moodys presentation 2005
TRANSCRIPT
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2005 Esoteric Asset-Backed Securities Investor Briefing
Sofitel Hotel, New YorkSofitel Hotel, New York
June 23, 2005
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2Speakers
Taimur Jamil: Wireless Towers
Julia Tung: Life Insurance
McGinnis Caldwell: Tobacco Settlements
Christophe Razaire: Tobacco Litigation Update
Stephen Macy: Legal Issues
Olga Filipenko: Intellectual Property
Parla Ozgediz: Aircraft
Michael McDermitt: Small Business Loans
Kent Becker: Equipment Leases
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Wireless Towers
Presented by:
Taimur JamilAsset Finance Group
Presented by:
Taimur JamilAsset Finance Group
June 23, 2005
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4Wireless Towers (I)
What are wireless towers?
Tall metallic structures
Pivotal for wireless communications
Who owns them?
Infrastructure developed by Wireless Service Providers
Decision to dispose off non-critical assets
Aggregation of tower portfolios by new entrants
Crown Castle, American Tower, SpectraSite, SBA
and Global Signal
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5Wireless Towers (II)
What is being securitized?
Revenues from underlying leases between wireless tower companies and wireless service providers
Proprietary networks (Dispatch services, government networks, TV/Radio broadcasters)
Why securitization?
Lower cost of funds
Favorable interest rate environment
Retire high yield debt, recapitalize balance sheet
Portfolio acquisition financing
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6Transactions to Date
3 transactions to date raising a total of $2.61 billion in tranched investment and non-investment grade debt
Global Signal
Global Signal Trust I, Series 2004-I ($418 mil)
Global Signal Trust II, Series 2004-II ($290 mil)
Crown Castle
Crown Castle Towers LLC, Series 2005-1 ($1.9 bil)
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7A Tower that is Aesthetically Appealing
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8Wireless Technology
What constitutes wireless technology?
Telephony
Land Mobile Radio / Specialized Mobile Radio
Paging
Other Data Services
Broadcasting
Telephony is the most dominant and prevalent revenue source
All other revenue sources considered declining
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9Wireless Technology
What is driving the need for wireless services?
Infrastructure easy to deploy
Increased usage and prevalence of cellular phones
Trend towards mobile computing resulting in
Greater demand for bandwidth
Seamless integration with Wi-Fi networks
Compatibility among different standards such as GSM and CDMA
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Wireless Technology
What are the associated technology risks?
Satellite communications
Currently exists such as Motorolas Iridium service
which has a constellation of 77 LEO satellites
Wide spread market acceptance not forthcoming
due to high usage costs and bulky equipment
Usage limited to niche specialties to remote
communication such as news reporting
Potential health concerns
Wireless service a commoditized necessity
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Single Tower Cash Flow Mechanics
Initial investment of $200,000 - $300,000 by owner
On-going expenses minimal
With 2 tenants cash flows are Ebitda positiveBasic One Tower Model
Number of Tenants on Tower 1 2 3
Revenue (~ $1,600 per month) 19,200 38,400 57,600Direct Operatign Cost 13,000 13,260 13,525Tower Gross Profit 6,200 25,140 44,075
Gross Profit Margin 32.3% 65.5% 76.5%
SG&A 7,300 7,300 7,300
EBITDA (1,100) 17,840 36,775EBITDA Margin -5.7% 46.5% 63.8%
Maintenance Capex (4,000) (4,000) (4,000)
Free Cash Flow (5,100) 13,840 32,775Free Cash Flow Margin -26.6% 36.0% 56.9%
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How does Moodys Evaluate the Cash Flows?
Ascertain the sustainable level of cash flow over the life of the debt
Evaluate firms operating performance
Comparable public company and market data
Determine the net present value of the future flows
And an appropriate advance rate based on LTV and Debt Service Coverage Ratio
Like other asset back transactions liability structure also modeled
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How does Moodys Evaluate the Cash Flows?
Revenue
Correlated to the number of tenants per tower
Industry average is 2.5 tenants
This is a function of the location of the towers,
population density and management strategy
Evaluate underlying tenant leases
Duration of leases
Composition of tenants
Built-in rent escalators (2% to 5% per annum)
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How does Moodys Evaluate the Cash Flows?
Revenue
Tenant attrition
Minimal since service providers optimize their
networks for a particular geographic area
Barriers to entry are high, since it is difficult to
build new structures due to zoning restrictions
Associated moving costs (~$30,000 to $50,000) far
outweigh rent escalator increments
Tenant concentration
Majority of revenue derived from few tenants
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How does Moodys Evaluate the Cash Flows?
Revenue
Impact of mergers
Each service provider operates on a specific
frequency spectrum
Equipment is not dual use and cannot be
consolidated
Merger benefits realized through consolidation of
other support functions (marketing, etc)
Wireless tower revenues not impacted; Demand for
more bandwidth will fuel request for space
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How does Moodys Evaluate the Cash Flows?
Expenses
Direct operating expenses
Industry Ebitda margins range from 40% to 75%
Correlated to managements expertise and size of
the company
Maintenance capital expenditures
Per tower capital expenditure estimated at $3000
to $5000 per tower per annum
Evaluated on a case by case basis
Lower estimates used for the rated transactions
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How does Moodys Evaluate the Cash Flows?
Expenses
Management fee
For the rated transaction a management fee equal
to 10% of revenue was used
Must be sufficient enough to retain another
manager if the existing manager needs to be
replaced
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How does Moodys Evaluate the Cash Flows?
