U.S. patent application number 14/058196 was filed with the patent office on 2014-02-13 for method, system, device, and media for managing debt support.
This patent application is currently assigned to The BondFactor Company LLC. The applicant listed for this patent is The BondFactor Company LLC. Invention is credited to George H. BUTCHER, III, Stephen T. MARK.
Application Number | 20140046703 14/058196 |
Document ID | / |
Family ID | 44069537 |
Filed Date | 2014-02-13 |
United States Patent
Application |
20140046703 |
Kind Code |
A1 |
BUTCHER, III; George H. ; et
al. |
February 13, 2014 |
METHOD, SYSTEM, DEVICE, AND MEDIA FOR MANAGING DEBT SUPPORT
Abstract
A computer-implemented method, system, apparatus, and media is
directed to minimizing a risk associated with an anticipated value
of an investment. An insurer establishes a capital structure within
a computer memory of a computer system, the capital structure
designed to minimize risk and being pledged to fund a default
associated with the investment. Establishing the capital structure
can include allocating regulatory capital based on a coverage
factor multiplied by an average annual depression scenario default
percentage for the investment and determining a portion of the
capital structure for a pledged insuring investment that produces
at least a portion of the cash stream. A determination of whether
the established capital structure is sufficient to obtain a minimal
target credit rating for the insurer is generated. The desired
target rating is electronically provided based on the
determination.
Inventors: |
BUTCHER, III; George H.;
(New Rochelle, NY) ; MARK; Stephen T.; (Redding,
CT) |
|
Applicant: |
Name |
City |
State |
Country |
Type |
The BondFactor Company LLC |
New York |
NY |
US |
|
|
Assignee: |
The BondFactor Company LLC
New York
NY
|
Family ID: |
44069537 |
Appl. No.: |
14/058196 |
Filed: |
October 18, 2013 |
Related U.S. Patent Documents
|
|
|
|
|
|
Application
Number |
Filing Date |
Patent Number |
|
|
12955852 |
Nov 29, 2010 |
8600781 |
|
|
14058196 |
|
|
|
|
61265135 |
Nov 30, 2009 |
|
|
|
Current U.S.
Class: |
705/4 |
Current CPC
Class: |
G06Q 20/24 20130101;
G06Q 40/04 20130101; G06Q 40/08 20130101; G06Q 40/06 20130101 |
Class at
Publication: |
705/4 |
International
Class: |
G06Q 40/08 20060101
G06Q040/08 |
Claims
1. A computer-implemented method for minimizing a financial risk
associated with an anticipated value of an investment, which
comprises: establishing by a computer system of an insurer a
capital structure within a computer memory, the capital structure
designed to minimize the risk and being structured with capital to
fund a default on payments associated with the investment;
generating by the computer system a determination of whether the
established capital structure is sufficient to cover a depression
scenario period to obtain a minimal target credit rating for the
insurer; and electronically receiving the target rating based on
the generated determination.
2. The method of claim 1, wherein the investment comprises at least
one of a debt, a bond or a loan, and wherein the establishing of
the capital structure comprises: allocating the regulatory capital
in the computer memory to an amount equal to at least a coverage
factor multiplied by an average annual depression scenario default
percentage for the investment; selecting by the computer system an
investment criteria to invest the regulatory capital to create an
investment return; and determining by the computer system a portion
of the capital structure for a pledged insuring investment.
3. The method of claim 1, which further comprises: allocating, with
the computer system, a first credit having a first obligation to
make specified payments and a second credit having a second
obligation to make specified payments, each of the first credit and
second credit being in a non-default state when a respective
obligation is met and being in a default state when a respective
obligation is not met; associating, with the computer system, a
first senior holder and a first subordinate holder with the first
credit using (a) a respective first senior holder financial
instrument through which payments from the first credit flow to the
first senior holder and (b) a respective first subordinate holder
financial instrument through which payments from the first credit
flow to the first subordinate holder; associating, with the
computer system, a second senior holder and a second subordinate
holder with the second credit using (a) a respective second senior
holder financial instrument through which payments from the second
credit flow to the second senior holder and (b) a respective second
subordinate holder financial instrument through which payments from
the second credit flow to the second subordinate holder; and
structuring the first senior holder financial instrument and the
first subordinate holder financial instrument in the computer
memory to give priority to payments due the first senior holder
prior to payments due the first subordinate holder in the event the
first credit enters the default state.
4. A computer-implemented system for carrying out the method of
claim 1 and minimizing a financial risk associated with an
anticipated value of an investment, comprising: a company computer
implemented component for establishing capital structure,
determining whether the established capital structure is sufficient
to cover the depression scenario period and electronically
receiving the target rating based on the results of the determining
step.
5. A non-transitory processor readable medium for carrying out the
method of claim 1 for minimizing a financial risk associated with
an anticipated value of an investment, comprising processor
readable instructions that when executed by a processor causes the
processor to perform the recited steps of the method.
6. A computer-implemented method for insuring a default of a debt
specified in a financial instrument, which comprises: establishing,
by a computer processor, an insuring debt of a debtor related to
the debt specified in a financial instrument; allocating by the
computer, in a computer memory associated with an insuring vehicle,
a first loss class and a second loss class; and routing, over a
computer network, a payment payable from the insuring vehicle to a
first class holder in the first class, wherein the first class
holder is entitled to the payment based on an insured debt to the
first class holder of the insuring debt, wherein the insuring
vehicle insures an obligation to make payments for the insured
debt.
7. The method of claim 6, wherein the insuring vehicle provides an
insuring payment to a holder of the insured debt when the debtor
defaults on the obligation to make payments for the insured debt
and wherein the routing comprises intercepting at least a portion
of the insuring payment when the debtor defaults on the obligation
to make payments for the insured debt and diverting at least a
portion of the payment to the first class holder.
8. The method of claim 6, which further comprises providing an
interactive user interface configured to provide a simulation of
the capital structure including an insuring scenario based on
inputs for the capital structure, and wherein the user interface
provides a mechanism to change the inputs thereby changing the
insuring scenario.
9. A computer system for carrying out the method of claim 6,
including a device for debt management, comprising: a computer
memory configured to manage financial data; and a computer
processor configured to perform the establishing, allocating and
routing actions of the method.
10. A computer system for carrying out the method of claim 8,
including a device for debt management, comprising: a computer
memory configured to manage financial data; a computer processor
configured to perform the establishing, allocating and routing
actions of the method; and a graphical user interface configured to
provide a simulation of the capital structure including an insuring
scenario based on inputs for the capital structure, and wherein the
user interface provides a mechanism to change the inputs thereby
changing the insuring scenario.
11. A non-transitory processor readable medium for carrying out the
method of claim 6, comprising instructions that are executable by a
computer processor to cause the processor to perform the
establishing, allocating and routing actions of the method.
Description
CROSS-REFERENCE TO RELATED APPLICATIONS
[0001] This application is a continuation of U.S. application Ser.
No. 12/955,852 filed on Nov. 29, 2010, which claims the benefit of
U.S. provisional patent application No. 61/265,135 filed on Nov.
30, 2009, the entire content of each of which is expressly
incorporated herein by reference thereto.
