固定收益证-券Commercial-Mortgage-Loans-and-Commercial-Mortgage-Backed-Securities课件

Chapter14

CommercialMortgageLoansandCommercialMortgage-BackedSecurities

LearningObjectivesAfterreadingthischapter,youwillunderstandhowcommercialmortgageloansdifferfromresidentialmortgageloansthedifferentpropertytypesforwhichcommercialmortgageloansareobtainedthetwoindicatorsofperformanceusedforevaluatingcommercialmortgageloans—debt-to-servicecoverageratioandloan-to-valueratiothedifferenttypesofcallprotectionprovidedforincommercialmortgageloansandinacommercialmortgage-backedsecuritywhatballoonriskisforacommercialmortgageloanandacommercialmortgage-backedsecurityLearningObjectives(continued)Afterreadingthischapter,youwillunderstanddifferencesinstructuringacommercialmortgage-backedandresidentialmortgage-backedsecuritiestransactionthestructuralfeaturesofacommercialmortgage-backedsecuritydealhowprepaymentpremiumsmaybedistributedamongbondholdersinacommercialmortgage-backedsecuritythedifferencebetweenasingleborrower/multipropertydealandaconduitdealthedifferenttypesofservicersinacommercialmortgage-backedsecuritiesdealfactorstoconsiderintheanalysisofthecollateralofacommercialmortgage-backedsecuritywhyitisimportanttostresstestadeal’sstructureCommercialMortgageLoansCommercialmortgageloansareforincome-producingproperties.Thesepropertiesincludemultifamilypropertiesofficebuildingsindustrialproperties(includingwarehouses)shoppingcentershotelshealthcarefacilitiesCommercialmortgageloansarenon-recourseloans.Thismeansthatthelendercanonlylooktotheincome-producingpropertybackingtheloanforinterestandprincipalrepayment.CommercialMortgageLoans(continued)IndicatorsofPotentialPerformanceIfthereisadefaultonacommercialmortgageloan,thelenderlookstotheproceedsfromthesaleofthepropertyforrepaymentandhasnorecoursetotheborrowerforanyunpaidbalance.Twomeasureshavebeenfoundtobekeyindicatorsofthepotentialcreditperformance:

debt-to-servicecoverageratio

loan-to-valueratioCommercialMortgageLoans(continued)IndicatorsofPotentialPerformanceThedebt-to-servicecoverageratio(DSCratio)istheratioofaproperty’snetoperatingincome(NOI)dividedbythedebtservice.NOIistherentalincomereducedbycashoperatingexpenses(adjustedforareplacementreserve).Aratiogreaterthanoneindicatesthatthecashflowfromthepropertyisadequatetocoverdebtservicing.CommercialMortgageLoans(continued)IndicatorsofPotentialPerformanceStudiesofresidentialmortgageloanssuggestthatthekeypredictorofdefaultistheloan-to-valueratio.Forincome-producingproperties,thevalueofthepropertyisbasedontheprinciplethatthevalueofanassetisthepresentvalueoftheexpectedcashflow.Invaluingcommercialproperty,theexpectedcashflowsarethefutureNOIs.Adiscountrateor“capitalizationrate,”reflectingtherisksassociatedwiththecashflows,isusedtocomputethepresentvalueofthefutureNOIs.CommercialMortgageLoans(continued)CallProtectionForresidentialmortgageloans,onlyprepaymentpenaltymortgagessupplyprotectionagainstprepayments.Forcommercialmortgageloans,callprotectionincludes:prepaymentlockoutdefeasanceprepaymentpenaltypointsyieldmaintenancechargesCommercialMortgageLoans(continued)CallProtectionAprepaymentlockoutisacontractualagreementthatexcludesanyprepaymentsduringthelockoutperiod.Afterthelockoutperiod,callprotectionusuallycomesintheformofeitherprepaymentpenaltypointsoryieldmaintenancecharges.Withdefeasance,theborrowerprovidesamplefundsfortheservicertoinvestinaportfolioofTreasurysecuritiesthatreplicatesthecashflowsthatwouldexistintheabsenceofprepayments.CommercialMortgageLoans(continued)CallProtectionPrepaymentpenaltypointsarepredeterminedpenaltiesthatmustbepaidbytheborroweriftheborrowerwishestorefinance.Prepaymentpenaltypointsarenotalwaysaneffectivemeansfordiscouragingrefinancing.Yieldmaintenancechargemakesthelenderindifferentastothetimingofprepayments.Thesimplestandmostrestrictiveformofyieldmaintenancecharge(“Treasuryflatyieldmaintenance”)penalizestheborrowerbasedonthedifferencebetweenthemortgagecouponandtheprevailingTreasuryrate.CommercialMortgageLoans(continued)BalloonMaturityProvisionsCommercialmortgageloansaretypicallyballoonloansrequiringsizeableprincipalpaymentattheendoftheballoonterm.Iftheborrowerfailstomaketheballoonpayment,theborrowerisindefault.Duringthework-outperiodfortheloan,theborrowerischargedahigherinterestrate,whichiscalledthedefaultinterestrate.Theriskthataborrowerwillnotmaketheballoonpaymentiscalledballoonriskorextensionrisk.CommercialMortgage-BackedSecuritiesManytypesofcommercialloanscanbesoldbytheoriginatorasacommercialwholeloanorstructuredintoacommercialmortgage-backedsecurity(CMBS)transaction.ACMBS