Refinancing and the Anticipated Refinancing Date
Our assumption is that refinancing does not occur
Assets continue to operate on an as-is basis with additional interest penalties
Rating addresses whether bonds will be repaid by legal final maturity
Discount rates
Range of 10% to 13% - reflects our view on the riskiness of the cash flows
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How does Moodys Evaluate the Cash Flows?
Advance rate
LTV for different rated tranches
Liability structure must hold under all valuation
stresses
Ratings LTV Range
Aaa 35% - 46%Aa2 43% - 53%A2 51% - 60%
Baa2 59% - 65%Baa3 62% - 67%Ba1 66% - 70%Ba2 72% - 75%
Ba3 and Below > 76%
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Structural and Legal Provisions
Bells and whistles just like any structured transaction
Environmental reviews on all sites
No pending litigation
Clear record from the FAA and FCC pertaining to non-compliant activities
For the rated transactions 70% of revenue derived from sites where an estoppels had been obtained
Appropriate reserves
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Structural Flexibility in Rated Transactions
Site acquisition account
Property release provisions
Property substitution
Issuance of additional notes
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Conclusion: Not Just by the Numbers
Analysis driven by quantitative and qualitative factors such as:
Market trends
Asset and sponsorship qualities
Loan structural characteristics
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Life Insurance
Presented by:
Julia TungAsset Finance Group
Presented by:
Julia TungAsset Finance Group
June 23, 2005
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Life Insurance Products
Four Types of Securitizations:
Life or Senior Settlements
Life Insurance/Life Annuity
Corporate or Bank Owned Life Insurance Commissions (COLI/BOLI)
Life Insurance Premium Finance
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Life Settlements
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What is a Life Settlement?
Individual generally over age 65 sells life insurance policy at a discount of face amount
Insured has shortened life expectancy (LE) compared to general population (e.g. LE of 2-12 years)
Insured typically does not have a single impairment
Face amount range of $250,000 to $10 million
Funding for purchase provided through warehouse facility or institutional funding
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Issuance in the ABS Market
Several warehouse facilities outstanding not rated by Moodys
One term transaction rated by Moodys
Legacy Benefits 2004-1 (2/25/04)
Class A ($61.5 million) rated A1
Class B ($8.5 million) rated Baa2
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What are the Primary Risks in a Life Settlement Deal?
Legal/Regulatory
Life Settlement Company/Servicer
Credit of insurance companies and other entities
Timing of cash flows
Mortality analysis
Pool analysis
Analysis of policies
Structure
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Risks in a Life Settlement Deal:Life Settlement Company/Servicer
What is the companys background?
What is the companys origination policy?
Is the servicer a viable entity? Is there a viable back-up servicer?
Does the servicer/back-up have the appropriate licenses to originate and service?
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Risks in a Life Settlement Deal:Credit of Insurance Companies and Other Entities
Rating of insurance policy providers
Concentration of insurance policy providers
Rating of any other related entities, e.g. annuity provider, supplemental insurance provider, etc.
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Risks in a Life Settlement Deal:Timing of Cash flows (Part 1)
Mortality Analysis
Base mortality table for male/female and smoker/non-smoker (e.g. 2001 VBT table)
Adjustment to mortality supplied by medical underwriter
Verification of mortality expectations from a third party
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Risks in a Life Settlement Deal:Timing of Cash flows (Part 2)
Pool Analysis
Number of lives in the pool
Relative size of policies
Diversification of ailments
Geographic diversification (regulatory concern)
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Risks in a Life Settlement Deal:Timing of Cash flows (Part 3)
Analysis of policies
Type of insurance policy
universal/variable/whole/term
Premium schedule
Cash reserves
Past the period of contestability
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Risks in a Life Settlement Deal:Timing of Cash flows (Part 4)
Structure
How will premium/interest payments be covered given the uncertain timing of the death benefits?
Possible solutions: reserve account, annuities, policy to cover life extension risk, etc.
Will a sufficient number of policies have paid out by the legal final?
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Risks in a Life Settlement Deal:Timing of Cash flows (Part 5)
Monte Carlo Simulation
Stress the mortality rates
Magnitude of stress may depend on
Number of lives in the pool
Life expectancy of insured
Confidence in medical underwriting
Size of policy
If premiums are not fixed, stress the increase in premium payments
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Life Insurance/ Life Annuity
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What is a Life Insurance/Life Annuity Transaction?
New life insurance policy is purchased on a healthy senior over the age of 70
Securitization proceeds are used to purchase fixed annuities to cover interest and premium payments and additional coverage
Residual goes to insureds designation (typically charity or family member)
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Cash Flows of a Life Insurance/Life Annuity Deal:
Proceeds from Investors
Fund Reserve AccountPurchase Supplemental Policies
Purchase Annuity
Annuity Payments
Bond Interest, Life Insurance Premiums & Trustee Expenses
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What are the Economics Behind the Deal?