TECHNICAL FIELD
[0002] The present invention relates to a method, system,
apparatus, and media for managing insurance of debts. More
particularly, but not exclusively, the present invention relates to
insuring against defaults on bond obligations.
BACKGROUND
[0003] Bond insurers are monoline (single industry) insurance
companies that provide credit enhancement in the form of a
financial guaranty for bondholders. Traditional bond insurers rely
on invested cash capital to support their claims paying ability.
Capital has historically been provided by a holding company that
raises funds by issuing stock (common and preferred) and debt and
then depositing a substantial portion of the proceeds in a wholly
owned operating subsidiary to capitalize the insurance company. The
subsidiary's capital base is used to support guarantee
underwriting. For each insured credit, the rating agencies can
require that a portion of the insurance subsidiary's capital be set
aside to offset the risk exposure. The amount set aside for each
credit, which is known as a capital charge, is based on two
measures of the quality of the risk underwritten: [0004] The credit
type, e.g. state general obligation (GO), city GO, water and sewer
system, school district, toll road, or hospital system; and [0005]
The rating of the individual credit for which the capital charge is
being assessed.
[0006] The availability of capital to fund the capital charges for
new insured credits serves as a constraint on the insurance
capacity of the monoline insurer, which can be addressed by raising
additional capital.
[0007] The basis for the capital charges is the rating agencies'
assessment of the risk of municipal default for each credit type
and each rating category thereof during a four-year depression
scenario. The capital charges represent the anticipated percentage
defaults within the insurer's portfolio for each such credit type
and rating category. To achieve a AAA monoline rating the insurer's
capital can cover the aggregate capital charges (i.e., its assumed
four-year depression scenario defaults) by at least 1.25 times. In
practice the monoline insurers have been capitalized at slightly
higher level, e.g., 1.5 times to 1.6 times. Based on these
parameters, monoline insurers habitually accumulated risk exposure
at insured risk-to-capital ratios in excess of 100:1. If insured
defaults occurred or the credit quality of the portfolio
deteriorated so as to increase the monoline insurer's capital
charges beyond its available capital, the insurer was expected to
raise additional capital to pay claims and to maintain its AAA
ratings. But, in a financial crises, raising capital at the time it
is needed to fund potential defaults may be difficult or
impractical.
[0008] The value of the bond insurance product to municipal
governments is in the interest cost savings that can be achieved by
being able to issue bonds based on the top available long term
ratings. The value of bond insurance for the bond investor is based
on their willingness to forgo a portion of future investment return
(the credit spread) for being directly exposed to the underlying
repayment risk of a purchased bond in favor of a lower return on an
insured bond rated on the basis of the claims paying ability
assigned by the nationally recognized rating services to the bond
insurer. In return for providing the additional margin of safety
represented by the bond insurance policy, bond insurers charge an
insurance premium that is paid, usually upfront, by the municipal
bond issuer. The premium is paid from bond proceeds and represents
a portion of the issuer's debt service savings.
[0009] Monoline insurers may use Collateralized Bond Obligations
("CBO"). CBO creates strong credits (such as loans, bonds, or other
obligations) by tranching a large pool of individual credits. The
pool can be a large pool of unrated credits such as credit card
receivables or a relatively small (e.g., 20 borrowers) pool of
rated and/or unrated credits in the case of a municipal State
Revolving Fund ("SRF"). The high quality of the more senior CBO
tranche(s) is achieved at the expense of the quality of the more
junior tranche(s). As the pools get larger, the percentage of
underlying credits that can be expected to default decreases even
though the absolute number increases. Thus, as the pool becomes
larger, the smaller the percentage of total pool that is required
to be subordinate, but the more likely it is that a subordinate
tranche will in fact sustain losses. The most subordinate tranche
is viewed as similar to equity (in the case of an SRF, it is funded
with program equity) and bears a large credit and yield
penalty.
[0010] In general, because the subordinate tranche(s) bear the risk
of a default of an underlying credit and adding more credits
increases the likelihood that the subordinate tranche(s) will
sustain losses (even though losses may decrease on a percentage
basis), pools are generally closed unless consent is obtained from
the holder(s) of the subordinate tranche(s). As a result, CBOs are
generally only used in situations where there is a wide credit and
yield spread between the quality of the underlying credits and that
of the senior tranche(s) or where there is a compelling business
need for someone to hold the equity (e.g., to get the underlying
loans off the balance sheet).
[0011] Thus, there is a need for new ways to protect against
defaults on bond obligations and the present invention provides
some solutions to this problem.
SUMMARY OF THE INVENTION
[0012] The invention relates to a computer-implemented method for
minimizing a financial risk associated with an anticipated value of
an investment, which comprises: establishing by a computer system
of an insurer a capital structure within a computer memory, the
capital structure designed to minimize the risk and being
structured with capital to fund a default on payments associated
with the investment; generating by the computer system a
determination of whether the established capital structure is
sufficient to cover a depression scenario period to obtain a
minimal target credit rating for the insurer; and electronically
receiving the target rating based on the generated determination.
Advantageously, the investment comprises at least one of a debt, a
bond or a loan, and wherein the establishing of the capital
structure comprises: allocating the regulatory capital in the
computer memory to an amount equal to at least a coverage factor
multiplied by an average annual depression scenario default
percentage for the investment; selecting by the computer system an
investment criteria to invest the regulatory capital to create an
investment return; and determining by the computer system a portion
of the capital structure for a pledged insuring investment.
[0013] The method preferably further comprises allocating, with the
computer system, a first credit having a first obligation to make
specified payments and a second credit having a second obligation
to make specified payments, each of the first credit and second
credit being in a non-default state when a respective obligation is
met and being in a default state when a respective obligation is
not met; associating, with the computer system, a first senior
holder and a first subordinate holder with the first credit using
(a) a respective first senior holder financial instrument through
which payments from the first credit flow to the first senior
holder and (b) a respective first subordinate holder financial
instrument through which payments from the first credit flow to the
first subordinate holder; associating, with the computer system, a
second senior holder and a second subordinate holder with the
second credit using (a) a respective second senior holder financial
instrument through which payments from the second credit flow to
the second senior holder and (b) a respective second subordinate
holder financial instrument through which payments from the second
credit flow to the second subordinate holder; and structuring the
first senior holder financial instrument and the first subordinate
holder financial instrument in the computer memory to give priority
to payments due the first senior holder prior to payments due the
first subordinate holder in the event the first credit enters the
default state.
[0014] Another method relates to insuring a default of a debt
specified in a financial instrument, by establishing, by a computer
processor, an insuring debt of a debtor related to the debt
specified in a financial instrument; allocating by the computer, in
a computer memory associated with an insuring vehicle, a first loss
class and a second loss class; and routing, over a computer
network, a payment payable from the insuring vehicle to a first
class holder in the first class, wherein the first class holder is
entitled to the payment based on an insured debt to the first class
holder of the insuring debt, wherein the insuring vehicle insures
an obligation to make payments for the insured debt. In this
method, the insuring vehicle provides an insuring payment to a
holder of the insured debt when the debtor defaults on the
obligation to make payments for the insured debt and wherein the
routing comprises intercepting at least a portion of the insuring
payment when the debtor defaults on the obligation to make payments
for the insured debt and diverting at least a portion of the
payment to the first class holder.
