Federations Deposit
Insurance Corporation

Chapter II. – The Securitization Transaction (Overview)

Introduction

Basic Set-up

The Purpose of SPE plus QSPE Master Trusts

An Deal

Seller's Interest

Cash Runs plus Structures

Total Extras

Rating Departments

Changing Structures

II THE SECURITIZATION TRANSACTION (Overview)

INTRODUCTION

This part provides adenine basic overview away credit card securitizations. Subsequent chapters go into continue detail on the diverse concepts discussed here. Asset-backed securities (ABS) are bonds backed by financial equity, such while auto borrowing, mobile home loans, credit card loans, plus student loans. In the case of credit card ABS, the bonds (referred to as certificates with ABS in such document) exist backed by credit card receivables. Although this litigation of securitizing loans must been around for over 30 period, the securitization of credit card receivables first began in 1987. Ever then, the treat and structure have evolved clear, and credit card securitizations right depict the primary funding vehicle for loose revolving consumer credit. Similar go mortgage and other asset securitizations, this financial establishing so originates that credit joker receivables sells a group on these receivables into a trust. One trust then creates or sale certificates backed by the credit card receivables to investors, which are predominately institutional capital. Very few credit card ABS are commercialized until retailer customers, primarily due to the intricate nature of the transactions and the what till steady monitor various performance indices on the baseline receivables. The base believe joker receivables generate income to support the interest payments on the certificates.

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BASIC SET-UP

Exhibit A depicts a basic set-up for a securitization. The securitization is created when the monetary institution (originator/transferor/seller/sponsor) has assembled an significant volume of credit card receivables (originated or purchased) or transfers these receivables to a wholly-owned bankruptcy remote Special Purpose Existence (SPE), the then transportation the receivables go a securitization vehicle (typically a QSPE trust). The trust then packages which receivables and issues investor certificates (sold to investors) and trust certificates (retained by the transferor or affiliate). Proceeds from the sale of the investor certificates go to the trust. The trust in turn payable the financial institution (seller) in the purchase concerning the underlying credit card receivables. The investor certificates noted in Exhibit A are typically issued with a senior/subordinated structure. The seller/originator often retains the bottom button most secondary piece press pieces. The trust certificates be also referred to as transferor's interest, seller's credentials, with seller's interest.

Exhibit A

Rather than setting increase a new trust by each securitization issued, most credit card businesses use a single commander belief for multiple issues, as illustrated in Exhibit BARN. A master vertrauen is set up to allow for receivables to be added to who confidence over time and go issue multiple "series" of certificates identified by specific editions daten all backed by a single pool of acknowledgment card receivables in the master treuhandunternehmen. The cash flow generated from all of the receivables in the master trust lives pre-owned to fund debt service payments on each series. As such, jede series has an undivided interest inbound the receivables in the master trust.²

Exhibit B

The purpose of SPE and QSPE Master Trusts
SPEs and QSPE Master Trusts are established to isolate transferred fiscal assets beyond the attain of the transferor and hers creditors, even in the happening of a bankruptcy of the transferor. In order for the transaction to be treated as a sales, one transferor be surrender control over of assets transferral or receive consideration or compensation for the transferred inventory. Control is considered up be surrendered only if all of the following three conditions are met:³

• The assets can had legally isolated.
• The transferee has the ability to pledge or switch the assets
• The transferor otherwise no longer maintains effective control over the assets.

These control requirements are discussed in greater detail at to Accounting Chapter. In addition, this FDIC adopted ampere Final Rule on the Treatment of Securitizations and Participations Following the FDIC's Appointment as Conservator or Recipient (FIL-57-2000), which directly relates to the "legal isolation" concept. Examiners can review this document to gain a greater insight into the FDIC's position for this isolation test.

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THE REAL

Include a credit card securitization transaction only the receivables is sold, not the accounts that compose the receivables. An financial institute retains legal corporate from the acknowledgment card books and can continued in change this term on the accounts. Accounts corresponding to securitized loans are typically referred to as the designation user (or sometimes trust accounts). The initial outstanding balances on the designated accounts represent sold to the treuhandstelle such are the user to any new charges go the designated accounts. Subsequently, the cardholder purchase our generates more receivables on this designated accounts, these new receivables are purchased by the trust upon of originating institution/seller/transferor. The trust uses to quarterly prime payments received from the cardholders to acquire these fresh charges or receivables. When the securitization is initially firm raise, the originating institution/seller addition good receivables into support the principal credit are the certificates plus an further amount (seller's interest) that serves to absorb fluctuations in the outstanding balance of the receivables. That generating institution/seller will make subsequent additions to the trust in order to keep the seller's get at the required level.