Annuity payments and premiums/bond interest are perfectly matched no mortality analysis
Insurers/reinsurers and annuity companies have very different views of mortality of healthy seniors
Arbitrage will narrow as more data appears
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Life Insurance/Life Annuity Deals Involving Charities
Moodys has rated six transactions to date from one issuer
Issuance has stopped because of proposed legislation
crack down on abuses in certain life insurance contracts involving tax-exempt organizations
25% excise tax on death benefits (Bush administrations proposed FY 2006 budget)
100% excise tax on acquisition costs of any interest in an applicable insurance contract (Grassley-Baucus Bill)
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Other Life Insurance/Life Annuity Proposals
Moodys has reviewed several proposals in which life policies are purchased by individuals in exchange for a cash payment or a small portion of the death benefit
So far no deal has closed because of legal concerns
wet ink policies
Insurable interest
Fraud and contestability
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Tobacco Settlements
Presented by:
McGinnis CaldwellAsset Finance Group
Presented by:
McGinnis CaldwellAsset Finance Group
June 23, 2005
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Introduction
Revenue under Master Settlement Agreement (MSA)
Tobacco Legal Fees
Revenue Associated with Tobacco Quotas
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MSA Revenue Asset Characteristics
The MSA was entered into in November 1998 by 46 states, DC, Puerto Rico, U.S. territories and four major US Tobacco Companies
MSA ended litigation between the states and the Tobacco Companies for smoking related injuries in exchange for payments to be made to the states in perpetuity
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MSA Revenue Deals Rated by Moodys
Since 1999
42 transactions rated, includes
15 state deals
23 city and county deals
4 US territory deals and Washington DC
Ratings: Currently Baa1 to Ba1 on senior tranches (mostly Baa3), all on review with direction uncertain
Subordinate tranches rated mostly Ba2
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Tobacco Legal Fee Asset Characteristics
Outside counsel for a specific state must agree to have fees set by negotiation with the tobacco companies, subject to an aggregate $1.25 billion cap or by an arbitration panel
Arbitrated fees are subject to national cap of $125 million per quarter and $500 million per annum
Each of tobacco companies is severally obligated for a portion of quarterly payments corresponding to market share, adjusted annually
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Tobacco Legal Fee Asset Characteristics
Future tobacco class action lawyers may elect to have their fees determined by arbitration and included under the quarterly and annual caps above
This inclusion would result in the extension of securitized legal fees. This is an opt-in extension risk
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Legal Fee Revenue Deals Rated by Moodys
Since 2001, state counsel for following states have securitized
California, Florida, Hawaii, Illinois, Massachusetts, Mississippi, Ohio and Texas
Ratings: Currently Aa3 to Baa2 on senior tranches; Baa3 on subordinate
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Tobacco Quota Revenue Asset Characteristics
The Fair and Equitable Tobacco Reform Act of 2004 (the Buyout Legislation) eliminates the current federal tobacco price support and quota programs
Secretary of Agriculture, through Commodity Credit Corporation, enters into a contract with each tobacco quota holder in exchange for the termination of tobacco marketing quotas and price supports
$10 billion paid over 10 years
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Tobacco Quota Revenue Concerns
Full faith and credit?
Release of prior liens?
Assignability?
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Tobacco Quota Deals Rated by Moodys
None
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MSA Revenue Stream Features
Aggregate Base MSA Payments
Year
Initial Payments
(January 10)
Annual Payments (April 15)
Strategic Contribution
(April 15)
Total PaymentsBefore
Adjustments
1998 $2,400,000,000 $0 $2,400,000,0001999 2000 2,472,000,000 4,500,000,000 6,972,000,0002001 2,546,160,000 5,000,000,000 7,546,160,0002002 2,622,544,800 6,500,000,000 9,122,544,8002003 2,701,221,144 6,500,000,000 9,201,221,1442004 8,000,000,000 8,000,000,000
2007 8,000,000,000 8,000,000,0002008 8,139,000,000 861,000,000 9,000,000,000
2017 8,139,000,000 861,000,000 9,000,000,0002018 9,000,000,000 9,000,000,000
$9 Billion Annual Payments Continued in Perpetuity
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MSA Revenue Stream Features
These Base Payments are subject to adjustments. The three primary adjustments are described below:
Inflation Adjustment - The Base Payments are to be increased each year by the greater of 3% or the actual Consumer Price Index
Volume Adjustment - The Base Payments are to be increased or decreased according to the amount of cigarette shipments relative to the amount of shipments in 1997 (475.7 billion cigarettes)
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MSA Revenue Stream Features
Previously Settled States Reduction - The Base Payments are reduced by the set percentages below:
2000-2007 12.45%
2008-2017 12.24%
2018 and after 11.07%
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MSA Revenue Stream Features
MSA Payments
0
5
10
15
20
25
30
35
2003 2008 2013 2018 2023 2028 2033 2038 2043
$
B
i
l
l
i
o
n
s
Base PaymentsAfter InflationAfter Inflation and Consumption (1)After Inflation, Consumption (1) and Previously Settled States
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MSA Revenue Stream Features
Two adjustments contributing to potentially significant downward pressure on base payments
Volume adjustments: long term cigarette consumption trends
Size of non-participating manufacturer (NPM) market and necessity of NPM adjustment
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MSA Revenue Stream: Volume Adjustment
-3.13%4651998
-6.45%4351999
-1.15%4302000
-1.16%4252001
-2.35%4152002
-3.61%4002003
-1.75%~3932004
Percentage Change
Consumption (Billions)
Year
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MSA Revenue Stream: NPM Adjustment
Loss of market share (Currently, Original Manufacturers ~85%, Subsequent Manufacturers ~7%, NPMs ~8%)
Independent consultant makes a significant factor determination
Model Statute is not being diligently enforced
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NPM Adjustment: Diligent Enforcement
Enforcement of escrow statutes
Repeal of the allocable share release loophole
Equity assessments
Monitoring NPMs via annual certifications
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Freedom Holdings, Inc. v. Eliot Spitzer
Challenges the MSA, Model Statute and NYs Escrow Statute
Claims that MSA violates the Sherman Antitrust Act as an output cartel that protects OPMs by penalizing SPMs for exceeding original market shares and penalizing NPMs through Escrow Statutes
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Freedom Holdings, Inc. v. Eliot Spitzer
Lawsuit dismissed May 15, 2002 based on theory of governmental immunity
Second Circuit Court of Appeals reversed trial court decision in January 2004
District Court denied a preliminary injunction against enforcement of Escrow Statute in September 2004 but grants preliminary injunction against the repeal of allocable share. Plaintiffs appeal
In June 2005, appellate court affirms denial of preliminary injunction
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Freedom Holdings, Inc. v. Eliot Spitzer
Appellate court did not really give guidance on the law, which would have provided grounds for motion for summary judgment
Discovery proceedings continue in the District Court. No trial date set
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Positive News on Tobacco Company Litigation
DOJ
Manhattan Supreme Court decision on the diligent enforcement issue
Freedom Holdings and denial of appeal of preliminary injunction
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Conclusion: Legal Opinions Important
Bankruptcy remoteness
Executory contract and approval of debtors decision to assume MSA
Enforceability of MSA and Model Statute
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Tobacco Litigation Update
Presented by:
Christophe RazaireCorporate Finance Group
Presented by:
Christophe RazaireCorporate Finance Group
June 23, 2005
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Our View
3 threats remain: Price / Miles
DOJ
Engle
Star Scientific could be added to list depending on upcoming ruling
If these threats are eliminated, litigation risk could reach lowest level in a decade
Resolution on 3 cases not likely before early 2006
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3 Threats
Case In what way is it a risk for MSA bonds? In what way is it a risk for corporate bonds?