[0015] The method preferably further comprises providing an
interactive user interface configured to provide a simulation of
the capital structure including an insuring scenario based on
inputs for the capital structure, and wherein the user interface
provides a mechanism to change the inputs thereby changing the
insuring scenario.
[0016] The invention also relates to a computer-implemented systems
for carrying out the methods disclosed herein. Also, non-transitory
processor readable media are described for carrying out the methods
disclosed herein. A further embodiment is a graphical user
interface configured to provide a simulation of the capital
structure including an insuring scenario based on inputs for the
capital structure, and wherein the user interface provides a
mechanism to change the inputs thereby changing the insuring
scenario.
BRIEF DESCRIPTION OF THE DRAWINGS
[0017] Further features of the invention, its nature and various
advantages will be more apparent from the following detailed
description, taken in conjunction with the accompanying drawings in
which like reference characters refer to like parts throughout, and
in which:
[0018] FIG. 1 shows a flowchart of a method according to an
embodiment of the present invention;
[0019] FIG. 2 shows a flowchart of a method according to another
embodiment of the present invention;
[0020] FIG. 3 shows a flowchart of a method according to another
embodiment of the present invention;
[0021] FIG. 4 shows a flowchart of a method according to another
embodiment of the present invention;
[0022] FIG. 5 shows a flowchart of a method according to another
embodiment of the present invention;
[0023] FIG. 6 shows a flowchart of a method according to another
embodiment of the present invention;
[0024] FIG. 7 shows a block diagram of a software program according
to another embodiment of the present invention;
[0025] FIG. 8 shows a block diagram of a system according to
another embodiment of the present invention;
[0026] FIG. 9 shows a block diagram of a flow of funds according to
another embodiment of the present invention;
[0027] FIG. 10 shows a block diagram of a method according to
another embodiment of the present invention;
[0028] FIG. 11 shows a block diagram of a method according to
another embodiment of the present invention;
[0029] FIGS. 12A to 12E are functional block diagrams of
illustrative systems for managing debt according to another
embodiment of the present invention;
[0030] FIG. 13 is an example of a computing device operable to
execute various aspects of the invention according to another
embodiment of the present invention;
[0031] FIGS. 14A to 14D, 15 to 20, 21A, 21B, 22A, 22B, 23 to 25 are
an examples of computer-implemented process and models for managing
debt insurance according to embodiments of the present
invention;
[0032] FIG. 26 shows an example of a data model for determining a
percentage of possible defaults over a 4 year depression scenario
for a type of debt;
[0033] FIGS. 27A to 27H and 28A to 28I show examples of a method,
data model, and interfaces for providing calculations of a summary
of the application of the BECM an a comparison against monoline
systems;
[0034] FIGS. 29A and 29B show an example of a method, data model,
and interface for computing a downgrade function, and sizing the
insuring bond and loss class and/or category subclasses;
[0035] FIGS. 30A to 30C show examples of a method, data model, and
interfaces for providing calculations of sizing of structured
insured and insuring bonds;
[0036] FIGS. 31A to 31I show examples of a method, data model, and
interfaces for providing calculations of coupons, proceeds, and
yields paid by an issuer for insuring bonds;
[0037] FIGS. 32A to 32F show examples of a method, data model, and
interfaces for providing calculations of coupons, proceeds, and
yields payable to holders of loss position subclasses; and
[0038] FIGS. 33A to 33F show examples of a method, data model, and
interfaces for providing calculations of debt service coverage
based on debt insurance.
DETAILED DESCRIPTION OF THE INVENTIVE EMBODIMENTS
[0039] The following description is presented to enable any person
of ordinary skill in the art to practice the present invention.
Various modifications to the preferred embodiment will be readily
apparent to those of ordinary skill in the art, and the principles
defined herein may be applied to other embodiments and applications
without departing from the spirit and scope of the invention. Thus,
the invention is not intended to be limited to the specific
embodiments shown, but the claims are to be accorded an appropriate
scope consistent with the principles and features disclosed herein
as understood by skilled artisans. The figures are not necessarily
to scale, some features may be exaggerated to show details of
particular components. Therefore, specific structural and
functional details disclosed herein are not to be interpreted as
limiting, but merely as a basis for the claims and as a
representative basis for teaching one skilled in the art to
variously employ the present invention.
[0040] The disclosure of U.S. Pat. No. 7,593,894 is fully
incorporated herein by reference thereto. That application
generally describes the creation of loss classes which can be
incorporated into the methods and systems of the present
invention.
[0041] The invention relates to a computer-implemented for
minimizing a financial risk associated with an anticipated value of
an investment. The method includes the step of establishing by a
computer system of an insurer a capital structure within a computer
memory of a computer system, the capital structure designed to
minimize the risk and being structured with regulatory capital and
a cash stream that is pledged to fund a default on payments
associated with the investment; generating by the computer system a
determination of whether the established capital structure is
sufficient to cover a depression scenario period to obtain a
minimal target credit rating for the insurer; and electronically
receiving the target rating based on the generated determination.
In one embodiment, the investment comprises an insured bond issued
by an issuer, and the cash stream is produced from a trust bond
issued by the issuer.
[0042] In one embodiment, the investment comprises an insured bond
issued by an issuer, and the cash stream is produced from an
insuring bond issued by the issuer. In another embodiment, the
investment comprises at least one of a debt, a bond or a loan,
wherein the cash stream is produced from the investment, or a
dividend or an account receivable associated with the
investment.
[0043] Establishing the capital structure can include allocating
the regulatory capital in the computer memory to an amount equal to
at least a coverage factor multiplied by an average annual
depression scenario default percentage for the investment;
selecting by the computer system an investment criteria to invest
the regulatory capital to create an investment return; determining
by the computer system a portion of the capital structure for a
pledged insuring investment that produces at least a portion of the
cash stream; and/or securing a draw on sources of the regulatory
capital based on the portion of the cash stream.
[0044] In one embodiment, the method can further include the step
of including a capital pre-funding in the capital structure; and
determining by the computer system an amount of the capital
pre-funding by the insurer in an amount that is a multiple of an
average annual depression scenario default percentage that is based
on an underlying credit rating of the investment.
[0045] The method can include the step of including a capital
pre-funding in the capital structure; determining by the computer
system an amount of the capital pre-funding by the insurer that is
sufficient to cover a default and that is calculated by (a) at
least a pre-funding coverage factor multiplied by (b) a downgrade
function that is applied to an average annual depression scenario
default percentage for the investment based on the credit rating of
the investment; examining by the computer system, a capital
adequacy of the insurer's capital structure to cover a default
based on a default scenario that occurs during or at an end of the
depression scenario period; and determining the credit rating for
the trust based on the determined capital pre-funding and the
examined capital adequacy.
[0046] In one embodiment, the method can further include
determining a credit rating of the insurer based on the determined
credit rating of the trust.