isasecuritybackedbyoneormorecommercialmortgageloans.Thewholeloanmarket,whichislargelydominatedbyinsurancecompaniesandbanks,isfocusedonloansbetween$10and$50millionissuedontraditionalpropertytypes(multifamily,retail,office,andindustrial).CMBStransactions,ontheotherhand,caninvolveloansofvirtuallyanysizeand/orpropertytype.CommercialMortgage-BackedSecurities

(continued)IssuersofCMBSAswithresidentialmortgage-backedsecurities(RMBS),CMBScanbeissuedbyGinnieMae,FannieMae,FreddieMac,andprivateentities.AllofthesecuritiesissuedbyGinnieMae,FannieMae,andFreddieMacareconsistentwiththeirmissionofprovidingfundingforresidentialhousing.WhilesecuritiesbackedbyGinnieMaeandissuedbyGSEsconstitutethelargestsectoroftheRMBSmarket,itisthesecuritiesissuedbyprivateentitiesthatarebyfarthelargestsectoroftheCMBSmarket.Typically,itislessthan3%ofthemarket.OurfocusinthischapterisonCMBSissuedbyprivateentities.CommercialMortgage-BackedSecurities

(continued)HowCMBSTradeintheMarketOnemightthinkthatbecauseCMBSandRMBSarebackedbymortgageloans,theywouldtradeinasimilarmannerinthemarketplace.Thatisnotthecase,andtheprimaryreasonhastodowiththegreaterprepaymentprotectionaffordedtoinvestorsinCMBScomparedtoRMBS.CMBStrademuchlikecorporatebonds.CommercialMortgage-BackedSecurities

(continued)DifferencesBetweenCMBSandNonagencyRMBSStructuringThestructureofaCMBStransactionisthesameasinanonagencyRMBSinthatmoststructureshavemultiplebondclasses(tranches)withdifferentratings,andtherearerulesforthedistributionofinterestandprincipaltothebondclasses.Thethreemajordifferencesduetothefeaturesoftheunderlyingloansare:theprepaymenttermsforcommercialmortgagesdiffersignificantlyfromresidentialmortgagesthesignificantdifferencebetweencommercialandresidentialmortgageswithrespecttotheroleoftheservicerwhenthereisadefaulttheroleofthebuyerswhenthestructureisbeingcreatedsoastoremovecertainloansfromthepoolCommercialMortgage-BackedSecurities