DOJ Could lead to court-driven volume reductions At worst, not before 2009. No risk of bankrupting bonding because federal court.
Could lead to court-driven volume reductions At worst, not before 2009. Bonding could eliminate upstreaming of dividends to obligors.
PRICE / MILES Full judgment bankrupting for PMUSA if under the form of
cash payment. At worst, no payment before 2006. Reduced, bearable judgment would have less effect on risk. RJR and B & W in Madison County. Still no bond cap in Illinois.
Full judgment bankrupting if under the form of cash payment. At worst, no payment before 2006. Reduced bearable judgment would have less effect on risk. Altria could survive PMUSA bankruptcy.
ENGLE Odds of verdict affirmation very low. Bonding protects PMUSA and Lorillard thru US Supreme Court, not RJR and B & W.
Odds of verdict affirmation very low. Bonding protects PMUSA and Lorillard thru US Supreme Court, not RJR and B & W.
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Why Litigation Clouds Could Lift
Bond caps
State Farm
Class Action Fairness Act
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Why Litigation Clouds Could Lift
ASSUMING RESOLUTION OF CRITICAL CASES, OUR REVIEW OF 10K AND 10Q DISCLOSURES SHOWS
In state courts, no largescale case scheduled for trial in a state without a bond cap
In federal courts, no largescale case scheduled for trial
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Cases with Some Bonding Risk and/or Risk of High Payments
Case Jurisdiction Potential bonding requirement CommentsDOJ Federal
(District of Columbia)
Up to 100% of judgment Disgorgement denied by DC Court of Appeals. Further successful appeal of the issue unlikely. However, bonding remains possible
Romero New Mexico More than 100% of judgment Price fixing case. Class has been certified. NM Court of Appeals affirmed certification in February 2005. Defendants seeking review of class certification by NM Supreme Court.
Schwab Federal (2nd Circuit)
More than 100% of judgment "Lights" nationwide class action. Hearing on certification in August 2005. Trial unlikely to start at scheduled date of November 2005.
Aspinall Massachusetts Bonding not required, but can be imposed by court at its discretion
(although this is rare)
Class certification has been affirmed by Mass. Supreme Court.PMUSA
Company named as defendant
Altria PMUSA
RJR Tobacco Co. Lorillard, B & W
PMUSA RJR Tobacco Co. Lorillard, B & W
PMUSA RJR Tobacco Co. Lorillard, B & W
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Cases with Some Bonding Risk and/or Risk of High Payments
Case JurisdictionPotential bonding
requirement CommentsTurner Illinois Up to 100% of judgment On hold, awaiting review of Price / Miles by
Illinois Supreme Court.
Howard Illinois Up to 100% of judgment On hold, awaiting review of Price / Miles by Illinois Supreme Court.
Star Scientific
Federal Up to 100% of judgment Patent infringement case. Awaiting ruling on issue of inequitable conduct.
Vending Machine
Federal (Tennessee)
Up to 100% of judgment Claim: Violation of Robinson - Patman Act. Trial scheduled for July 2005. Number of plaintiffs limited to 10. We believe worst-case damages would be low, but we could change our view with further analysis.
RJR Tobacco Co.
B & W
Company named as defendant
PMUSA
RJR Tobacco Co.
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Cases with Risk of High Payments Only, No Bonding Risk
Case Jurisdiction
Company named as defendant
Amount of Judgment or no verdict yet
If no verdict yet, potential bonding requirement Comments
Engle Florida PMUSA RJR Tobacco
Lorillard B & W
PMUSA = $74 billion RJR = $36.3 billion
Lorillard = $16.3 billion B & W = $17.6 billion
Bonding in place Expecting FL Supreme Court review. Bonding covers
PMUSA and Lorillard thru US Supreme Court.
Price / Miles Illinois PMUSA $10.1 billion Bonding in place Expecting IL Supreme Court review. Bonding covers thru
US Supreme Court.City of St. Louis Missouri Altria
PMUSA RJR Tobacco
Lorillard B & W BAT
No verdict yet $50 million for MSA signatories and affiliates
Healthcare cost recovery case brought by hospitals. Trial scheduled to start in
January 2006.