[0047] In a preferred embodiment, the downgrade function comprises
a weighted sum of a percentage of a given insured investment issued
by a given issuer that is at a current credit rating falling to a
lower credit rating multiplied by another default percentage that
is associated with the given issuer's industry and the lower credit
rating.
[0048] In one embodiment, the investment is an insured bond. The
method can further include evaluation, by the computer system, of
issuer data about proceeds (and/or the insured bonds) for
minimizing the risk of default of the insured bond; sizing, by the
computer system, an insuring bond based on the received data about
the insured bond, wherein the sized insuring bond produces the cash
stream that provides the capital structure necessary to achieve the
target credit rating; establishing, by the computer system, a trust
certificate, wherein a payment from the insuring bond is pledged to
be paid to a holder of the trust certificate; and routing payments
by the computer system of the payment to the holder of the trust
certificate based on a legal obligation to pay secured holders of a
plurality of insured bonds, which includes the insured bonds,
wherein the legal obligation is recorded in the computer
memory.
[0049] In yet another embodiment, the method can further include,
based on an early redemption of the insured bonds, providing
savings of fees that are not paid to the insurer for insuring the
insured bonds in a remaining period for the insured bonds.
[0050] Sizing of the insuring bond can include determining a
default criteria based on the depression scenario, wherein the
default criteria comprises a plurality of default percentages for a
plurality of issuers based on the depression scenario, and wherein
insurance coverage based on a factor of one of the plurality of
default percentages is sufficient to achieve the target credit
rating; determining a downgrade function for the insured bond based
on at least a portion of a plurality of insured bonds insured by
the insurer being downgraded to a lower credit rating; and
determining the debt service coverage provided by the insuring bond
for the insured bond based on the default criteria and the
downgrade function.
[0051] Establishing the trust certificate can include establishing
a loss category subclass for the trust certificate; and
determining, in the computer memory, for the trust certificate, a
type of the loss category subclass, wherein a type comprises (i) a
horizontal loss position subclass wherein a loss that obligates
payment is allocated based on a position within a plurality of loss
position subclasses, with each of the loss position subclasses
allocating the loss based on a category rating within that loss
position subclass, or (ii) a vertical loss position subclass,
wherein the loss is allocated based on another position within a
plurality of categories, with each category allocating the loss
based on a loss position rating within that category.
[0052] Establishing the trust certificate can instead include
establishing a plurality of loss category subclasses; and
determining a yield above a coupon amount for the insuring bond for
each position in the loss category subclasses, wherein the yield
increases as the position decreases.
[0053] The method can further include allocating, with the computer
system, a first credit having a first obligation to make specified
payments and a second credit having a second obligation to make
specified payments, each of the first credit and second credit
being in a non-default state when a respective obligation is met
and being in a default state when a respective obligation is not
met; associating, with the computers system, a first senior holder
and a first subordinate holder with the first credit using (a) a
respective first senior holder financial instrument through which
payments from the first credit flow to the first senior holder and
(b) a respective first subordinate holder financial instrument
through which payments from the first credit flow to the first
subordinate holder; associating, with the computer system, a second
senior holder and a second subordinate holder with the second
credit using (a) a respective second senior holder financial
instrument through which payments from the second credit flow to
the second senior holder and (b) a respective second subordinate
holder financial instrument through which payments from the second
credit flow to the second subordinate holder; and structuring the
first senior holder financial instrument and the first subordinate
holder financial instrument in the computer memory to give priority
to payments due the first senior holder prior to payments due the
first subordinate holder in the event the first credit enters the
default state.
[0054] Intercepting the coupon payment can include using payments
from the second subordinate holder financial instrument to perform
the first obligation of the first credit for the benefit of the
first senior holder to the extent that the first credit enters the
default state and payments due the first senior holder are not
available, wherein both the first subordinate holder and the second
subordinate holder are junior to the first senior holder.
[0055] Determining the credit rating can include increasing in the
at least one computer memory the credit rating for the first credit
based on an increased likelihood that a payment default can be
fully absorbed, wherein the credit rating is representative of a
probability of a party owing the first obligation to make specified
payments for the first credit to meet the first obligation.
[0056] The invention also relates to a computer-implemented system
for minimizing a financial risk associated with an anticipated
value of an investment. The system includes a company computer
implemented component for establishing by an insurer a capital
structure within a computer memory of a computer system, the
capital structure designed to minimize the risk and being
structured with regulatory capital and a cash stream that is
pledged to fund a default associated with the investment;
generating a determination of whether the established capital
structure is sufficient to cover a depression scenario period to
obtain a minimal target credit rating for the insurer; and
electronically receiving the target rating based on the generated
determination.
[0057] In one embodiment, the target credit rating is AAA, wherein
the investment comprises an insured bond issued by an issuer, and
the cash stream is produced from an insuring bond issued that is
related to the insured bond and that is issued by the issuer. In
another embodiment, the investment comprises a previously issued
bond issued by an issuer, and the cash stream is produced by an
investment unrelated to the issuer and is used as insurance or
re-insurance for the previously issued bond.
[0058] The system may also include a guarantor computer component
configured for allocating the regulatory capital in the computer
memory to an amount equal to a coverage factor multiplied by an
average annual depression scenario default percentage for the
investment; and selecting by the computer system an investment
criteria to invest the regulatory capital to create an investment
return. The system may also include a trust computer component
configured for determining by the computer system a portion of the
capital structure for a pledged insuring investment that produces
at least a portion of the cash stream; and securing a draw on
sources of the regulatory capital based on the portion of the cash
stream.
[0059] In one embodiment, the company computer component can be
further configured for allocating the regulatory capital in the
computer memory to an amount equal to a coverage factor multiplied
by an average annual depression scenario default percentage for the
investment; selecting by the computer system an investment criteria
to invest the regulatory capital to create an investment return;
determining by the computer system a portion of the capital
structure for a pledged insuring investment that produces at least
a portion of the cash stream; and securing a draw on sources of the
regulatory capital based on the portion of the cash stream.
[0060] In another embodiment, the system can further include a user
interface component. The user interface component can be configured
for receiving input relating to the insured bond and the insuring
bond to generate a model of applying the insuring bonds to enhance
the insured bond's credit rating; providing a break-even comparison
of applying established capital structure to a monoline insurance
of the insured bond; generating an indication of the determination
of whether the established capital structure is sufficient to cover
the depression scenario period to obtain the minimal target credit
rating for the insurer; and sending a message to the company
computer system to establish the capital structure based on the
model and the indication.
[0061] The invention also relates to a non-transitory processor
readable medium for minimizing a financial risk associated with an
anticipated value of an investment, comprising processor readable
instructions that when executed by a processor causes the processor
to perform actions. The actions include establishing by an insurer
a capital structure within a computer memory of a computer system,
the capital structure designed to minimize the risk and being
structured with regulatory capital and a cash stream that is
pledged to fund a default associated with the investment;
generating a determination of whether the established capital
structure is sufficient to cover a depression scenario period to
obtain a minimal target credit rating for the insurer; and
electronically receiving the target rating based on the generated
determination.
