SECURITIZATION COLLOQUIUM Securitization Past Present and Future What

SECURITIZATION COLLOQUIUM “Securitization: Past, Present and Future” What It Is. Where It Came From. Where It’s Going. Kellogg Graduate School of Management April 28, 2003 Joseph M. Donovan Managing Director and Group Head

WHAT IS AN ASSET BACKED SECURITY? n A fixed income instrument designed to capture the cash flow and credit attributes of a specific pool of assets (loans, receivables) n Enhanced to achieve high ratings or target a particular buyer n Examples of Assets Yes n Autos n Credit Cards n Home Equities n Equipment Leases n Student Loans n CBO/CLOs Maybe n Future Export Rec. ’s n Tax Liens n Disney Film Library n Bowie Bonds No n Secured Debt n Commodity Backed

WHAT IS AN ASSET BACKED SECURITY? Company Individual Assets (Loans, Receivables) on Company’s Balance Sheet Rights to future cash flows Future cash flows Cash proceeds today “Excess” future cash flows Bond Investors Trust or SPV Purchase bonds (cash today) Credit enhancement

WHAT IS AN ASSET BACKED SECURITY? Sources of Credit Enhancement n Internal – The assets – Excess interest – Spread or reserve accounts – Subordinated classes n External – Seller’s limited guaranty – Third-party LOC/surety bond

The Early Years: 1985 -1994

I. THE EARLY YEARS: 1985 -1994 In 1985 the ABS Market was born, first with autos. . . ($ in Billions) Auto Source: Thomson Financial Securities Data, Credit Suisse First Boston, Public/144 A ABS Annual Issuance

I. THE EARLY YEARS: 1985 -1994 …then with credit cards ($ in Billions) Auto Source: Credit Cards Thomson Financial Securities Data, Credit Suisse First Boston, Public/144 A ABS Annual Issuance

I. THE EARLY YEARS: 1985 -1994 Auto & Credit Cards - The Fundamental Structures Autos: Liquidating pool generally in existence at closing Average Life (20 months) Expected Final Callable Legal Final Months

I. THE EARLY YEARS: 1985 -1994 Auto & Credit Cards - The Fundamental Structures Credit Cards: Designed to accommodate short-lived assets Future originations must meet established parameters RECEIVABLES BALANCE 107 MINIMUM SELLER'S INTEREST 100 PEPCO FUTURE REVOLVING PERIOD STEP DOWN PERIOD TERM SERIES 200 X-1 36 MONTH 60

I. THE EARLY YEARS: 1985 -1994 Back to the Evolution of the Market ($ in Billions) Auto Source: Credit Cards Other Thomson Financial Securities Data, Credit Suisse First Boston, Public/144 A ABS Annual Issuance

I. THE EARLY YEARS: 1985 -1994: Top ABS Issuers ISSUER PRINCIPAL (in millions) GMAC $37, 928. 7 1 10. 7% Chrysler $35, 876. 7 2 10. 1% Citibank $28, 656. 8 3 8. 1% Household International $18, 571. 5 4 5. 2% Ford Motor Credit $17, 328. 6 5 4. 9% MBNA $17, 097. 2 6 4. 8% RANK MARKET SHARE Top 6 Totals $155, 459. 5 43. 8% Industry Totals $355, 120. 8 100. 0% Source: Domestic Public and 144 A Asset Backed Issues, Thomson Financial Securities Data, CSFB.

I. THE EARLY YEARS: 1985 -1994 Why Securitize? n Cheaper source of capital n Improved leverage n Perfect matched funding n Fund growth n Access new investors n Origination discipline

I. THE EARLY YEARS: 1985 -1994 Why Invest in ABS? n Extremely high credit quality n Yield pick-up over corporates n Liquid market n Limited “event risk” n Asset diversification n Relatively predictable cashflow

The Middle Years: 1995 -1997 a. k. a. “The Gain on Sale” Years

I. THE GAIN ON SALE YEARS Public/144 A ABS Annual Issuance, 1985 -1998 35 % CA G R ($ in Billions) Source: Thomson Financial Securities Data.

I. THE GAIN ON SALE YEARS Public/144 A ABS Annual Issuance, 1994 -1998 ($ in Billions) Source: Thomson Financial Securities Data.