Curtis Minnesota PMUSA No verdict yet $150 million "Lights" Claim. Will go to trial unless successful motion for summary
judgment or settlement.
Marrone Ohio PMUSA No verdict yet $50 million "Lights" Claim. Will go to trial unless successful motion for summary
judgment or settlement.
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Cases with Risk of High Payments Only, No Bonding Risk
Case Jurisdiction
Company named as defendant
Amount of Judgment or no verdict yet
If no verdict yet, potential bonding
requirement CommentsCollora Missouri RJR Tobacco,
RJR Tobacco Holdings
No verdict yet $50 million for MSA signatories and affiliates
"Lights" Claim. Will go to trial unless successful motion for summary
judgment or settlement.Smith Kansas PMUSA
RJR Tobacco Lorillard B & W
No verdict yet $25 million (MSA signatories)
Price-fixing claim. Class certification not appealable.
British Columbia British Columbia Provincial court
(federally appointed)
PMUSA Philip Morris Intl RJR Tobacco RJR Tobacco
Holdings
No verdict yet It appears that no bonding would be required.
Healthcare cost recovery case brought by hospitals.
Awaiting review of receivability of claim by
Canadian Supreme Court.
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Legal Issues
Presented by:
Stephen MacyAsset Finance Group
Presented by:
Stephen MacyAsset Finance Group
June 23, 2005
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Legal Risk Analysis: Two Directions
Traditional bankruptcy remoteness concerns
Deal-specific legal issues
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Traditional Bankruptcy Remoteness
Basic concern: securities-issuing entity remains legally unaffected by bankruptcy of other deal participants
Deal sponsor is greatest worry
Often the (ultimate) parent of the issuer
Other affiliates
Sister companies or subsidiaries
Servicer replacement issues
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Legal Theories
Recharacterization of sale as financing
Substantive consolidation of issuer with bankrupt affiliate
Voidable preference
Fraudulent conveyance
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Heightened concern because:
Facts may be closer to problem cases
Especially where assets are not financial assets that convert to cash by their terms
Uniqueness of deals means adverse legal decision does not necessarily affect any sizeable industry
Easier to restrict decision to its facts
Judges less leery of upsetting established markets
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Deal-specific Issues
Not a natural kind
Particular legal issues unique to particular asset types
No useful general conclusions
Must look at specific examples
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Example: Life Insurance
Questions re insurable interest
Solicitation by brokers
Attitude of state insurance commissioner
Credit enhancement for potential problems
State registration requirements
State Life Settlement laws
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Example: Tobacco Lawyers Fees
MSA issues discussed already
Separability of Fee Agreements from MSA
Compliance with professional guidelines
Challenges to size of fee awards
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Example: Intellectual Property
Core assets issues
Assuring patent, trademark and copyright protection
Federal filings, opinions, etc.
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Example: Aircraft
Foreign jurisdictions
Maintenance of security interests
Ability to repossess aircraft under defaulted leases
May need first to foreclose on stock of aircraft-
owning company, then to begin repossession effort
Titling and tax issues
May require additional structuring
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Intellectual Property
Presented by:
Olga FilipenkoAsset Finance Group
Presented by:
Olga FilipenkoAsset Finance Group
June 23, 2005
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Intellectual Property
Film Receivables
Trademark Licensing
Franchise Fees
Patent Licensing Royalties
Music Royalties
What has been securitized to date?
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Film Receivables
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Assets Include
The entire output of a studio
The tangible film materials as well as rights to
Release, distribute and exhibit
Receive gross receipts from agreements the studio already has with distributors
Enter into new distribution agreements
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Different Distribution Windows
provide for different streams of cashflows
Applicable for domestic and international
Theatricals
Home Video
Pay TV
Free TV
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Types of Transactions
Advancing against Ultimates
Films included after domestic release
$1B DreamWorks (2002) and $950M Vivendi Universal (2003)
Slate Financing
Future in the can films of a studio
$900M Village Roadshow (2003) and $300M Melrose Investors (2004)
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Types of Transactions: Advancing against Ultimates
Advancing against Ultimates of each movie after theatrical release
Reduced exposure to the film performance risk
Credit Protection
Over-collateralization depending on advance rate
True sale from studio (expenses from reserve account)
Amortization triggers tied to accuracy of ultimate projections, asset and expense coverage
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Types of Transactions: Slate Financing
Portfolio of future films of a studio
Films production costs and limited portion of studio overhead are financed
Exposure to film performance risk
Credit Protection
Subordination of distribution expenses
Diversity by the portfolio of films and minimum number of films to be included
Triggers tied to asset and debt service coverage as well as financial condition of the studio
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Outlook for Film Receivables
Future transactions
Slate financing with distribution costs on the top of the waterfall
Partnership type agreements
Include films from multiple studios in one deal
At least three transactions in 2005
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Trademark Licensing
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Assets Include
The trademark
Royalties generated from the sale of licensed branded products
Could include sales through
3rd Party License Wholesale Retail
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$53M BCBG Max Azria Deal Rated in 2004
Collateral
All current and future trademarks
Royalties generated by the licensing of those trademarks to 3rd parties and parent company
Credit Protection
Over-collateralization and reserve
Triggers capturing excess cash when royalty streams fall below certain levels
IPIFS Guarantee Corp. arranged LOC for the benefit of one class of the notes
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Credit Issues Considered in BCBG Analysis
The history and longevity of the trademark
Competition and the trademark positioning
Projected cash flows from wholesale and retail sales
The current licenses in place including credit quality of the 3rd party licensees, minimum payments, and potential renewals
The manager/servicer of the trademark
Reliance of the trademark on a single person for artistic direction
Potential market for the trademark in distressed situations
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Past Activity: Trademark Licensing
Other apparel trademark transactions rated:
$75M Guess?, rated Baa2 in 2003
$20M Candies, rated Baa3 in 2002
$23M Bill Blass, rated Baa3 in 1999
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Franchise Fees
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What are the Assets?