[0062] In a specific embodiment, a method of structuring risk in a
financial transaction is provided, including: allocating to a
transaction pool a first credit having an obligation to make
specified payments and a second credit having an obligation to make
specified payments, each of the first credit and second credit
being in a non-default state when a respective obligation is met
and being in a default state when a respective obligation is not
met; associating a first senior holder and a first subordinate
holder with the first credit using a) a respective first senior
holder financial instrument through which payments from the first
credit flow to the first senior holder and b) a respective first
subordinate holder financial instrument through which payments from
the first credit flow to the first subordinate holder; associating
a second senior holder and a second subordinate holder with the
second credit using a) a respective second senior holder financial
instrument through which payments from the second credit flow to
the second senior holder and b) a respective second subordinate
holder financial instrument through which payments from the second
credit flow to the second subordinate holder; structuring the first
senior holder financial instrument and the first subordinate holder
financial instrument to give priority to payments due the first
senior holder prior to payments due the first subordinate holder in
the event the first credit enters the default state; using payments
from the second subordinate holder financial instrument to perform
the obligation of the first credit for the benefit of the first
senior holder to the extent that the first credit enters the
default state and payments due the first senior holder are not
available; and providing the second subordinate holder the benefit
of the obligation of the first credit to the extent that payments
due the second subordinate holder were used to perform the
obligation of the first credit.
[0063] This method may further include: structuring the second
senior holder financial instrument and the second subordinate
holder financial instrument to give priority to payments due the
second senior holder prior to payments due the second subordinate
holder in the event the second credit enters the default state;
using payments from the first subordinate holder financial
instrument to perform the obligation of the second credit for the
benefit of the second senior holder to the extent that the second
credit enters the default state and payments due the second senior
holder are not available; and providing the first subordinate
holder the benefit of the obligation of the second credit to the
extent that payments due the first subordinate holder were used to
perform the obligation of the second credit.
[0064] Preferably, at least one of the first senior holder
financial instrument, the second senior holder financial
instrument, the first subordinate holder financial instrument, the
second subordinate holder financial instrument, the first credit,
and the second credit may include a bond. Also, at least one of the
first credit and second credit may include a credit of the type
selected from a municipal credit, a hospital credit, an industrial
credit, and a high-yield credit.
[0065] At least one of a) the step of providing the second
subordinate holder the benefit of the obligation of the first
credit to the extent that payments due the second subordinate
holder were used to perform the obligation of the first credit may
be carried out through an assignment and b) the step of providing
the first subordinate holder the benefit of the obligation of the
second credit to the extent that payments due the first subordinate
holder were used to perform the obligation of the second credit may
be carried out through an assignment. Alternatively, these steps
may be carried out through subrogation, by providing a recovery
value associated with second credit, or by providing a liquidation
value associated with second credit.
[0066] Preferably, at least one of a) the first senior financial
instrument and the first subordinate financial instrument may be
included in a first master financial instrument and b) the second
senior financial instrument and the second subordinate financial
instrument may be included in a second master financial instrument.
At least one of the first master financial instrument and the
second master financial instrument generally form a series of bonds
having a senior/subordinate structure. Also, the transaction pool
may comprise a trust.
[0067] In another embodiment, a method of structuring risk in a
financial transaction is provided, including: allocating to a
transaction pool n credits, each of the credits having an
obligation to make specified payments and each of the credits being
in a non-default state when a respective obligation is met and
being in a default state when a respective obligation is not met;
associating a senior holder and a subordinate holder with each of
the credits using a) a respective senior holder financial
instrument through which payments from a respective credit flow to
the senior holder and b) a respective subordinate holder financial
instrument through which payments from a respective credit flow to
the subordinate holder; structuring each senior holder financial
instrument and each subordinate holder financial instrument to give
priority to payments due each respective senior holder prior to
payments due each respective subordinate holder in the event a
respective credit enters the default state; using payments from at
least one subordinate holder financial instrument associated with a
credit in the non-default state to perform the obligation of a
credit in the default state to the extent that payments due the
senior holder associated with the credit in the default state are
not available; and providing each subordinate holder at least a
portion of the benefit of the obligation of the credit in the
default state to the extent that payments due each subordinate
holder were used to perform the obligation of the credit in the
default state; wherein n is an integer in the range of 1 to 1000.
In this embodiment, the transaction pool may comprise a trust.
[0068] In yet another embodiment, a method of structuring risk in a
financial transaction is provided, including: allocating to a
transaction pool a first sub-pool containing a first credit having
an obligation to make specified payments and a second credit having
an obligation to make specified payments, each of the first credit
and second credit being in a non-default state when a respective
obligation is met and being in a default state when a respective
obligation is not met; allocating to the transaction pool a second
sub-pool containing a third credit having an obligation to make
specified payments and a fourth credit having an obligation to make
specified payments, each of the third credit and fourth credit
being in a non-default state when a respective obligation is met
and being in a default state when a respective obligation is not
met; associating a first senior holder and a first subordinate
holder with the first credit using a) a respective first senior
holder financial instrument through which payments from the first
credit flow to the first senior holder and b) a respective first
subordinate holder financial instrument through which payments from
the first credit flow to the first subordinate holder; associating
a second senior holder and a second subordinate holder with the
second credit using a) a respective second senior holder financial
instrument through which payments from the second credit flow to
the first senior holder and b) a respective second subordinate
holder financial instrument through which payments from the second
credit flow to the second subordinate holder; associating a third
senior holder and a third subordinate holder with the third credit
using a) a respective third senior holder financial instrument
through which payments from the third credit flow to the third
senior holder and b) a respective third subordinate holder
financial instrument through which payments from the third credit
flow to the third subordinate holder; associating a fourth senior
holder and a fourth subordinate holder with the fourth credit using
a) a respective fourth senior holder financial instrument through
which payments from the fourth credit flow to the fourth senior
holder and b) a respective fourth subordinate holder financial
instrument through which payments from the fourth credit flow to
the fourth subordinate holder; structuring the first senior holder
financial instrument and the first subordinate holder financial
instrument to give priority to payments due the first senior holder
prior to payments due the first subordinate holder in the event the
first credit enters the default state; structuring the second
senior holder financial instrument and the second subordinate
holder financial instrument to give priority to payments due the
second senior holder prior to payments due the second subordinate
holder in the event the second credit enters the default state;
structuring the third senior holder financial instrument and the
third subordinate holder financial instrument to give priority to
payments due the third senior holder prior to payments due the
third subordinate holder in the event the third credit enters the
default state; structuring the fourth senior holder financial
instrument and the fourth subordinate holder financial instrument
to give priority to payments due the fourth senior holder prior to
payments due the fourth subordinate holder in the event the fourth
credit enters the default state; using payments from the second
subordinate holder financial instrument to perform the obligation
of the first credit for the benefit of the first senior holder to
the extent that the first credit enters the default state and
payments due the first senior holder are not available; using
payments from at least one of the third subordinate holder
financial instrument and the fourth subordinate holder financial
instrument to perform the obligation of the first credit for the
benefit of the first senior holder to the extent that the payments
of the second subordinate holder financial instrument used for the
benefit of the first senior holder do not cover the obligation of
the first credit; providing each of the third subordinate holder
and the fourth subordinate holder the benefit of the obligation of
the first credit to the first senior holder to the extent that the
payments of the third subordinate holder financial instrument and
the fourth subordinate holder financial instrument are used for the
benefit of the first senior holder; and providing the second
subordinate holder the benefit of the obligation of the first
credit to the first senior holder to the extent that payments of
the second subordinate holder financial instrument were used to
perform the obligation of the first credit and to the extent that a
benefit exists after any benefit is provided the third subordinate
holder and the fourth subordinate holder.