(continued)DifferencesBetweenCMBSandNonagencyRMBSStructuringThefirstdifferenceinstructuringinvolvesthefactthattheprepaymenttermsforcommercialmortgagesdiffersignificantlyfromresidentialmortgages.CMBStransactionsimposeprepaymentpenaltiesorrestrictionsonprepayments.WhilethereareRMBStransactionswithprepaymentpenalties,theyareasmallfractionofthemarket.CommercialMortgage-BackedSecurities

(continued)DifferencesBetweenCMBSandNonagencyRMBSStructuringTheseconddifferenceinstructuringisduetothesignificantdifferencebetweencommercialandresidentialmortgageswithrespecttotheroleoftheservicerwhenthereisadefault.Incommercialmortgages,theloancanbetransferredbytheservicertothespecialservicerwhentheborrowerisindefault,imminentdefault,orinviolationofcovenants.Thereisnoequivalentfeatureforaresidentialmortgageinthecaseofanimminentdefault.Therecanbedifferencesinloansastohowtodealwithdefaultsduetoafailuretomeettheballoonpayment.WhileballoonriskmustbetakenintoaccountinstructuringaCMBStransaction,itisnotsomethingthathastobedealtwithinstructuringanRMBS.CommercialMortgage-BackedSecurities

(continued)DifferencesBetweenCMBSandNonagencyRMBSStructuringThethirddifferenceinstructuringbetweenCMBSandRMBShastodowiththeroleofthebuyerswhenthestructureisbeingcreatedsoastoremovecertainloansfromthepool.Morespecifically,typicallypotentialbuyersofthejuniorbondclassesarefirstsoughtbytheissuerbeforethedealisstructured.Thepotentialbuyersfirstreviewtheproposedpoolofmortgageloansandinthereviewprocessmay,dependingonmarketdemandforCMBSproduct,requesttheremovalofsomeloansfromthepool.CommercialMortgage-BackedSecurities

(continued)StructuralFeaturesofaCMBSTransactionTounderstandthefeaturesofaCMBStransaction,onecanlookatanactualdeal.Indoingthis,onecanobserve:theissuedate,thenumberoftranchesinthedeal,thedetails(suchasratingsandcouponrates)foralltranches,thedistributionsofinterestandprincipalfromthesupplementaryprospectusandsoforth.CommercialMortgage-BackedSecurities

(continued)StructuralFeaturesofaCMBSTransactionWhentherearemortgageloanlosses,theyareallocatedinascendingordertothebondclasses.BecauseClassXisaninterest-onlysecurity,noprincipalpaymentsorloanlossesareallocatedtothatclass.However,thenotionalamountforClassXisreducedbyprincipalpaymentsorloanlosses.ThecreditenhancementsfornonagencyRMBScanbeusedinCMBSstructures.Typically,theprimaryformofcreditsupportisthesenior-subordinatedstructure.CommercialMortgage-BackedSecurities

(continued)PrepaymentProtectionandDistributionsofPrepaymentPremiumsInaCMBSstructure,therearetwolevelsofprepaymentprotection.Theloanlevelwheretherearevariousformsofprepaymentprotectionprovided(lockouts,prepaymentpenaltypoints,yieldmaintenance,anddefeasance).Thestructurelevel,e.g.,theseniortranchescanbestructuredtopayoffsequentiallyasinaCMOstructure.Whenadefeasanceoccurs,thereisnodistributionmadetothebondholders.Sincetherearenopenaltiesorcharges,thereisnoissueastohowanypenaltiespaidbytheborroweraretobedistributedamongthebondholdersinaCMBSstructure.CommercialMortgage-BackedSecurities

(continued)PrepaymentProtectionandDistributionsofPrepaymentPremiumsWhenthereareprepaymentpenaltypoints,therearerulesfordistributingthepenaltyamongtheCMBSbondholders.Inthecaseofloanswithayieldmaintenanceprovision,severalmethodsareusedfordistributingtheyieldmaintenancecharge.Dependingonthemethodspecifiedinadeal,notallbondholdersinaCMBSmaybemadewhole.Prepaymentpenaltiesandyieldmaintenancechargesarereferredtoasprepaymentpremiums.CommercialMortgage-BackedSecurities