Intellectual property of the concept
Franchise fees paid by franchisee for the right to use name and concept
Additional revenues might include upfront amounts paid when new stores are opened
If franchisor provides certain specific materials to franchisees, then the profits on these materials might also be included
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Key Points to Consider in Analysis
Strength of the concept
Industry overview
Reason for securitization
Historical data on the performance
Role and strength of franchisor/servicer
Need for back-up servicer
Legal concerns (core assets, true sale, non-consolidation, fraudulent conveyance)
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Recent Activity
Rated several concepts
Athletes Foot, footwear industry, rated Baa3 in 2003
$290M Arbys transaction, fast food restaurant industry, rated Aaa in 2000
In 2005, downgraded Athletes Foot Asset-Backed Notes to Ba2 following parent companys bankruptcy filing
Closing of company-owned stores
True sale not challenged in bankruptcy
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Patent Licensing Royalties
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103
Only Drug Royalty Patent Transactions Rated To Date
Assets include
Rights to receive royalties and contingent pay rights for a pool of pharmaceutical products
Moodys has historically looked at other patents, factors to consider are
Risk of obsolescence
Diverse uses of patents
A pool of patents as compared to only one patent
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Drug Royalty Transactions Rated
$225M Royalty Pharma transaction rated Aaa in 2003
MBIA guarantee
Upsized twice
to allow for acquisition of additional patents
due to better than expected performance
$229M Paul Royalty transaction rated Aaa in 2004
Ambac guarantee
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Points Considered in Rating Paul Royalty Transaction
Performance of the drugs in the pool
Diversity in product application and uses of the collateral
Credit quality of licensees responsible for paying the royalties
Risk of the drug recall by FDA
Servicer
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Aircraft
Presented by:
Parla OzgedizAsset Finance Group
Presented by:
Parla OzgedizAsset Finance Group
June 23, 2005
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Three Major Segments of Aircraft ABS
Revenue StreamAircraft Type
LoansCorporate Jets
Operating LeasesCommercial Jets
Finance LeasesRegional Jets
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Regional Jet Lease-Backed Securitizations
RJs: small capacity jets, usually under a 100 seats
Cashflow Stream: Finance leases
Series of rental payments over the useful life of the aircraft
Lessee is entitled to acquire the title of the aircraft
Lessee is responsible for maintenance, taxes and insurance of the aircraft
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Regional Jet Lease-Backed Securitizations
70EmbraerERJ170/175
50-70EmbraerERJ135/140/145
90BombardierCRJ900
70BombardierCRJ700
44-50BombardierCRJ100/200/440
SeatsManufacturerType
NEW GENERATION
50SaabSaab 2000
25/78Fokker AircraftF28/70/100
32-70Fairchild Aerospace328 Jet/728 Jet/ 428 Jet
85-100BaE SystemsAvro-RJ 70/85/100
60-100McDonnell DouglasDC 9-10/30
SeatsManufacturerType
OLD GENERATION
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Regional Jet Lease-Backed Securitizations
Emerging Asset Class with some initial challenges:
Relatively younger and immature market compared to commercial aircraft
Not statistically significant data
Affiliation of regional airlines with major airlines-good and bad
Highly concentrated in North America
Finance lease structure- not a liquid operating lessee base
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Regional Jet Lease-Backed Securitizations
Rating Approach
Three different perspectives: Portfolio, Lessee, Servicer
Portfolio:
Asset Type: mainly 50-70 seat new generation
Age
Current Market Values and Base Values
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112
Regional Jet Lease-Backed Securitizations
Rating Approach
Lessee:
Credit Quality- low single B
Correlation of default probabilities within the
regional operators in the portfolio
Geographical/Jurisdictional Concentration
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Regional Jet Lease-Backed Securitizations
Rating Approach
Servicer: Usually the manufacturer itself
Review of servicers total owned and managed
portfolio
Marketability Reach: Lessee Connections
Historical Repossession/Remarketing experience,
Strategy on Repossessions
Sale Values
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Regional Jet Lease-Backed Securitizations
Quantitative Analysis
Monte Carlo Simulation
Simulated Variables:
Lease payments upon default of the lessee
Lease Rate Factor: Lease Rate/ Value of the aircraft
Default of the lessees, correlations incorporated
Aircraft Value curve
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Regional Jet Lease-Backed Securitizations
Historical Issuance
Three private, synthetic transactions
Insurance protection
Outlook
Possibly one or two transactions this year
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116
Commercial Aircraft Lease-Backed Securitizations
2004 Market Review
No new pooled aircraft securitization
More Downgrades
2005 Outlook
Slow pick-up in the securitizations through acquisitions of servicers
Repack proposals
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Corporate Aircraft Financing
Corporate Jets:
Loans to high net-worth individuals to finance acquisition of corporate jets
Corporate Jets vs. Commercial Jets
Productivity vs generating revenue
Maintenance and useful life
Major Players: Banks and Finance Companies such as GE, AFG, CIT, Textron, GMAC
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118
Corporate Aircraft Financing
Historical Activity:
Textron Transactions (1997, 2000, 2001)
GE Transactions (2003, 2004)
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119
Corporate Aircraft Financing
Quantitative Analysis
Shift from Static Pool Analysis to Monte Carlo Simulation
The variables include:
Depreciated appraised value of the aircraft
Obligor defaults and prepayments
Economic recessions
Repossession costs, repossession timing
and finally upon default the sale value of the
corporate aircraft
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Corporate Aircraft Financing
Outlook
Currently Quiet, big players may return
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Small Business Loans
Presented by:
Michael McDermittAsset Finance Group
Presented by:
Michael McDermittAsset Finance Group
June 23, 2005
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122
Issuance History
Slow Growth in 1990s
Consolidation Phase in Early 2000s
Return To Growth Mid-2000s
Average Deal Sizes Also Larger
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123
Annual New Issue Volume
$0
$500,000,000
$1,000,000,000
$1,500,000,000
$2,000,000,000
$2,500,000,000
$3,000,000,000
$3,500,000,000
$4,000,000,000
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
YTD
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124
Annual Volume By # Deals & # Issuers
0
2
4
6
8
10
12
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005YTD
# New Issues # Issuers # Repeat Issuers
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125
Credit Performance History
Credit Performance By Downgrade Activity Excellent
TMS Business Loan Trust 1997-1
FNBNE (1998)/ FIB (1999 & 2000)
Total of $365 Million Across 7 Deals
Defaults: FIB Sub/Mezz Classes, < $8MM UPB
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126
Major Participants Then & Now
1990s
The Money Store
2000s
Lehman Small Business Finance (fmr. div. CNL)
GECC Small Business & Middle Market divs.
