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    • GLGi: Structured Investment Vehicles (SIVs) Jay Eisbruck
      • Council Member Biography
      • Jay Eisbruck was the Managing Director of Moody’s Asset-Backed Finance Group, until November 2007. Jay had worked with Moody's since 1991 managing the credit analysis of all non-residential mortgage Asset-Backed Securities. During this time Mr. Eisbruck analyzed the quantitative, qualitative, structural, and legal risks of over 70 different asset classes including whole business securitization, reverse mortgages, credit cards, autos loans, intellectual property, insurance-related assets, and aircraft leases. He currently is focusing his efforts on aiding the development of new assets. Mr. Eisbruck also contributed to a number of articles on structural innovations and general trends in the asset-backed market. His article on the rating approach to intellectual property assets was included in the Wiley and Co. publication, “From Ideas to Assets,” Mr. Eisbruck earned both a MBA in Finance and a B.S. in Economics from New York University’s Stern School of Business, where he was a Racoosin Scholar.
      • Topics
      • What is a SIV?
      • How are they rated?
      • What went wrong?
      • Future outlook
      • How are structured transactions purchased by SIVs rated?
      • About GLG Institute
      • GLG Institute (GLGi SM ) is a professional organization focused on educating business and investment professionals through in-person meetings. It is designed to revolutionize the professional education market by putting the power of programming into the hands of the GLG community.
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      • Gerson Lehrman Group Contacts
      • Aaron Liberman
      • Managing Director, Sales and Marketing
      • Gerson Lehrman Group
      • 850 Third Avenue, 9th Floor
      • New York, NY 10022
      • 212-984-3684
      • [email_address]
      • Carly Pisarri
      • Process Manager
      • Gerson Lehrman Group
      • 850 Third Avenue, 9th Floor
      • New York, NY 10022
      • 212-750-1435
      • [email_address]
      • IMPORTANT GLG INSTITUTE DISCLAIMER – By making contact with this/these Council Members and participating in this event, you specifically acknowledge, understand and agree that you must not seek out material non-public or confidential information from Council Members. You understand and agree that the information and material provided by Council Members is provided for your own insight and educational purposes and may not be redistributed or displayed in any form without the prior written consent of Gerson Lehrman Group. You agree to keep the material provided by Council Members for this event and the business information of Gerson Lehrman Group, including information about Council Members, confidential until such information becomes known to the public generally and except to the extent that disclosure may be required by law, regulation or legal process. You must respect any agreements they may have and understand the Council Members may be constrained by obligations or agreements in their ability to consult on certain topics and answer certain questions. Please note that Council Members do not provide investment advice, nor do they provide professional opinions. Council Members who are lawyers do not provide legal advice and no attorney-client relationship is established from their participation in this project.
      • You acknowledge and agree that Gerson Lehrman Group does not screen and is not responsible for the content of materials produced by Council Members. You understand and agree that you will not hold Council Members or Gerson Lehrman Group liable for the accuracy or completeness of the information provided to you by the Council Members. You acknowledge and agree that Gerson Lehrman Group shall have no liability whatsoever arising from your attendance at the event or the actions or omissions of Council Members including, but not limited to claims by third parties relating to the actions or omissions of Council Members, and you agree to release Gerson Lehrman Group from any and all claims for lost profits and liabilities that result from your participation in this event or the information provided by Council Members, regardless of whether or not such liability arises is based in tort, contract, strict liability or otherwise. You acknowledge and agree that Gerson Lehrman Group shall not be liable for any incidental, consequential, punitive or special damages, or any other indirect damages, even if advised of the possibility of such damages arising from your attendance at the event or use of the information provided at this event.
    • An Introduction to Structured Investment Vehicles Presentation by Jay Eisbruck
    • Agenda
      • What is a SIV?
      • How are they rated?
      • What went wrong?
      • Future outlook
      • How are structured transactions purchased by SIVs rated?
    • Part 1-What is a Structured Investment Vehicle?