I. THE GAIN ON SALE YEARS 1995 -1997: Selected ABS Issuers ISSUER PRINCIPAL (in millions) RANK MARKET SHARE Green Tree $24, 306. 7 1 5. 5% MBNA $18, 365. 8 4 4. 1% Chrysler $16, 919. 8 6 3. 8% Sallie. Mae $16, 713. 4 7 3. 8% Money Store $16, 254. 7 8 3. 7% Advanta $11, 470. 2 9 2. 6% Ford Motor Credit $11, 167. 0 10 2. 5% Conti. Mortgage $10, 550. 6 11 2. 4% Olympic/Arcadia $7, 683. 4 13 1. 7% GMAC $7, 520. 4 14 1. 7% United Companies $6, 817. 5 15 1. 5% AMRESCO $4, 101. 5 21 0. 9% Industry Totals $445, 135. 4 100. 0% Source: Domestic Public and 144 A Asset Backed Issues, Thomson Financial Securities Data, Bloomberg.

The Later Years: 1998 -2002 Maturity/Stability

I. THE LATER YEARS Public/144 A ABS Annual Issuance, 1985 -2002 ($ in Billions) Source: Thomson Financial Securities Data, Credit Suisse First Boston

I. THE LATER YEARS Public/144 A ABS Annual Issuance, 1998 -2002 ($ in Billions) Source: Thomson Financial Securities Data, Credit Suisse First Boston

I. THE LATER YEARS 1998 -2002: Top 10 ABS Issuers ISSUER PRINCIPAL (in millions) GMAC $98, 011. 2 1 6. 5% Ford Motor Credit $56, 804. 1 2 3. 8% Citigroup $48, 452. 6 3 3. 2% JP Morgan Chase $44, 230. 4 4 2. 9% MSDW (Discover) $44, 086. 0 5 2. 9% MBNA $39, 972. 6 6 2. 7% Lehman $33, 757. 1 7 2. 2% Daimler/Chrysler $32, 484. 0 8 2. 2% Conseco (Green Tree) $32, 070. 7 9 2. 1% Capital One $26, 974. 9 10 1. 8% Top 10 Totals Industry Totals Source: RANK MARKET SHARE $456, 843. 6 30. 4% $1, 504, 848. 7 100. 0% Domestic Public and 144 A Asset Backed Issues (excluding CDO’s), Thomson Financial Securities Data.

2002: Enron “SPE” is not a 4 -Letter Word

II. The Present

II. THE PRESENT Cumulative Public ABS Issuance PA ST 10 YE AR S: 23 % CA G R ($ in Billions) $1 Trillion $500 Billion $100 Billion Source: Thomson Financial Securities Data. $2 Trillion

II. THE PRESENT Cumulative Public ABS Issuance ($ in Billions) $2 Trillion $1 Trillion Europe $500 Billion $100 Billion Source: Thomson Financial Securities Data.

II. THE PRESENT Relative Market Size ($ in Billions) Source: Thomson Financial Securities Data.

II. THE PRESENT Relative Market Size ($ in Billions) Source: Thomson Financial Securities Data.

II. THE PRESENT ABCP Overview ($ in Billions) Source: Federal Reserve.

II. THE PRESENT ABCP Overview ($ in Billions) Total Unsecured CP ABCP Source: Federal Reserve.

III. The Future

III. THE FUTURE CSFB’s 2003 Projected ABS Issuance ASSET CLASS 2002 ACTUAL 2003 PROJECTED % CHANGE $70. 3 $75. 0 6. 7% 78. 3 80. 0 2. 2% 156. 0 160. 0 2. 6% 4. 6 3. 0 -34. 8% 26. 2 30. 0 14. 5% 5. 3 7. 0 32. 1% CDOs 50. 6 50. 0 -1. 2% Other 56. 9 55. 0 -3. 3% Total Public/144 A $448 $460 2. 7% Credit Card Auto Home Equity and Related Manufactured Housing Student Loan Equipment Source: Credit Suisse First Boston.