BLX (subsid. Allied Capital)
BayView Financial
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127
Types Of Loans
Unguaranteed Portion of SBA 7(a) Loans
Cannot be mixed in pool with other types
Companion Loans to SBA 7(a) & 504
Conventional Loans
Conventional & Companion loans may be mixed in same pool
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128
Typical Collateral & Underwriting
1st Lien on Commercial RE Usually Main Collateral
May Be Supported By Liens on Ancillary Real Estate or Equipment
Personal Guarantees Are Common
Underwriting DSCR: Business, Real Estate, or Combined Business/ Personal
FICO Sometimes Obtained As Supporting Factor
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129
Wide Variety of Borrowing Terms
Fixed or Floating Interest Rate
Fully Amortizing or Balloon
Owner Occupied or 3rd Party Tenanted
Special Purpose or General Purpose Property
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130
Issuer Differentiation
Historic: Small Business Oriented
Focus on Owner Occupied Properties
Often Special Purpose e.g. Restaurants/ Hotels
Personal Guarantees Required
Added: Commercial Real Estate Oriented
3rd Party Tenanted Properties Common, More General Purpose (Office, Apartment, Strip Malls)
Personal Guarantees May Not Be Required
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131
Typical ABS Deal Structure
Pro Rata Structure most common
Credit Tranched Aaa to A/Baa
$150MM to $750MM
Excess Spread Available for Enhancement
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132
Rating Issues
Product & Property Mix
Obligor Diversification
At Issue/ At Tail
Gross Defaults
Recoveries
Balloon Maturities
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133
Rating Approach Quantitative Methodology
Choose Model To Fit Issuer/Pool Characteristics
Key Pool Metrics Vs. Prior Deals and Other Issuers
Key Drivers Application
Discrete asset model Default frequency by obligor or obligor group Pool Concentrations/ Balloons collateral types & recoveries by type Limited Historical Default Data
Cash flow model Default frequency & recovery rate Granular Pool
Good Historic Default Data Multiclass model Expected loss & variability thereof Granular Pool
Good Historic Default Data Consistent Recovery Rate
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Equipment Leases
Presented by:
Kent BeckerAsset Finance Group
Presented by:
Kent BeckerAsset Finance Group
June 23, 2005
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Issuance Down in 2004
Year Public (Bil) 144A Market (Bil)
2005 YTD $3.6 ---
2004 $5.1 $2.1
2003 $6.8 $3.1
2002 $5.3 $1.5
2001 $6.9 $2.5
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Recent Reduction in Issuance Due to:
Exit of smaller leasing companies
Acquisitions by larger companies less reliant on securitization
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137
Public Issuers in 2004
Caterpillar
CIT
CNH
GE
John Deere
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138
Public Issuers in 2005
John Deere-$741 million
CAT-$854 million
GE-$636
CNH-$1.38 billion
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139
144 Issuers in 2004
CIT
CNH
Frontier
GE
GreatAmerica
Marlin
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140
Equipment Types Unchanged
Ag & Construction equipment
Office equipment: computers, copiers, faxes
Manufacturing equipment
Average balance: $25,000-$250,000 for ag & construction; $5,000-$50,000 for office equipment
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Structures
Pro-rata principal pay deals dominate, but more sequential pay deals coming to market
Emergency principal structure shuts off interest to subordinate classes if subs are undercollateralized
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142
Credit Performance Improves Recently
Stronger liquidity of obligors due to stronger economy
Telecom, manufacturers, high tech stronger sectors
Tighter controls implemented by servicers in collections and workout functions
Improved recoveries on repos due to stronger demand for used equipment
Upgrades in ag & construction sector (CNH, Deere, CAT)
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143
Industry Plagued by Blowups
DVI
ICON
Prime
T&W
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144
Backup Servicing Important
Backup maps servicing systems
Recalculates servicing reports
Servicing transfer triggers based on deal performance, financial covenants, or servicers other existing debt facilities
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145
Outlook
Modest increase in issuance as equipment needs grow due to improving economy
144A market should grow as small leasing companies enter the market
Credit performance should remain stable in 2005
