CREDIT-DERIVATIVES AND SYNTHETIC-SECURITIZATION
For well over a decade, Morgan Stearns Corporation has made it possible for companies in emergent markets to seize the opportunity through Structured Finance.
A synthetic securitization or Hybrid Asset-Based Securities Program enables easier collateral selection and sourcing, and a more efficient liability funding cost,
A growing number of capital market investments are providing hybrid facilities that combine asset-based securities program (ABSP) with special purpose vehicles (SPV). These facilities, give capital market investors with safer choices in the market.
“The term “hybrid” refers to CDO assets being comprised of both ABS credit default swaps (CDS) and asset-backed securities (ABS) cash bonds.
These Hybrid facilities provide access to funding in a wider range of overseas jurisdictions. Also, have become a popular way for distressed companies with subsidiaries to find much needed capital during the credit crisis. Hybrid transactions combine revolving asset-based which can be collateralized with a range of assets, with SPVs.
The advantages of the hybrid ABS CDO structure are increased access to collateral, more diversified portfolios, shorter collateral ramp-up periods, diminishment of available funds cap risk, flexibility to switch from cash to synthetic assets to take advantage of negative or positive basis, and cheap super-senior credit protection.
- First, hybrid CDOs make CDS protection payments by drawing upon their reserve funds and super senior tranches.
- Second, during the reinvestment phase of a CDO, CDS amortization can be reinvested in new CDS or used to free up the reserve fund or the unfunded super-senior tranche to allow the purchase of cash ABS. During the CDO's amortization period, ABSPs amortization can be used to amortize the unfunded super-senior tranche or free up the reserve fund to amortize the CDO's cash liabilities.
- Third, cash asset amortization is first available for unpaid expenses and deferred interest on CDO liabilities.
- Fourth, during the reinvestment period, if cash amortization is not used to purchase new cash assets, it must first be used to pay down the funded super-senior tranche and then to increase the reserve fund.
In summary, with the use of HYBRID ABS CDOs, many well-earned enterprises, throughout emergent market, are given an opportunity for new life that would not have been possible otherwise.The purpose of packaging a company's securitized assets into SPVs is to protect investors in jurisdictions with weak insolvency rules. These new hybrid structures have four cash flow challenges faced by structurers of hybrid ABS CDOs.
CREDIT DERIVATIVES
The primary purpose of credit derivatives is to enable the efficient transfer and repackaging of credit risk. Credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the credit risk" or the risk of an event of default of a corporate or sovereign borrower, transferring it to an entity other than the investor. With the introduction of unfunded products, credit derivatives have for the first time separated the issue of funding. This has made the capial markets more accessible to those with high funding costs and made it cheaper to leverage credit risk.
Credit derivatives market has experienced considerable growth over the past five years. From almost nothing, total market notional now approaches $1 trillion, according to recent estimates. This rise has been spurred by the imperative for banks to better manage their risks, not least credit risks, and the appetite shown by institutional investors and hedge funds for innovative, high yielding structured investment products. As a result, growth in collateralized debt obligations and other second-generation products, such as credit indices, is currently phenomenal. It is enabled by the standardization and increased liquidity in credit default swaps – the building block of the credit derivatives market.
SYNTHETIC-SECURITIZATION
One of the great contributions of investment banking to global economic developments Realizing value from asset portfolios, diversifying investment opportunities, greater intermedation, and the list of advantages is very long…ABS, MBS, CDO. Capital Markets had developed a method by which it could focus on generating assets while at the same time getting these funded without capital requirements.
Synthetic securitization is the process of artificial securitization of the pool of debt obligations, without transferring underlying credits from the balance. Synthetic Securitization combines the advantages of both credit derivatives and traditional securitization, as well as overcomes the shortcomings of the traditional structure of the transaction by combining credit derivatives with a synthetic structure.
- Synthetic Collateralized Debt Obligations (CDOs) are credit derivatives on a pool of reference entities that are "synthesized" through more basic credit derivatives, mostly, credit default swaps (CDSs) and credit linked notes (CLNs). A common structure of CDOs involves slicing the credit risk of the reference pool into a few different risk levels.