      • SIVs are investment vehicles that fund a diversified portfolio of assets by issuing:
        • Commercial paper (CP)
        • Medium term notes (MTNs)
        • Capital
      • Generate yield on portfolio by managing:
        • Credit risks (Aa vs. Aaa/P-1)
        • Liquidity/funding risks
      • Exhibit characteristics of both structured transactions and operating companies
    • History
      • First SIVs created in late 1980s-Alpha and Beta Finance Corps created by Citibank
      • Sophistication grows over time
        • Dynamic capital structures
        • Alternative liquidity
        • Synthetic exposures
      • To date approximately 36 SIVS have been launched including 6 SIV-Lites
      • As of August 2007 SIVs held over $400 billion of assets (Largest $55 billion)
    • Structure
      • Set up to be bankruptcy remote
      • Established in beneficial tax jurisdiction (Cayman Islands, Jersey)
      • Can issue
        • Euro CP
        • US CP
        • MTNs
        • Subordinated debt
        • Equity
      • SIV investments run by manager
        • Operating manual
    • Typical SIV Structure SIV Manager Custodian Derivative Counterparties Liquidity Providers Security Trustee SIV Board of Directors Assets Senior Liabilities CP & MTN Investors CP & MTN Dealers Issuer and Paying Agents Capital Note Investors Capital SIV Source: DerivativeFitch
    • The Asset Portfolio
      • Guidelines set to maintain senior and sub ratings
        • Limits on individual assets
        • Limits on portfolio assets
        • Limits on unrated assets
        • Hedging with investment grade counterparties
    • Sample Asset Guidelines Additional concentration limits are imposed dynamically by the capital structure. Additional sublimits are in place for investment in Structured Finance assets. Furthermore, there are limits in place to address the remaining maturity of assets and limit exposure to single transaction servicers. − Minimum Rating Composition: Aaa 40% Aa3 to Aaa 50% A3 to Aaa 80% Baa3 to Aaa 95% Ba3 to Aaa 100% − Maximum Obligor Group concentration is expressed as function of its rating: Aaa 10% Aa 8% A 4% Baa 2% Ba 1% − Country Limits United States of America 100% Other countries with a Rating of Aaa 50% Other countries with a Rating of Aa 25% Other countries with a Rating of A 10% Other countries with a Rating of Baa 5% Other countries with a Rating of Ba or lower 3% − Sector Limits Financial 75% Structured Finance 100% Sovereign 75% Corporate 50% Source: Moody’s Investors Service
    • Capital Sufficiency
      • Matrix approach
        • Fixed guidelines
      • Simulation approach
      • Marking to market
        • Max daily/Min weekly
        • Various pricing sources, described in manual
    • Liquidity
      • Sized to cover maximum net outflows in fixed periods over next 365 days
        • 1, 5 day tests fully covered by backup liquidity (Typically 5-10% of outstanding senior debt)
        • 10, 15 day test covered by backup liquidity and highly liquid assets
      • If tests failed vehicle can go into enforcement and assets liquidated
    • Role of the Manager
      • Investment
        • Determining what investments to buy and sell
      • Funding
        • Need to maintain access to capital markets
      • Operational support
      • Systems
      • Reporting
        • At least weekly
    • How are Ratings Maintained?
      • Portfolios managed within pre-agreed limits
      • Maintain sufficient liquidity
      • Effectively eliminate interest rate and currency risks
      • Frequent mark to market of assets
      • Procedures for controlled wind-down if necessary
    • Moody’s Rating Rationale
      • The eligibility criteria, portfolio parameters and mark-to-market procedures for assets purchased
      • The minimum over-collateralisation requirement provided by Capital Notes, which is calculated based on the mark-to-market of the asset portfolio and in accordance with various factors relating to the composition of the portfolio;
      • Interest rate and currency hedging requirements that limit exposure to a narrow tolerance range
      • Liquidity facilities, breakable deposits and certain highly liquid assets within the investment portfolio
      • The performance of the Manager including its ability to keep the SIV within the limits, manage the parameters of the SIV in a stable manner, and mitigate risks arising from adverse developments by proactive and reactive measures
      • The Restricted Operations operating state designed to protect the vehicle from further deterioration
      • The Restricted Funding operating state whereby the SIV is prevented from issuing further CP and MTNs and acts to repay outstanding senior debt as it becomes due.