(continued)BalloonRiskinCMBSDealsCMBSwithseniorsubordinatedstructuresfacetheriskthatallloansmustberefinancedtopayoffthemostseniorbondholders.Theballoonriskofthemostseniortranchemaybeequivalenttothatofthemostjuniorbondclassinthedeal.TherearetwotypesofstructuralprovisionsthatcanbepresentinCMBStransactionstomitigateballoonrisk:Theinternaltailcallsfortheborrowertodocumenteffortstorefinancetheloanwithinoneyearoftheballoonmaturitydate.Withanexternaltail,thematuritydatefortheCMBSissueissettobelongerthantheballoonpaymentforthepoolofcommercialmortgageloans.CommercialMortgage-BackedSecurities

(continued)TypesofDealsThetwomajorclassificationsforCMBSdealsare:singleborrower/multi-propertydealsmulti-propertyconduitdealsInasingleborrower/multi-propertydealthereisoneborrowerandmultipleproperties.Threekeystructuralfeaturesinsuchdealsare:thecross-collateralizationfeaturecross-defaultfeaturepropertyreleaseprovisionsCommercialMortgage-BackedSecurities

(continued)TypesofDealsThecross-collateralizationfeatureisamechanismwherebythepropertiesthatcollateralizetheindividualloansinthemortgagepoolarepledgedagainsteachloan.Thecross-defaultfeaturepermitsthelendertocalleachloanwithinthemortgagepoolwhenanyonepropertydefaults.Byincludingthesetwofeatures,theprincipalandinterestpaymentsofallthepropertiesareavailabletomeettheobligationsofalltheloans.Becausethereisasingleborrower,thereisconcernthattheborrowercanbenefitbyremovingthebestpropertiesfromthemortgagepoolbyprepayingthebalanceandsellingthoseproperties.Thisactionwouldresultinadeteriorationofthestructuralprotectionaffordedthebondholders.CommercialMortgage-BackedSecurities

(continued)TypesofDealsTheobjectiveofpropertyreleaseprovisionsistoprotecttheinvestoragainstborrowerremovingthebestpropertiesfromthemortgagepoolbyprepayingthebalanceandsellingthoseproperties.Twoexamplesofapropertyreleaseprovisioninvolve:arequirementthatifanypropertyissold,theborrowermustretiremorethantheinitialmortgagebalanceinthepool(say,125%)asalemaynottakeplaceiftheDSCratiosafteraproposedsalearelessthanpriortothesaleCommercialMortgage-BackedSecurities

(continued)TypesofDealsBesidesasingleborrower/multi-propertydeal,asecondtypeofdealisamulti-propertyconduitdeal,whichinvolvesloansbyconduits.Conduitsarecommercial-lendingentitiesthatareestablishedforthesolepurposeofgeneratingcollateraltosecuritize,andtheCMBStransactionsthatresultarecalledconduitdeals.Theratingagenciesrefertoconduittransactionsasmulti-borrowerdeals.Whenaconduitdealcontainsonelargepropertyformorethan$50millionandthensmallerloans,itisreferredtoasafusionconduitdeal.CommercialMortgage-BackedSecurities

(continued)ServicesAswithanonagencyRMBS,aservicerisrequiredandplaysanimportantrole.Theresponsibilitiesoftheservicerinclude:collectingmonthlyloanpaymentskeepingrecordsrelatingtopaymentsmaintainingpropertyescrowfortaxesandinsurancemonitoringtheconditionofunderlyingpropertiespreparingreportsforthetrusteetransferringcollectedfundstothetrusteeforpaymenttobondholdersCommercialMortgage-BackedSecurities

