Ch6 Structuring Process (2)

6. Structuring Process
6-1. Identification of Economic Motivation

6-2. Ensure Costs are Justified & Structuring Method is Appropriate

6-3. structuring must be Motivated by Commercial Considerations

6-4. Preliminary Cash Flow Model
6-4-1. cash flow (interest & principal) waterfalls
- models of income on the target assets
- application to various expense items & to the liabilities
- at the early stage, mainly consist of revenues & certain expenses
**expenses: senior expenses associated with structuring (fees paid to asset trustees, custodians, project managers, etc - generally fixed) & subordinated expenses - performance-related (success or management fees)
***subordinated expenses will be allocated from the cash flow waterfall based on what is left over later

6-4-2. design featurs
- definition of per-period cash flows of the structure
- appropirate project evaluation principle of the possibilities(ROI, NPV)

6-5. Appointment of a Structuring Agent

6-6. Identification of Investor Interest

6-7. Design of the Institutional Features of the Structure

6-8. Design of Securities

6-9. Target Ratings & Enhancements

6-10. Executing & Ramp-Up


7. Tranching & Subordination
equivalent to designing a reinsurance program for the retained risks on the underlying assets.

7-1. Tranching
One of key characteristics for defining ingredients in securitization

7-1-1. Video lecture: http://www.youtube.com/watch?v=HymdWTSrNTA
http://www.youtube.com/watch?v=Ip0lZ-TjdHI&feature=related

7-2. Subordination
- key part structuring
- internal credit enhancement

7-2-1. Video lecture: http://www.youtube.com/watch?v=iTehlK4nF6w

7-2-2. Credit Enhancement for more Senior Claims
- A financial capital viewed as a type of insurance sold by investor in the firm's securities to the firm.
- Each class of security holder provides insurance (credit enhancements) to all the more senior investors in the firm's securities.

7-2-3. Credit-Related Loss Probabilities
- Loss distribution & ratings
**first loss applied to equity & junior tranches (bottom of tranches, riskiest layer, absorb the first losses)
**give a kind of protection to the senior classes
- The number of tranches (layers) of subordination will affect the distribution of ratings and the attachment points for each rating.

7-2-4. Balance Prospective
- Reference Portfolio(Credit Sensitive Assets): Loans; Principle & Interest Waterfall
- SPV
- Investor Tranches (Liabilities)
*transferring credit risks to originators