay contract, 278 drawback, 60 U.S. investor purchase, 196 Take-or-pay contracts, 277 economics, 58–63 U.S. Federal Reserve Board of Take-out financing. See Long- funding structures, combina- Governors, 290 term take-out financing tion. See Referenced notes U.S. Treasury bonds, 136 Tan, Madeleine M.L., 4 illustration, 61–62 futures, 25–26 Tavakoli, Janet, 4 interest rate swaps, compari- contracts, trading. See Chi- Tax considerations. See Project son, 60–61 cago Board of Trade financing reset date, 168–169 U.S. Treasury issue, delivery Tax credit, usage, 226 structure, 177 (consideration), 50 Tax indemnities, 246 trade, funding, 165 U.S. Treasury notes futures, 25–26 Tax law usage, 60, 136 Useful life (deterioration), 215 changes, tax indemnification, Toyota Auto Receivables 2003-B test, 251 253–254 Owner Trust, 96 risk, definition, 254 Trade date, 30 Van Gorp, Jon, 4 Tax-loss-carryforward position, 212 Tranches, 68. See also Equity Variable fee structure, 14 Tax-oriented lease, 212 ratings, 146 Variable interest entity (VIE), Tax-oriented leasing, economics Transaction 280–282 (understanding), 243 closure, 111 Vendor lease, 218 Tax-oriented TRAC lease, usage. costs, 149 Vrensen, Hans, 4 See Over-the-road vehicles sizing, 107 Tax-oriented true leases, 209–211 Transparency, increase, 20–21 Wadden, William M., 91 Tax-rate change, risk, 254 Treasury bonds. See U.S. Trea- WAM. See Weighted average matu- Technological obsolescence, 215 sury bonds rity Telecom bonds, 55 Treasury notes. See U.S. Treasury Waterfall, 107, 123. See also Cash ownership, 56 notes flow Telpner, Joel S., 195 Triggering event, 299 order, paydown, 116 Termination value, 49 Triggers, 112–113 Waterson, David, 143 TermoEmcali (counterparty risk; levels. See CIT Equipment Weather-related securities, 7 political risk), 275 Collateral 2006-VT1 Weighted average contract rate, Term , 288 term, meaning, 112 85–87 Third-party agent, 301 Triple-net lease, 208 Weighted average cost of capital Third-party calculations, 183 True lease transactions, federal (WACC), 226 Third-party contractor, 252 income tax requirements, usage, 230 Third-party credit support, 66 222–224 Weighted-average coupon, 128 Third-party equity participant, True sale, 14 Weighted average coupon (WAC). 244–245 True-sale asset swap, 57 See Gross WAC; Net WAC Third-party guarantees, 66 True-sale issues, 149 Weighted average maturity (WAM), disadvantage, 105 Trust certificates, issuance, 244 87 Third-party leasing company, 218 Trustees Weighted-average rating, 128 Third-party rents, guarantees, 242 assumption. See Single trustees Weighted-average rating factor Third-party sponsor, 260–261 involvement. See Indenture (WARF), 129 Three-party transactions, 211 trustees Weighted-average spread, 128 Threshold, 53 reports, 123 Wholesale price, 84 amount, 154 Worenklein, Jacob, 20–21 Thym, Jennifer, 301 Uchill, Lawrence E., 4 Working capital Tier 1 capital, 288 Uncapped interest costs, 302 conservation, 212–213 elements, 293 Unconsolidated subsidiaries, equity requirements, 155 Tier 2 capital, 288 investment, 279 World Bank, criteria, 197 elements, 293 Underwriting. See CIT Equipment Writer, 36–37 Time horizon, 292 Collateral 2006-VT1 Time value, 40 process, information usage, 83– XL Capital Assurance, 106 Total contingent lease payments, 222 85 Total return bond index swap, 58 standards, 68 Yen assets, U.S. investor expo- Total return credit swaps, 58 Unexpected loss (UL), 291 sure (avoidance), 196 Total return index swaps, 58, 63 Unfunded CDO, 146 Yield maintenance agreement, 103 Total return payer, 58–59 structure, 134 , 138. See also Collat- Total return receiver, 58, 61 Unfunded CDS, 152 eralized debt obligations Total return swaps (TRSs), 45, Unfunded structured finance trans- 57–58. See also Basket actions, usage, 11 Ziser, Boris, 4 TRS; Unfunded TRS Unfunded synthetic MBS, 298–299 Index Page 386 Thursday, August 24, 2006 3:02 PM