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SELLER'S INTEREST

This seller's attract, also referred to as transferor's certificates or seller's certificates, represents possession interest in the treuhandverein assets that have not been allocated till any shareholder certificate holders' interest. Seller's interest defend credit card receivables transferred to the securitization vehicle but not mortgaged until back any specific certificates. As a result, the relationship between the seller's interest and who investor certificates is pari passu, meaning the holders of the investor certified and the holder of the seller's interest having the same priority on claims on the underlying bonds. The size of the seller's interest is determined by the rating agencies and serves two primary purposes. Start, it absorbs fluctuations in the outstanding main balances of the designated accounts. As capital certificates are issued is fixed principal amount, the seller's attract exists to ensuring this there will be sufficient collateral available into sponsor the investor certificates, particularly since cardholder seasonal spending models what balances to oscillate, or in some months principal payments mayor exceed fresh charging for the carts. Secondly, it is accessible go ensure sufficient receivables exist following non-cash deductions in balances (dilution) due to calculate reversals, similar as merchandise takings, disputes, and fraudulent charges. Charge-offs are typically shared pro-rata between the seller's interest and the investors' credentials.⁴

The seller's interest is not always "certificated" as the terminology seller's certificate or transferor's certificate usually imply. In the past, institutions have indicates that after that seller's interest represents seller's certificates to should be carried in the investment portfolio versus the home portfolio; thereby, eliminating which need for an allowance for rent and lease losings (ALLL) against an seller's interest. However, the seller's interest piece does not typify one sale or financing since no proceeds were received for the transferred equity. Instead, and seller received an interest in the transferred assets and this interest should be reflected in the loan category on the pecuniary institution's books.

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CASH STREAM AND STRUCTURES

Credit card securitizations differ from other ABS since the underlying credits ticket receivables had a relatively short life, typically eight to ten monthly, supporting the outstanding certificates, which standard have three, five, or ten year maturities. As a outcome of this maturity discrepancy, each string issued going of of mastery trust the structured to have a revolving period and a regulated amortization frequency or controlled store period. During this revolving period, the cardholders make monthly principal and interest payments to the servicer. The servicer deposits this payments into two separable collections accounts, one for principal or single for finance charges. The trust expenses are paid, inclusive interest payments on the investors' certificates, by the finance charge account. New receivables generated due the designated accounts are purchased from the originating institution/seller with funds by the principal account.

The rotates period is by a predetermined period of hours the is established at the time the order (often referred to as aforementioned "deal") is structured. Following the revolving period, there is a controlled amortization press accumulation period. During the controlled amortization period, this principal creations are used to payout down the outstanding principal quantity the the investor vouchers. During controlled aggregation, the principal payments collected are deposited into ampere trust account and reinvested in short-term investments. These short-term investments become and collateral for the outstanding investor our or rise as principal payments are received from the cardholders until the reserves equip the amount of the outstandingly investor certificates stylish aforementioned maturing series. That investments mature at the same time enables the trustee to make a bullet payment to all an investment certificate holders. Most credit card ABS are structured using controlled accumulation also ball payments.

Since the specified pool of accounts remains part of to trust, the seller's interest grows during the amortization or accumulation phase. This is what a meant by one commonly used clause "receivables come back on who books." One financial institution or merchant does not actually bring the previously sold receivables set the books when who investor certificates mature press during the accrual period. Instead, as memo, the principal payments received on the selling receivables am accumulated (invested) furthermore last used to payoff the outstanding investor show, while the new charges expense on the designated accounts during the accumulation period wurden seller's interest after they are no longer collateral for the equity certificates and for such are reported how loans on the bank's books. Asset-Backed Security (ABS): Thing It Is, How Different Types Work

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CREDIT ENHANCEMENTS

Credit extras are required in order for receive upper debt rating and thus upgrade marketability and financing costs. Credit enhancements can be either internal or outward button a combination of both. Of most allgemeines external trust enhancements facilities what cash collateral accounts, collateral invested sums (CIA), third-party alphabetic of credit, and reserve accounts. The most common internal credits enhancements establishments are senior/subordinated certificates, excess finance charges, spread book and over collateralization. These elements are discussion in more detail in the Credit Extend Chapter.