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146
www.moodys.com www.moodys.com
2005 Esoteric Asset-Backed Securities Investor BriefingWireless TowersWireless Towers (I)Wireless Towers (II)Transactions to DateA Tower that is Aesthetically AppealingWireless TechnologyWireless TechnologyWireless TechnologySingle Tower Cash Flow MechanicsHow does Moodys Evaluate the Cash Flows?How does Moodys Evaluate the Cash Flows?How does Moodys Evaluate the Cash Flows?How does Moodys Evaluate the Cash Flows?How does Moodys Evaluate the Cash Flows?How does Moodys Evaluate the Cash Flows?How does Moodys Evaluate the Cash Flows?How does Moodys Evaluate the Cash Flows?Structural and Legal ProvisionsStructural Flexibility in Rated TransactionsConclusion: Not Just by the NumbersLife InsuranceLife Insurance ProductsLife SettlementsWhat is a Life Settlement?Issuance in the ABS MarketWhat are the Primary Risks in a Life Settlement Deal?Risks in a Life Settlement Deal:Life Settlement Company/ServicerRisks in a Life Settlement Deal:Credit of Insurance Companies and Other EntitiesRisks in a Life Settlement Deal:Timing of Cash flows (Part 1)Risks in a Life Settlement Deal:Timing of Cash flows (Part 2)Risks in a Life Settlement Deal:Timing of Cash flows (Part 3)Risks in a Life Settlement Deal:Timing of Cash flows (Part 4)Risks in a Life Settlement Deal:Timing of Cash flows (Part 5)Life Insurance/ Life AnnuityWhat is a Life Insurance/Life Annuity Transaction?Cash Flows of a Life Insurance/Life Annuity Deal:What are the Economics Behind the Deal?Life Insurance/Life Annuity Deals Involving CharitiesOther Life Insurance/Life Annuity ProposalsTobacco SettlementsIntroductionMSA Revenue Asset CharacteristicsMSA Revenue Deals Rated by MoodysTobacco Legal Fee Asset CharacteristicsTobacco Legal Fee Asset CharacteristicsLegal Fee Revenue Deals Rated by MoodysTobacco Quota Revenue Asset CharacteristicsTobacco Quota Revenue ConcernsTobacco Quota Deals Rated by MoodysMSA Revenue Stream FeaturesMSA Revenue Stream FeaturesMSA Revenue Stream FeaturesMSA Revenue Stream FeaturesMSA Revenue Stream FeaturesMSA Revenue Stream: Volume AdjustmentMSA Revenue Stream: NPM AdjustmentNPM Adjustment: Diligent EnforcementFreedom Holdings, Inc. v. Eliot SpitzerFreedom Holdings, Inc. v. Eliot SpitzerFreedom Holdings, Inc. v. Eliot SpitzerPositive News on Tobacco Company LitigationConclusion: Legal Opinions ImportantTobacco Litigation UpdateOur ViewWhy Litigation Clouds Could LiftWhy Litigation Clouds Could LiftCases with Some Bonding Risk and/or Risk of High PaymentsCases with Some Bonding Risk and/or Risk of High PaymentsCases with Risk of High Payments Only, No Bonding RiskCases with Risk of High Payments Only, No Bonding RiskLegal IssuesLegal Risk Analysis: Two DirectionsTraditional Bankruptcy RemotenessLegal TheoriesHeightened concern because:Deal-specific IssuesExample: Life InsuranceExample: Tobacco Lawyers FeesExample: Intellectual PropertyExample: AircraftIntellectual PropertyIntellectual PropertyFilm ReceivablesAssets IncludeDifferent Distribution WindowsTypes of TransactionsTypes of Transactions: Advancing against UltimatesTypes of Transactions: Slate FinancingOutlook for Film ReceivablesTrademark LicensingAssets Include$53M BCBG Max Azria Deal Rated in 2004Credit Issues Considered in BCBG AnalysisPast Activity: Trademark LicensingFranchise FeesWhat are the Assets?Key Points to Consider in AnalysisRecent ActivityPatent Licensing RoyaltiesOnly Drug Royalty Patent Transactions Rated To DateDrug Royalty Transactions RatedPoints Considered in Rating Paul Royalty TransactionAircraftThree Major Segments of Aircraft ABSRegional Jet Lease-Backed SecuritizationsRegional Jet Lease-Backed SecuritizationsRegional Jet Lease-Backed SecuritizationsRegional Jet Lease-Backed SecuritizationsRegional Jet Lease-Backed SecuritizationsRegional Jet Lease-Backed SecuritizationsRegional Jet Lease-Backed SecuritizationsRegional Jet Lease-Backed SecuritizationsCommercial Aircraft Lease-Backed SecuritizationsCorporate Aircraft FinancingCorporate Aircraft FinancingCorporate Aircraft FinancingCorporate Aircraft FinancingSmall Business LoansIssuance HistoryAnnual New Issue VolumeAnnual Volume By # Deals & # IssuersCredit Performance HistoryMajor Participants Then & NowTypes Of LoansTypical Collateral & UnderwritingWide Variety of Borrowing TermsIssuer DifferentiationTypical ABS Deal StructureRating IssuesRating Approach Quantitative MethodologyEquipment LeasesIssuance Down in 2004Recent Reduction in Issuance Due to:Public Issuers in 2004Public Issuers in 2005144 Issuers in 2004Equipment Types UnchangedStructuresCredit Performance Improves RecentlyIndustry Plagued by BlowupsBackup Servicing ImportantOutlook