      Source: Moody’s Investors Service
    • Basic Approach
      • Monte Carlo simulation approach
      • SIVs calibrate their models to Moody’s Capital Model to achieve ratings
      • Based on historical data
        • Rating transitions
        • Correlations
        • Liquidation prices and timing
      • Manager quality rating
    • What Went Wrong?
      • Through August 2007 performance was strong so flexibility increased (SIV-Lites)
        • Market grew quickly
      • Downgrades in subprime mortgage market and CDO market
        • Leads to loss of confidence in structure
      • Inability to roll maturing CP and MTNs
      • Inability to liquidate assets at sufficient price
    • SIV Holdings
      • Holdings drop from $400 billion to $300 million
      • NAVs drop from over 100% in July 2007 to 53% at November 30.
      • Leverage increases from 15x to 18x
      • Types of assets vary from SIV to SIV
    • Assets Under Management (approx $ Bil) Source: Moody’s Investors Service
    • SIV Asset Sector Composition (as of 10/07) Source: Moody’s Investors Service
    • SIV Rating Composition (as of 10/07) Source: Moody’s Investors Service
    • Rating Actions to Date
      • Over $100 Billion of securities downgraded
      • Five senior notes of SIVs downgraded nine others under review
      • All six senior notes of SIV-lites downgraded
      • Vast majority of capital notes downgraded, most to Caa or below
      • Stresses updated to reflect market conditions
    • Implications on Banks
      • Holders of capital notes suffer losses
        • Lack of transparency
      • Liquidity obligations
        • Relatively manageable
      • Support SIV
        • Not obligated but expected to do so
        • Citibank downgraded
        • Other banks in better position
    • Restructuring Initiatives
      • Attempt to create Super-SIV fails
      • Sponsor provides 100% liquidity
      • Sponsor wraps senior debt
        • Back on balance sheet
      • Use of repo agreements
      • Capital notes exchanged for slice of asset portfolio
        • Allows investor to avoid recognition of losses
    • Future Outlook for SIVs
      • Next wave of rating actions awaiting results of restructuring
      • Existing portfolios will wind down
        • Speed will depend on recovery of asset prices
      • Unlikely to see new SIVs for near to medium term
      • New structure could be developed
    • SIV Refinancing Schedule ($ Bil) Source: Moody’s Investors Service
    • How are structured transactions purchased by SIVs rated?-Part 2
      • Asset credit quality analysis
        • To what extent will the assets pay as promised?
      • Structured cash flow analysis
        • Who gets that cashflow?
      • Legal Analysis
        • Can other investors make a claim on that cashflow?
    • Asset Credit Analysis
      • Assessing the extent to which the loans pay as promised
        • Expected loss
      • Analyze industry, originator, particular pool
      • Analyze origination, underwriting, servicing, collections policies and strategies
    • Many Types of Securitized Assets
      • Residential Mortgages
      • Home equity loans
      • Commercial mortgages
      • Auto leases
      • Equipment leases
      • Aircraft leases
      • Insurance receivables
      • Franchise loans
      • Music Royalties
      • Tax liens
      • Credit card receivables
      • Auto loans
      • Manufactured housing loans
      • Student loans
      • Healthcare receivables
      • Film receivables
      • Trade receivables
      • Timeshare receivables
      • Motorcycle loans
      • Stranded utility costs
    • Structural Cashflow Analysis
      • Allocation of cashflows among investors, credit enhancement providers, and originator
      • Allocation of credit losses on underlying assets
      • Triggers
      • Availability of credit enhancement
    • Legal Analysis
      • Can other creditors claim cashflows?
      • Bankruptcy-remoteness
        • Remote from effects of originator’s bankruptcy
        • Remote likelihood of “issuer’s” bankruptcy
    • Monitoring Ratings
      • Compare actual performance to expectations
      • Determine cause of deviation
        • Short term or long term
      • Reset expectations
      • Take rating action if necessary
    • Questions and Answers