Introduction to Insured Asset Securitization

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Monoline Insurers and Credit Enhancement
Asia Pacific Finance and Development
Center Shanghai National Accounting Institute,
Shanghai November 7th-9th, 2005
Diane K.Y. Lam, CFA Director Asia
Pacific Email dlam_at_fsa.com Tel [phone]
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Agenda

• Monoline Financial Guaranty Insurance Industry
• FSA Financial Guarantees/Surety Bonds
• Case Study-Hyundai Capital

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The Aaa/AAA-Rated Monoline Financial Guaranty
Insurance Industry

• Big Four primary providers AMBAC (1971), MBIA
  (1973), FGIC (1983), FSA (1985)
• Recent entrants XLCA (2000), CIFG (2002),
  Assured Guaranty (2003)
• Insure municipal/governmental, project finance
  and asset-backed bonds, domestically and
  internationally
• All rated Aaa/AAA/AAA by Moodys/SP/Fitch
  Ratings
• Regulated by
• Government Agencies
• Rating Agencies
• Barriers to entry
• Experienced management requirements
• Strong ownership/business model requirements
• Market recognition acceptance trading value
  and liquidity
• Staffing infrastructure requirements
• Significant capital requirements
• Weak returns in early years of start-up
• Underwrite investment-grade transactions
• No forced acceleration insurer is only required
  to make principal and interest payments as
  scheduled
• Low industry loss experience

(1)
(1) Assured Guaranty is rated AAA by SP and
Fitch and Aa1 by Moodys.
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Rating Agencies Oversight

• Transaction level
• Insurance company level

• Shadow rating assigned to each insured
  transaction by sector specialist
• Capital charges assigned for each specific
  exposure

• Continuous review of operations, risk management
  practices, profitability, liquidity and quality
  of management
• Review capital sources and investment practices
• Evaluate worst-case loss potential from claims
• Assess capital adequacy under stress scenarios
• SPs FER (Financial Enhancement Ratings)

• Measures willingness to pay claims and commitment
  to maintain Triple-A

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AAA-Rated Monoline Financial Guaranty Insurance
Industry Net Par Outstanding by Product Line
6/30/05
International 217 Billion
U.S. ABS377 Billion
13
23
U.S. Municipal 1,042 Billion
64
Total Net Par Outstanding 1.64 Trillion
Includes Ambac, FSA, MBIA and FGIC. Gross
outstanding par for those companies was 1.9
trillion at 6/30/05. Source Company reports.
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AAA-Rated Monoline Financial Guaranty Insurance
Industry Annual Gross Par OriginatedTrends
Growth in Originations and Diversification
414
404
Non-U.S. U.S. ABS U.S. Muni
Bn Par
364
366
(1)
73.4
52.7
59.2
64.3
268
256
167.1
151.1
103.1
23.7
57.0
213
159.6
30.1
110.0
113.0
67.7
125
3.1
196.9
44.4
189.3
184.0
147.2
52
122.4
115.2
43
0.9
98.0
10.0
0.25
77.2
43.0
41.0
Sources FSA, MBIA, Ambac and FGIC company
reports. Includes secondary market
transactions. (1) Includes ABS, MBS and funded
and unfunded CDOs and CDSs.
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How Does a FSAs Guarantee Work?

• Simplest Form
• Time Tested Form of External Credit Enhancement
• Unconditional
• Irrevocable
• Timely Payment of Interest and Principal
• Ability to Pay ? Robust and comprehensive risk
  cover, backed by FSAs AAA financial strength
• Willingness to Pay ? Unlike some history of
  multiline financial guarantors, monolines like
  FSA have a clean record of timely payment.

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FSA Credit Enhancement At Work Value Added

• Benefits to Investors
• Timely payment guarantee from AAA rated guarantor
• Credit expertise and analysis on complex
  transactions
• Commitment to credit quality investment grade
  shadow ratings.
• Dedicated surveillance and transaction oversight
• Country risk and portfolio management
• High liquidity for investments
• A stable investment with low rating volatility
  and low expected loss severity

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FSA Credit Enhancement At Work Value Added

• Benefits of FSA Guarantee to Originators
• Lowers cost of capital
• Support to first time issuer of ABS
• Experts to help optimize transaction structures
• Simplifies risks and pricing for swaps since swap
  counterparty does not take credit risk on the
  portfolio or SPV
• Helps Extend Tenor of Transaction
• Provides Matched Funding
• Facilitates large placements and quick execution
• Helps broaden access to capital and name
  recognition
• Achieve capital relief
• Deal with one knowledgeable party for critical
  decision making

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FSA Credit Enhancement At Work US160MM
Hyundai Capital Auto Funding Ltd, due 2005

• Background
• Transaction closed in March 2002
• Originator, Hyundai Capital Services is an
  unrated captive finance company of Hyundai Motors
• First time cross-border issuer
• Lack of comparable publicly available auto loan
  performance data for Korea
• Companys credit scoring system was revised in
  2000 and not tested against a stressful economic
  down cycle
• Structured to investment grade shadow ratings
  from Moodys and Standard Poors
• Achieved AAA rating with FSA Guarantee

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FSA Credit Enhancement At Work US160MM
Hyundai Capital Auto Funding Ltd, due 2005

• Credit Enhancement Package
• Internal
• Junior notes equally 25 of the Pool Balance (as
  of closing)
• Excess spread (if any)
• External
• Cash reserves of 3 of the Pool Balance (as of
  closing)
• FSA Guarantee on the Swap
• FSA Guarantee on the Notes

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FSA Credit Enhancement At Work

• FSA assumed the following risks to safeguard
  investors
• Portfolio experiences defaults in excess of the
  subordination
• Default risk of 3rd party to the transaction such
  the swap counterparty
• Default risk or performance risk of the servicer
• Commingling risks upon the the default of Hyundai
  Capital
• Preferential or clawback risk upon the default of
  Hyundai Capital
• Set-off risks which may accrue to the borrowers
• Inability of the Back Up Servicer to Collect in a
  timely manner
• Recovery process on non performing loans is
  frustrated or takes a long time
• Fraud, or misreporting risk
• FSA would ultimately assume cross-border and
  transferability of the Korean won if the swap
  provider failed under the terms of the swap
  agreement
• Legal risks associated with untested Korean
  securitization laws
• Downgrade risk

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FSA Credit Enhancement At Work

• FSAs Guarantee Delivered to Hyundai Capital
  Services the following benefits
• A single point of communication and decision
  making prior, during and post closing.
• Favorable funding rates in international markets
• Favorable swap pricing terms
• Facilitated large placements and quick execution
• First time issue in cross border markets
• Documentation template for executing future deals
  rapidly
• Data templates and data collection which allowed
  investors to become more comfortable, and also,
  eventually supported a reduction in credit
  enhancement in later deals.
• Achieved a diversified funding base to complement
  domestic ABS funding
• US/Euro/Yen denominated ABS in conduits
• Achieved name recognition and enlarged investor
  base
• Yen denominated unsecured corporate samurai bonds

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Thank You