[0069] In this embodiment, all credits allocated to a particular
sub-pool may have a substantially similar risk of entering the
default state. In particular, the all credits allocated to a
particular sub-pool may be selected from one of a traditional
municipal credit, a hospital credit, an industrial corporate
credit, and a high-yield credit. Preferably, the transaction pool
may comprise a trust.
[0070] The methods of the invention may also include structuring a
transaction pool with n sub-pools; allocating to each of the
sub-pools between j and k credits, each credit having an obligation
to make specified payments and each credit being in a non-default
state when a respective obligation is met and being in a default
state when a respective obligation is not met; associating a senior
holder and a subordinate holder with each of the credits using a) a
respective senior holder financial instrument through which
payments from the credit flow to the senior holder and b) a
respective subordinate holder financial instrument through which
payments from the credit flow to the subordinate holder;
structuring each senior holder financial instrument and each
subordinate holder financial instrument to give priority to
payments due the respective senior holder prior to payments due the
respective subordinate holder in the event the associated credit
enters the default state; using payments from each subordinate
holder financial instrument associated with credits within the same
sub-pool as a defaulting credit to perform the obligation of the
defaulting credit for the benefit of the associated senior holder
to the extent that payments due the senior holder associated with
the defaulting credit are not available; using payments from each
subordinate holder financial instrument associated with credits
outside the sub-pool containing the defaulting credit to perform
the obligation of the defaulting credit for the benefit of the
associated senior holder to the extent that the payments of each
subordinate holder financial instrument associated with credits
within the same the sub-pool as the defaulting credit which were
used for the benefit of the senior holder do not cover the
obligation of the first credit; providing each subordinate holder
associated with credits outside the sub-pool containing the
defaulting credit the benefit of the obligation of the defaulting
credit to the associated senior holder to the extent that the
payments due each subordinate holder associated with credits
outside the sub-pool containing the defaulting credit were used to
perform the obligation of the defaulting credit; and providing each
subordinate holder associated with credits within the same sub-pool
as the defaulting credit the benefit of the obligation of the
defaulting credit to the associated senior holder to the extent
that payments due each subordinate holder associated with credits
within the same sub-pool as the defaulting credit were used to
perform the obligation of the defaulting credit and to the extent
that a benefit exists after any benefit is provided each
subordinate holder associated with credits outside the sub-pool
containing the defaulting credit; wherein n, j, and k are integers
in the range of 1 to 1000.
[0071] Alternatively, the methods can include: structuring a
transaction pool with n sub-pools, each of the sub-pools containing
between j and k mini-pools; allocating to each of the mini-pools
between j and k credits and allocating to each of the sub-pools
between j and k credits, each credit having an obligation to make
specified payments and each credit being in a non-default state
when a respective obligation is met and being in a default state
when a respective obligation is not met; associating a senior
holder and a subordinate holder with each credit using a respective
senior holder financial instrument through which payments from the
credit flow to the senior holder and a respective subordinate
holder financial instrument through which payments from the credit
flow to the subordinate holder; structuring each senior holder
financial instrument and each subordinate holder financial
instrument to give priority to payments due the respective senior
holder prior to payments due the respective subordinate holder in
the event the associated credit enters the default state; using
payments from each subordinate holder financial instrument
associated with credits within the same mini-pool as the defaulting
credit to perform the obligation of the senior holder financial
instrument associated with the defaulting credit for the benefit of
the senior holder to the extent that payments due the senior holder
associated with the defaulting credit are not available; using
payments from each subordinate holder financial instrument
associated with credits outside the mini-pool with the defaulting
credit but within the same sub-pool as the defaulting credit to
perform the obligation of the senior holder financial instrument
associated with the defaulting credit for the benefit of the senior
holder to the extent that the payments of each subordinate holder
financial instrument associated with credits within the same
mini-pool as the defaulting credit which were used for the benefit
of the senior holder do not cover the obligation of the defaulting
credit; using payments from each subordinate holder financial
instrument associated with credits outside the sub-pool containing
the defaulting credit to perform the obligation of the senior
holder financial instrument associated with the defaulting credit
for the benefit of the senior holder to the extent that the
payments of each subordinate holder financial instrument associated
with credits within the same sub-pool as the defaulting credit
which were used for the benefit of the senior holder do not cover
the obligation of the defaulting credit; providing each subordinate
holder associated with credits outside the sub-pool containing the
defaulting credit the benefit of the obligation of the defaulting
credit to the associated senior holder to the extent that the
payments due each subordinate holder associated with credits
outside the sub-pool containing the defaulting credit were used to
perform the obligation of the defaulting credit; providing each
subordinate holder associated with credits within the same sub-pool
as the defaulting credit the benefit of the obligation of the
defaulting credit to the associated senior holder to the extent
that payments due each subordinate holder associated with credits
within the same sub-pool as the defaulting credit were used to
perform the obligation of the defaulting credit and to the extent
that a benefit exists after any benefit is provided each
subordinate holder associated with credits outside the sub-pool
containing the defaulting credit; and providing each subordinate
holder associated with credits within the same mini-pool as the
defaulting credit the benefit of the obligation of the defaulting
credit to the associated senior holder to the extent that payments
due each subordinate holder associated with credits within the same
mini-pool as the defaulting credit were used to perform the
obligation of the defaulting credit and to the extent that a
benefit exists after a) any benefit is provided each subordinate
holder associated with credits outside the sub-pool containing the
defaulting credit and b) after any benefit is provided each
subordinate holder associated with credits outside the mini-pool
containing the defaulting credit and within the sub-pool containing
the defaulting credit; wherein n, j, and k are integers in the
range of 1 to 1000. If desired, all credits allocated to a
particular mini-pool within a particular sub-pool may be selected
from a sub-category associated with the credits allocated to the
particular sub-pool.
[0072] In another embodiment, a method of structuring risk in a
financial transaction is provided, comprising: allocating to a
trust a first issuer credit having an obligation to make specified
payments and a second issuer credit having an obligation to make
specified payments, each of the first issuer credit and second
issuer credit being in a non-default state when a respective
obligation is met and being in a default state when a respective
obligation is not met; associating a first senior holder and a
first subordinate holder with the first issuer credit using a) a
respective first senior holder trust instrument through which
payments from the first issuer credit flow to the first senior
holder and b) a respective first subordinate holder trust
instrument through which payments from the first issuer credit flow
to the first subordinate holder; associating a second senior holder
and a second subordinate holder with the second issuer credit using
a) a respective second senior holder trust instrument through which
payments from the second issuer credit flow to the second senior
holder and b) a respective second subordinate holder trust
instrument through which payments from the second issuer credit
flow to the second subordinate holder; structuring the first senior
holder trust instrument and the first subordinate holder trust
instrument to give priority to payments due the first senior holder
prior to payments due the first subordinate holder in the event the
first issuer credit enters the default state; using payments from
the second subordinate holder trust instrument to perform the
obligation of the first issuer credit for the benefit of the first
senior holder to the extent that the first issuer credit enters the
default state and payments due the first senior holder are not
available; and providing the second subordinate holder the benefit
of the obligation of the first issuer credit to the extent that
payments due the second subordinate holder were used to perform the
obligation of the first issuer credit. In this embodiment, at least
one of the first senior holder trust instrument, the first
subordinate holder trust instrument, the second senior holder trust
instrument, and the second subordinate holder trust instrument may
be a bond issued by the trust.
