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Market Developments, Structures, Documentation and Regulatory Issues

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sutton
18 diapositives · 324 Views · Oct 21, 2014

This presentation explores the latest advancements in the Mexican CDO market, focusing on structures, documentation, and regulatory challenges. It covers basic and complex synthetic CDO structures, including fully funded, partially funded, and fully synthetic types. Regulatory and documentation issues are discussed in relation to global and local standards, including the impact of Basel II and recent legislative changes in Mexico. Key prospects and challenges for the market, such as diversification risks and subprime fallout, are also analyzed, providing insight into future trends in credit derivatives and structured finance.

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  1. Presentation toIMN Mexican Securitization Conference, Developments in the Mexican CDO, Credit Derivatives & Synthetics October 30, 2007 Market Developments, Structures, Documentation and Regulatory Issues Evan M. Koster Partner

  2. IMN Mexican Securitization Conference, Developments in the Mexican CDO, Credit Derivatives & Synthetics Disclosure Issues • Basic Structures—Review • Regulatory and Documentation Issues— • Global • Local • State of Market • Prospects and Challenges

  3. Derivatives and Structured Finance Basic Structures • Synthetic CDO Structure • Generic Synthetic Arbitrage CDO Structure • Fully Funded Synthetic Balance Sheet CDO Structure • Partially Funded Synthetic CDO Structure • Fully Synthetic or Unfunded CDO • Total Return Swap • Credit Linked Note • First to Default CLN continued 

  4. Synthetic CDO Structure SwapCounterparty Super senior credit default swap Junior defaultswap premium(or TRS payments) Note issue proceeds SPV(protection seller) Senior Note Originating Bank(protection buyer) CDO P + I Default swap protection “B” Note Credit Derivative P + I Note proceeds Reference Portfolio, e.g., corporateloans(100% BIS)Funded portion Equity Collateral pool (e.g., government bonds 0% BIS)

  5. Generic Synthetic Arbitrage CDO Structure Bank Reference Entity 1 Super Senior Credit DefaultSwap Swap Counterparty Total return LIBOR + Spread Reference Entity 2 Reference Entity 3 Note issue proceeds Senior Note SPV CDO P + I “B” Note Reference Entity n Equity Credit-linked notes: Par par on maturity, or (Par – Market value) at time of credit event

  6. Fully Funded Synthetic Balance Sheet CDO Structure Premium OriginatingBank SPV Note proceeds Credit-linked notes$500 million Credit default swap protection P + I on notesand guarantee fee Collateralsecurities Note proceeds Corporate Loans(100% BIS)Value $500 million Third Party

  7. Partially Funded Synthetic CDO Structure Originating Bank/Collateral Manager Corporate Loans 100% BIS/ Reference portfolio (Super seniorunfunded portion) Super SeniorCDSCounterparty Super SeniorSwapCounterparty Premium Default swap protection SPV Proceeds Corporate Loans100% BIS (Asset-backed funded portion) CDSCounterparty Premium Note Issue to Investors P + I Default swap protection Equity Guarantee fee CollateralSecurities

  8. The Fully Synthetic or Unfunded CDO Tranched portfolio of credit default swaps OriginatingBank Super SeniorTranche Credit defaultswap protection AAABankCounterparty Senior Tranche Premium Junior Tranche A OECDBankCounterparty Reference Assets(100% BIS) Junior Tranche B Equity

  9. Combined Note and TRS Funding Structure Issues 2-year note, receives par Regulated Broker-Dealer Investment Bank Pays basket performance Broker-dealer lends note proceeds at LIBOR-flat 1-year loan, rolled over on maturity for further one year 2-year TR swap arrangement, broker-dealer receives basket performance and pays LIBOR-flat 2-year TR swap arrangement, Investment bank pays basket performance and receives LIBOR + spread (bp) Investmentcompany/Hedge Fund

  10. Credit-Linked Note Credit-linked note on issue Issue proceeds (principal payment) Issuer Investor Note coupons Reference Assetor Entity No Credit event Issuer Investor Par value on maturity (100%) Reference Asset Credit event Issuer Investor 100% minus value of reference obligation Reference Asset

  11. First-to-Default CLN Structure BasketReference asset 1Reference asset 2Reference asset 3- - - Reference asset 10 Issuer(Bank or SPV) First-to-Default CLN Principal amount LIBOR + multiple ofaverage spread of basket No credit event: 100% par value on due maturity date Credit event on any basket entity: delivery of defaulted obligations

  12. Regulatory and Documentation Issues • Global • Basil II and Regulatory Relief • U.S. Securities Laws– Rule 144A Market • Credit Derivatives Documentation – ISDA Definitions and Physical Settlement Matrix

  13. Derivatives and Structured Finance Regulatory and Documentation • Local • 1996-laws passed allowing for more expedient foreclosure proceedings and an easier transfer of mortgages • 2000 & 2003—laws permitting fideicomisos to become SPVs. • 2001 amendment to the Securities Market Law introducing “certificado bursatil” • December 2006– Banxico Circular 4/2006– derivative operations regulation for financial institutions • Local market Derivatives Master Agreement

  14. State of Market • Local only, very small thus far: • BBAJIO 06– Banco Bajio– arranger J.P. Morgan—debt of Mexican states, municipalities and other public sector entities • Deutsche Bank BORHIS CDO-repackaging of five triple-A rated Mexican RMBS bonds • Global • Appear in global emerging markets CDOs, but not specific Latin American or Mexican CDOs– reference sovereign, quasi-sovereign and top-tier corporate names

  15. Prospects and Challenges • Fallout from U.S. Subprime • Diversification risk • Limitations on the ability of Administrados de fondos el retiro (“Afores”) to make investments in synthetic type structures • Expense involved in structuring CDOs • Other non-synthetic cash flow securitizations still have room to grow • Mid-range or mico-finance CLO’s • More Global Emerging Market Structures with Mexican names

  16. Dewey & LeBoeuf Worldwide Moscow London Warsaw Brussels Frankfurt Albany Almaty Paris Boston Milan Hartford Chicago Rome San Francisco New York Beijing East Palo Alto Washington, DC Austin Charlotte Los Angeles Jacksonville Houston Riyadh Hong Kong Johannesburg

  17. Selected Disclosure, Distribution and Offering Issues with title/subject of presentation from title page] QUESTIONS?