(continued)ServicesDependingonthetransactions,thereareseveraltypesofservicerswiththethreemostcommontransactionsforCMBSbeing:Thesub-servicer

collectsallpaymentsandgatherspropertyinformation,whichisthensenttothemasterservicer.Themasterservicerisresponsibleforoverseeingthedeal,verifyingthatallservicingagreementsarebeingmaintained,andfacilitatingthetimelypaymentofinterestandprincipal.Thespecialservicerhasdutiesthatariseonlywhenaloanbecomesmorethan60dayspastdue.Typically,thespecialservicerhastheauthoritytoextendtheloan,makeloanmodifications,restructuretheloan,orforecloseontheloanandselltheproperty.CommercialMortgage-BackedSecurities

(continued)AnalysisoftheCollateralTheuniqueeconomiccharacteristicsofeachincome-producingpropertyinapoolbackingaCMBSdealrequirethatcreditanalysisbeperformedonaloan-by-loanbasisnotonlyatthetimeofissuance,butalsobemonitoredonanon-goingbasis.Thestartingpointintheanalysisisaninvestigationoftheunderwritingstandardsoftheoriginatorsoftheloansinthemortgagepool.ForallpropertiesbackingaCMBSdeal,aweighted-averageDSCratioandaweighted-averageLTViscomputed.AnanalysisofthecreditqualityofaCMBSstructurewillalsolookatthedispersionoftheDSCandLTVratiosfortheunderlyingloans.CommercialMortgage-BackedSecurities

(continued)AnalysisoftheCollateralInanalyzingthecollateral,thetypesofincome-producingpropertiesareexamined.Ingeneral,investorspreferdealsthatarenotconcentratedinonepropertytype.FortheBancofAmericaCommercialMortgage,Series2001-1,thedistributionofpropertytypefortheinitialpoolbalanceisshowninExhibit14-6(seeOverhead14-32).Investorsarealsointerestedinthegeographicaldispersionoftheproperties.Theconcernisthatifthepropertieswereconcentratedinonegeographicalregion,investorswouldbeexposedtoeconomicdownturnsthatmaybeuniquetothatgeographicalregion.Exhibit14-6DistributionofPropertyTypeforBancofAmericaCommercialMortgage,Series2001-1PropertyTypeInitialPoolBalance(%)Multifamily30.2Retail9.9*Industrial13.0Office36.3Self-storage3.1Hotel4.2Mobile3.4*BreakdownforRetail:Unanchored,3.1%;ShadowAnchored,0.5%;andAnchored,6.3%CommercialMortgage-BackedSecurities

(continued)StressTestingStructuresAnanalysisofthecreditqualityofthetranchesinaCMBSinvolveslookingatthecommercialloansonaloan-by-loanbasis.Ratingagenciesandanalystswillthenstresstestthestructurewithrespecttoacombinationofdefaultandprepaymentassumptions.CommercialMortgage-BackedSecurities

(continued)StressTestingStructuresInstresstestingdefaultrisk,thefollowingthreekeyassumptionsaremade.Thefirstistheannualrateofdefaultsasmeasuredbytheconditionaldefaultrate(CDR).AnalystsoftenassumeaCDRof2%tostressteststrongdealsand3%totestweakerdeals.Asecondimportantassumptionisthetimingofthedefaults.Adefaultcanoccursometimeearlyinthetermoftheloanorattheballoondate(whenrefinancingisrequired).Athirdimportantassumptionisthepercentageoftheloanbalancethatwillbelostwhenadefaultoccurs.Thismeasureiscalledthelossseverity.CommercialMortgage-BackedSecurities