III. THE FUTURE Observation # 1: Securitization has permanently changed the dynamics of consumer and commercial lending… n Lowered/eliminated barriers to entry – – n Access to capital/cost of capital Ratings Size/balance sheet Experience Resulted in increased competition – Price – Credit n Two value added components remain – Origination – Servicing

III. THE FUTURE Observation # 1: But not without problems… n n n n Access Amresco Autobond Acceptance CFS Cityscape Conseco Conti. Financial First. Plus To name a few n n n n First Alliance IMC Mortgage Jayhawk Acceptance NAL Financial Group National Century Next. Card Southern Pacific UCFC

III. THE FUTURE Observation # 2: Everybody’s doing “it”! 1987 Credit card industry 2001 $80 bil $490 bil Top 10 market share 40% 85% % securitized <1% 50%

III. THE FUTURE Observation # 2: Everybody’s doing “it”! ($ in Billions) TOP 5 AUTO ISSUERS Ford 2002 ISSUANCE $12. 5 GMAC 11. 7 Daimler. Chrysler 7. 9 Ameri. Credit 6. 0 WFS 5. 0 Source: Thomson Financial Securities Data, Credit Suisse First Boston. Includes retail and wholesale issuance.

III. THE FUTURE Observation # 2: Everybody’s doing “it”! ($ in Billions) TOP 5 HOME EQUITY ISSUERS GMAC-RFC 2002 ISSUANCE $20. 0 PARENT COMPANY GM Countrywide 18. 4 Countrywide Equi. Credit 14. 2 Bank of America New Century 10. 4 New Century Option One Source: 9. 4 Credit Suisse First Boston. H&R Block

III. THE FUTURE Observation # 3: The equity market (and Congress) may not understand “gain on sale accounting” or SPE’s but the debt market understands securitization n Structures are proven and accepted n Significant downside protection vs. secured debt n Large, healthy investor base

III. THE FUTURE Observation # 3: Stability for Borrowers 2 -Year Treasury Yield A 2 Industrial A 2 Financial Source: Bloomberg, Credit Suisse First Boston.

III. THE FUTURE Observation # 3: Ford Unsecured vs. Secured Spreads 70 60 5 -Year Unsecured Ford Spreads 40 30 20 10 2 -Year “AAA” Ford ABS Spreads 0 Source: Credit Suisse First Boston. Secured Spread (BPs) 50

III. THE FUTURE Observation # 3: Household Unsecured vs. Secured Spreads 10 -Year Unsecured Household Spreads HSBC Merger Announcement “AAA” Household Home Equity Spreads Source: Credit Suisse First Boston.

III. THE FUTURE Observation # 4: Tiering, Tiering and More Tiering 3 -YR Triple-A Credit Card Spread Comparison (spread to 1 ML) Spread to 1 ML (bps) Providian Metris Source: Providian Metris Providian Credit Suisse First Boston.

III. THE FUTURE Observation # 5: Securitization creates inherent stability and liquidity for certain borrowers n International Harvester / Navistar n Chrysler / DCX n Tyco / CIT n Conseco / Green Tree n Mexico / Emerging Markets

III. THE FUTURE Observation # 6: Securitization’s effect on the buyside will continue to grow n Dedicated investors n New investors – CBOs – ABCP n CBOs as an asset gathering tool

III. THE FUTURE Observation # 6: Securitization’s effect on the buyside will continue to grow Indeed, CBOs have become so key to the junk market that companies planning offerings frequently tailor the securities to the tastes of the CBOs. “It’s the sell side and buy side working together to try and make a more efficient market…” - Wall Street Journal - 5/24/99 The rise of CBO has made a huge difference for the junk market. “The enormous amount of CBO activity has been a key factor in absorbing new supply” of junk issues… Wall Street Journal - 5/24/99

III. THE FUTURE Observation # 6: CBO/CLO Annual Issuance 1996 – 2002 ($ in billions) Source: Credit Suisse First Boston.

III. THE FUTURE Observation # 7: Commoditization and disintermediation of commercial banks will continue, particularly with any secured loan products n The Virtual Bank Residential Mortgages Consumer Loans Commercial Mortgages Small Business Loans Senior Unsecured Loans Mezzanine/Venture Capital MBS ABS CMBS/Conduits SBA/SBL/Franchise CLOs CBOs Regulatory Capital Arbitrage

IN CONCLUSION Securitization has become a permanent financing alternative with implications not only for the cost of capital but also for how certain types of assets will be originated and serviced in the future.

Thank You