[0073] In yet another embodiment, a method of structuring risk in a
financial transaction is provided, comprising: allocating to a
trust an issuer credit having an obligation to make specified
payments, wherein the issuer credit is in a non-default state when
the obligation is met and is in a default state when the obligation
is not met; associating a senior holder and a subordinate holder
with the issuer credit using a) a senior holder trust instrument
through which payments from the issuer credit flow to the senior
holder and b) a subordinate holder trust instrument through which
payments from the issuer credit flow to the subordinate holder; and
structuring the senior holder trust instrument and the subordinate
holder trust instrument to give priority to payments due the senior
holder prior to payments due the subordinate holder in the event
the issuer credit enters the default state. Preferably, at least
one of the senior holder trust instrument and the subordinate
holder trust instrument is a bond issued by the trust.
[0074] The present invention provides for what will hereinafter be
referred to as the Tranche Subordinated Bond approach (or "TSB"
approach), wherein each senior and subordinate holder is primarily
exposed to a particular identified ("related") credit and only
secondarily exposed to the impact of a default of any other
("unrelated") credit. This is achieved by tranching each individual
credit as well by creating a pool of credits. In other words, each
senior TSB holder is primarily exposed to (and perhaps even owns an
interest in) a particular credit of the pool. The senior TSB holder
cannot be affected by any underlying default except a default on
its related credit and only if the amount of the default exceeds
the amount of the subordinate TSBs related to the same underlying
credit. It is believed that this should also have the benefit of
avoiding concentration and capacity problems for holders of senior
TSBs, analogous to bond insurance for which holder capacity is
based on the underlying credit. If a default exceeds the amount of
the related subordinate TSBs (i.e., the subordinate TSBs that are
primarily exposed to the same underlying credit), then amounts
payable to the holders of unrelated subordinate TSBs would be
applied to make the holders of the related senior TSBs whole and
the unrelated subordinate TSB holders would become owners of or
become subrogated to the claim of the related senior TSB
holders.
[0075] If the amount of the senior TSBs is less than the expected
recovery value in the event of a default of the underlying credit,
then the unrelated subordinate TSB holders would be exposed to a
temporary non-payment ("timing risk") but not to a permanent
non-payment ("ultimate payment risk") in the event of a default on
the underlying credit since unrelated subordinate holders would be
reimbursed from recovery value when it is realized. Another
characteristic of the TSB approach is that the amount of senior
TSBs created may be limited to increase the likelihood that a
payment default could be fully absorbed by the holders of the
related subordinate TSB holders. Consequently, there may be an
intermediate tranche which is in effect a pass-through of the
underlying credit with neither the benefit nor burden of the
tranching of the pool. In one example, the intermediate tranche
would have the identical credit characteristics of the related
underlying credit, with the possible exception that all of the
recovery value of the loan may be devoted first to amounts due to
the related senior TSBs (including such amounts to which unrelated
subordinate TSBs have become subrogated).
[0076] Thus, when a new credit is added to the pool or the amount
of an existing credit is increased, the risk to the unrelated
subordinated TSB holders can be minimized, first, because the first
loss is borne by holders of the related subordinate TSBs and,
second, because the risk to the unrelated subordinate TSB holders
is essentially timing risk rather than ultimate payment risk.
Credits could be added to the pool either at the behest of an
issuer or by a holder of an underlying credit. This approach could
be targeted toward credits that in fact are directly held in the
public debt markets such as investment grade rated credits or
high-yield credits that are directly held by institutional buyers.
Both ultimate payment risk and timing risk to unrelated subordinate
TSB holders could effectively be eliminated through the use of
sub-pools and/or mini-pools as described below.
[0077] To further reduce the risk to holders of unrelated
subordinate TSBs, it may be desirable to create sub-pools within
the larger pool where the nature of the risk to subordinate TSB
holders within the sub-pool is similar. For example, traditional
municipal credits, hospital credits, industrial corporate credits,
and high-yield credits (including municipal) might be separated.
Also, credits of a particular rating category might be separated
from credits of a different rating category. It is believed that
the senior TSBs within the sub-pool should be able to independently
achieve high-grade ratings. To maximize the credit benefit to all
senior TSBs, however, all senior TSBs could ultimately be secured
by all subordinate TSBs. To further insulate subordinate TSB
holders from risk associated with a different sub-pool, the method
can require that, in order to combine sub-pools, the senior TSBs
within each sub-pool must meet a specified rating standard (e.g.,
triple-A) without the benefit of any cross-subsidization from any
other sub-pool. Hence, no subordinate TSB from a different pool
would be affected unless a credit that is triple-A on its own (the
senior TSBs within the other sub-pool) would default without the
benefit of the cross-subsidization. This reduces the risk to each
subordinate TSB holder from credits that are qualitatively
different, while maintaining the benefit to the senior TSBs of
having the largest and most diverse possible pool of subordinate
TSBs securing the senior TSBs.
[0078] From a credit and disclosure perspective, it is believed
that an important factor to a senior TSB holder are the quality of
the underlying credit (which the TSB holder is explicitly choosing)
and the quality of the credit enhancement provided by the entire
pool. Given the diversity of the pool, it is believed that it would
be unnecessary to provide disclosure on any particular credit. In
any case, it is likely that all of the underlying credits would be
registered or otherwise have publicly available disclosure that
could be incorporated by reference. The ability to identify each
underlying credit and incorporated disclosure by reference could be
important to providing adequate disclosure to subordinated TSB
holders who are on a secondary or tertiary basis exposed to credits
across the pool. It is believed, however, that the relevant
disclosure on an unrelated sub-pool should be no more than would be
required for the senior tranche of a stand alone pool (since no
subordinate TSB holder would be affected by a default on a credit
within an unrelated pool unless the senior tranche would otherwise
default), which for a large and diverse pool would be a standard
disclosure only.
[0079] Alternatively, for a particular type of credit where
sub-pools representing different rating categories are provided,
the integrity of the sub-pools could be maximized in the event of a
downgrade of the rating of an underlying credit by transferring the
credit from the higher rated sub-pool to the lower rated sub-pool.
This should not materially affect the holders of the related senior
TSBs since they are secured by the whole pool. It is believed that
this may slightly disadvantage the holders of the related
subordinate TSBs in that they would be exposed to secondary risk
related to an underlying default in the lower rated sub-pool.