(continued)StressTestingStructuresToillustratetheimportanceoftheassumptionsonstresstesting,CorcoranandPhillipsusedthreestresstestscenariosforaconduitdealtoassesstheimpactoneachbondclass.Exhibit14–9(seeOverhead14-36)showsthebondclassesinthestructure.Theloansare10-yearballoonloanswitha30-yearamortization.Foreachscenario,thelossseverityassumedwas33%alongwithaCPRofzero.Exhibit14–9showstheresultsoftheanalysisonthespread.Thespreadreportedisa“credit-adjustedspread,”whichisaspreadmeasurebasedoncashflowsadjustedfortheassumeddefaultsforthescenario.Exhibit14–9ScenarioBondSpreadsBaseCase:DefaultScenariosBondClasses0CDR0CPR2CDR0CPRModelDefaults0CPRBalloonDefaultScenario0CPRAAA-5yr98939798AAA-10yr123123123123AA137137137137A160160160160BBB195195195195BBB-275275275271BB575575575556B/B-72522443420B-950-1585-406-220UR1706-2921-16689X450127369475Allrightsreserved.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmitted,inanyformorbyanymeans,electronic,mechanical,photocopying,recording,orotherwise,withoutthepriorwrittenpermissionofthepublisher.PrintedintheUnitedStatesofAmerica.Chapter15

Asset-BackedSecurities

LearningObjectivesAfterreadingthischapter,youwillunderstandhowasset-backedsecuritiesarecreatedthebasicstructureofasecuritizationthepartiestoasecuritizationtheprimarymotivationforraisingfundsviaasecuritizationtheroleofthespecialpurposevehiclethedifferenttypesofstructures:selfliquidatingandrevolvingLearningObjectives

(continued)Afterreadingthischapter,youwillunderstandthevariousformsofcreditenhancementshiftinginterestmechanismandstepdownprovisionsthedifferenttypesofoptionalcallprovisionsthestructureofseveralmajortypesofasset-backedsecuritiesnotbackedbyresidentialmortgageloansthecreditrisksassociatedwithasset-backedsecuritiesandhowtheyareanalyzed.CreationofanABSAsecuritycreatedbypoolingloansotherthanmortgageloansisreferredtoasanasset-backedsecurity(ABS).ToexplainhowanABSiscreatedandthepartiestoasecuritization,thetextbookusesthefollowingillustration.SupposethatExceptionDentalEquipment,Inc.hasabulkofitssalesfrominstallmentcontracts(whereinthebuyeragreestorepayExceptionalDentalEquipment,Inc.,overaspecifiedperiodoftimefortheamountborrowedplusinterest).Thedentalequipmentpurchasedisthecollateralfortheloan.ThecreditdepartmentofExceptionalDentalEquipment,Inc.,makesthedecisionastowhetherornottoextendcredittoacustomer.CreationofanABS(continued)Thecriteriaforgrantingaloanarereferredtoasunderwritingstandards.BecauseExceptionalDentalEquipment,Inc.,isgrantingtheloan,thecompanyisreferredtoastheoriginatoroftheloan.Moreover,ExceptionalDentalEquipment,Inc.,(EDE)mayhaveadepartmentthatisresponsibleforservicingtheloan.Servicinginvolvescollectingpaymentsfromborrowers,notifyingborrowerswhomaybedelinquent,and,whennecessary,recoveringanddisposingofthecollateral(i.e.,thedentalequipmentinourillustration)iftheborrowerfailstomakethecontractualloanpayments.Whiletheserviceroftheloansneednotbetheoriginatoroftheloans,inourillustrationweareassumingthattheoriginator(EDE)isalsotheservicer.CreationofanABS(continued)SupposeEDEhasmorethan$300millionofinstallmentsalescontractsandwantstoraisethisamount.Ratherthanissuingcorporatebondsfor$300million,theEDE’streasurerdecidestoraisethefundsviaasecuritization.Thecriteriaforgrantingaloanarereferredtoasunderwritingstandards.BecauseExceptionalDentalEquipment,Inc.,isgrantingtheloan,thecompanyisreferredtoastheoriginatoroftheloan.Todothis,EDEsetsupalegalentitycalledaspecialpurposevehicle