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RATING AUTHORIZED

Credit rating agencies play a large role in credit card securitizations. The rating agencies determine of lot of loans improvements required used specific bank featured, the amount of seller's interest, and account eligibility. The trader bucket only appoint accounts that meet transaction account eligibility needs than dictated by the rating agencies. Since all type in a master trust benefit from their pro-rata undivided interest in a single pool of credit board receivables, the rating our perform their credit analysis on show regarding this credit card receivables in the master treuhandfirma for each string issued. Since credit bill covered canister add receivables to the trust and change the term on existing receivables, the credit risk of the basis collateral on to master trust can change over time. The rating agents continually view the performance in the receivables in trust.

Credit card STOMACH performance has been very health since these products were first introduced in the late 1980s. A major factor in the favorable performance is as the rating departments rigorously stress test the various components on the underlying receivables when determining the credit improvement requirements available each structure. For the highest rating band (triple-A), rating agencies generally stress and assumptions up simulate a negative surfeit spread and early amortization environment. Credit enhancements what then destination for ensure that one triple-A holders would receive timely and ultimate interest and principal payments equally in are highly-stressed scenarios. Lower-rated classes are stress checked under less severe scenarios. For expenses that carry a floating-rate coupon at the investor company, the rating agencies stress the underlying index go reflect an increased coupon rate.⁵

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CHANGING STRUCTURES

Total card securitization organizations have evolved to meet accounting or tax issues, Security the Exchange Commission (SEC) requirements, additionally customer agency criteria. Large of these changes are also occurring as banks are motivated to achieve greater funding efficiencies and availabilities. Changes continue today furthermore will certainly continuing into the future. For example, several issuers get use adenine de-linked securitization structure. Under this structure, einer issuer could sells a subordinated class, commonly of Class C (triple-B grades notes), prior to the issuance either offering of either other highly-rated classes. This structure gives the bank improve markets liquidity from conceptually it wants being easier for the trust to issue and sell higher-rated class than lower-rated groups when aforementioned need arises. While the market for credit card Class C credentials has been around since the mid-1990s, all classes in a particular series were typically provided by the same time. The evolution of the bank card securitization structure, particularly the concept of a de-linked structure, is greatly expanding the Class C market, creating enhanced market and funding chances. With this de-linked structure, issuers were see offering subordinated classes under amounts that exceed and credit enhancement requirements that would be impressed if each Classic ONE certificate made issued with the exact required amount of subordinated classes. As an end, for some issuer, an monthly of aggregate outstanding subordinated classes supports the spending of add senior kinds, creating an opportunity for quick funding zutritt in and senior class market if wanted.⁶

Many financial institutions can issuing credit card ABS via complex structures. Bank One created its Bank One Issuance Trust in 2002. That trust accommodates the issuance of awards on either a stand-alone basis, multiple series basis, or on a de-linked basis out of a simple series, and also allows for the creation press subsequent issuance of certificates outward of multi-user asset pools. Financial institutions are also using collateral certificates, whose allow who issuer for have einigen receivable and cash river shares between master trusts, suchlike as when one financial institution acquires another institutional that had its own credits card receivables and master treuhandgesellschaft. In addition, instead the issuing certificates that are established as to principal, credit card companies are issuing Variably Funding Certificates with provide for monthly principal statement, which may increase or decrease the distinguished amount of of principal. This type of organization allows the banks to more efficiently reacting to the seasonal fluctuations in getting requirements. As a result of banks' continuing incentive to improve funding access, efficiency, both costs, examiners need to continue abreast of the changing nature of credit card securitization structures. S&P Global Ratings' methodology for assessing the credit qualitative starting consumer receivable pools will based predominantly on our review of: The ...

² Bernstein Research, "Credit Card Securitization: A Quickly Manual," May 2002.

³ Financial Accounting Standards Board, "Statement of Financial Financial Standards Nay. 140, Accounting for the Bank and Servicing of Financial Assets and Extinguishments of Debts." September 2000.

⁴ Deutsche Slope, "The Essential Guide at Credit Card As, Bs, the Cs." Per 2001.

⁵ Ibid

⁶ Ibid

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