(SPV)thatiscalledDEAssetTrust(DEAT).EDEwillthenselltoDEAT$300millionoftheloansandsoreceivefromDEAT$300millionincash,theamountoffundsitwantedtoraise.DEATobtainsthe$300millionbysellingsecuritiesthatarebackedbythe$300millionofloans.Thesecuritiesareasset-backedsecurities.CreationofanABS(continued)PartiestoaSecuritizationInourhypotheticalsecuritization,ExceptionalDentalEquipment,Inc.(EDE),isnottheissueroftheABS(althoughitissometimesreferredtoastheissuerbecauseitistheentitythatultimatelyraisesthefunds).Rather,itoriginatedtheloans.Hence,inthistransaction,EDEiscalledthe“seller”becauseitsoldthereceivablestoDEAT.EDEisalsocalledthe“originator”becauseitoriginatedtheloans.DEAT(i.e.,theSPVinthesecuritization)isreferredtoasthe“issuer”or“trust”intheprospectus.CreationofanABS(continued)PartiestoaSecuritizationWhileinoursimpletransactionEDEmanufacturedthedentalequipmentandoriginatedtheloans,thereisanothertypeofsecuritizationtransactioninvolvinganothercompany(calledaconduit)thatbuystheloansandsecuritizesthem.AconduitthatfinancesdentalequipmentmanufactureswouldwarehousetheinstallmentcontractspurchaseduntilithadasufficientamounttoselltoanSPV,whichwouldthenissuetheABS.Therewillbeatrusteeforthesecuritiesissued.Theresponsibilitiesofthetrusteearetorepresenttheinterestsofthebondclassesbymonitoringcompliancewithcovenantsandintheeventofdefaultenforceremediesasspecifiedinthegoverningdocuments.CreationofanABS(continued)Two-StepSecuritizationThepreviousdescriptionofthepartiestoasecuritizationisreferredtoasa“one-stepsecuritization.”Forcertainreasonsthatarenotimportanttoinvestors,asecuritizationmightinvolvetwoSPVsinordertoensurethatthetransactionisconsideredatruesalefortaxpurposes.OneSPViscalledanintermediateSPV,whichisawhollyownedsubsidiaryoftheoriginatorandhasrestrictionsonitsactivities.ItistheintermediateSPVthatpurchasestheassetsfromtheoriginator.TheintermediateSPVthensellstheassetstotheSPVthatissuestheasset-backedsecurities(i.e.,theissuingentity).Intheprospectusforasecuritizationtransaction,theintermediateSPVisreferredtoasthedepositor.CreationofanABS(continued)TransactionStructureIncreatingthevariousbondclasses(ortranches)inasecuritization,therewillberulesfordistributionofprincipalandinterest.Allasset-backedsecuritiesarecreditenhanced.Creditenhancementlevelsaredeterminedrelativetoaspecificratingdesiredbytheseller/servicerforasecuritybyeachratingagency.CreationofanABS(continued)RoleoftheSPVTounderstandtheroleoftheSPV,weneedtounderstandwhyacorporationwouldwanttoraisefundsviasecuritizationratherthansimplyissuecorporatebonds.Therearefourprincipalreasonswhyacorporationmayelecttoraisefundsviaasecuritizationratherthanacorporatebond:potentialtoreducefundingcoststodiversifyfundingsourcestoaccelerateearningsforfinancialreportingpurposestoachieve(ifaregulatedentity)relieffromcapitalrequirementsCreationofanABS(continued)RoletheSPVLetusfocusonthefirstofthesereasons(e.g.,potentialtoreducefundingcosts)toseethecriticalroleoftheSPVinasecuritization.SupposethatExceptionalDentalEquipment,Inc.(EDE),hasaBBcreditrating.Ifitwantstoraisefundsequalto$300millionbyissuingacorporatebond,itsfundingcostthegoingrateforafirmwithaBBcreditrating.IfEDEdefaultsonanyofitsoutstandingdebt,thecreditorswillgoafterallofitsassets,includingtheloanstoitscustomers.CreationofanABS(continued)RoletheSPVSupposethatEDEcancreatealegalentityandselltheloanstothatentity.Thatentityisthespecialpurposevehicle(SPV).Inourillustration,theSPVisDEAT.IfthesaleoftheloansbyEDEtoDEATisdoneproperly,DEATthenlegallyownsthereceivables,notEDE.Asaresult,ifEDEiseverforcedintobank