However, it would impose on the subordinate TSB holder who chose
the credit the full burden of the credit deterioration rather than
sharing it with the holders of unrelated subordinate TSBs within
the higher rated sub-pool. The holders in the sub-pool to which the
credit is transferred would not be hurt since their exposure would
be no different than that related to adding any other qualifying
credit to the sub-pool. Similarly, if an underlying credit has its
rating increased, that credit could be transferred to the higher
rated sub-pool for that credit type. For the same reasons as just
stated, there would be no detriment to the holders in the sub-pool
to which the credit is transferred and the transfer would give the
holder of the transferred subordinate TSB the full benefit of the
appreciation of the credit.
[0080] Any actual default would be primarily the responsibility of
the subordinate TSB holders in the related sub-pool (and their
transferees) at the time of the default and secondarily the
responsibility of the unrelated subordinate TSB holders within the
pool. Alternatively, the program manager could at some earlier
point identify a troubled credit as the responsibility of the
subordinate TSB holders as of that date (and their transferees).
Thus, a problem with a particular credit can be isolated so as not
to affect the ability to add other credits to the pool. Otherwise,
a troubled credit could disincentivize potential subordinated TSB
holders from participating in the related pool since a loss on that
credit would be shared by the new subordinated TSB holder.
[0081] In a further embodiment, for credits without significant
recovery values, such as credits in bankruptcy which may or may not
have liquidation values (for which it is impossible to eliminate
ultimate payment risk by tranching an individual credit), or simply
to eliminate timing risk to unrelated TSBs, or to increase the
proportion of the securities that can be converted into senior
TSBs, it may be necessary or desirable for the subordinate TSB
structure to be based on groups of underlying credits (e.g., a
"mini-pool") rather than a single underlying credit. The structure
of a mini-pool would be similar to that of a sub-pool in that any
default within the pool would first be borne by the holders of the
subordinate TSBs within the mini-pool before the holders of any
unrelated subordinate TSBs would be affected. Each mini-pool might
contain credits of a particular sub-category of the type of credits
in the corresponding sub-pool (e.g., credits related to a
particular industry, such as telecommunications). The senior TSBs
related to a mini-pool could still be based on individual credits
rather than on the mini-pool of credits. The test for addition of a
mini-pool to a sub-pool could be significantly less rigorous than
the test for addition of a sub-pool to the pool. It may only be
necessary that the ultimate payment risk and/or timing risk to
holders of unrelated subordinate TSBs be made comparable to the
risk posed by each other underlying credit or pool of mini-credits
within the sub-pool.
[0082] Using the TSB approach, an institutional holder (e.g., a
pension fund) could create high-grade, credit enhanced, more liquid
senior TSBs related to either individual securities or a mini-pool
of securities that it holds. As the pool gets larger, the credit
quality of the senior TSBs would increase (or at least the
probability of any non-payment would get less and less). It is
further believed that the result for the senior TSBs would be
similar to adding bond insurance to municipal bonds: a) an increase
in price or b) a decrease in market yield. Alternatively, rather
than being reflected in the price of the senior TSBs, the economic
benefit of the TSB structure could be reflected in a higher
retained yield on the subordinate TSBs.
[0083] Referring now to FIG. 1, a flowchart showing a method
according to an embodiment of the invention is shown. As seen in
this FIG. 1, Pool 101 contains First Credit 103. First Credit 103,
which includes an obligation to make specified payments, can be in
a non-default state if the obligation is met or a default state if
the obligation is not met. First Senior Holder 105 is associated
with First Credit 103 using First Senior Holder Financial
Instrument 107, through which payments flow from First Credit 103
to First Senior Holder 105. First Subordinate Holder 109 is
associated with First Credit 103 using First Subordinate Holder
Financial Instrument 111, through which payments flow from First
Credit 103 to First Subordinate Holder 109. First Senior Holder
Financial Instrument 107 and First Subordinate Holder Financial
Instrument 111 may be structured to provide for the priority of
payments from First Credit 103 to First Senior Holder 105 prior to
payments from First Credit 103 to First Subordinate Holder 109.
[0084] Pool 101 also contains Second Credit 113. Second Credit 113,
which includes an obligation to make specified payments, can be in
a non-default state if the obligation is met or a default state if
the obligation is not met. Second Senior Holder 115 is associated
with Second Credit 113 using Second Senior Holder Financial
Instrument 117, through which payments flow from Second Credit 113
to Second Senior Holder 115. Second Subordinate Holder 119 is
associated with Second Credit 113 using Second Subordinate Holder
Financial Instrument 121, through which payments flow from Second
Credit 113 to Second Subordinate Holder 119. Second Senior Holder
Financial Instrument 117 and Second Subordinate Holder Financial
Instrument 121 may be structured to provide for the priority of
payments from Second Credit 113 to Second Senior Holder 115 prior
to payments from Second Credit 113 to Second Subordinate Holder
119.
[0085] In the event that First Credit 103 enters the default state
any payments available from First Credit 103 are first applied to
First Senior Holder 105 (at the expense of First Subordinate Holder
109). To the extent that the payments to First Senior Holder 105
are still not sufficient to cover the obligation of First Credit
103 then payments due Second Subordinate Holder 119 are used to
cover the obligation to First Senior Holder 105 (this is shown by
the dashed line marked A in FIG. 2). Further, to the extent that
any benefit remains in the obligation of First Credit 103 to First
Senior Holder 105 then Second Subordinate Holder 119 is provided
such remaining benefit (this is shown by the dashed line marked B
in FIG. 2).
[0086] Of course, if Second Credit 113 enters the default state
rather than First Credit 103 an analogous operation is carried out
with regard to First Subordinate Holder 109, Second Senior Holder
115, and Second Credit 113.
[0087] Referring now to FIG. 2, a flowchart showing a method
according to another embodiment of the present invention is shown.
This embodiment is similar to the embodiment of FIG. 1 and elements
of FIG. 1 corresponding to elements of FIG. 2 will not be described
again in detail. The principle difference between the embodiments
of FIGS. 1 and 2 is that in the embodiment of FIG. 2 the First
Senior Holder Financial Instrument 207 and the First Subordinate
Holder Financial Instrument 211 are included within a First Master
Financial Instrument 223 and the Second Senior Holder Financial
Instrument 217 and the Second Subordinate Holder Financial
Instrument 221 are included within a Second Master Financial
Instrument 225 The two embodiments otherwise operate in a similar
manner.
[0088] Referring now to FIG. 3, a flowchart showing a method
according to another embodiment of the invention is shown. As seen
in this Fig., Pool 301 contains First Credit 303, Second Credit
305, Third Credit 307, and Fourth Credit 309. First Credit 303 and
Second Credit 305 are included within First Sub-Pool 311 and Third
Credit 307 and Fourth Credit 309 are included within Second
Sub-Pool 313. Each of First Credit 303, Second Credit 305, Third
Credit 307, and Fourth Credit 309 includes an obligation to make
specified payments and each of First Credit 303, Second Credit 305,
Third Credit 307, and Fourth Credit 309 can be in a non-default
state if a respective obligation is met or a default state if the
obligation is not met.
[0089] First Senior Holder 315 is associated with First Credit 303
using First Senior Holder Financial Instrument 317, through which
payments flow from First Credit 303 to First Senior Holder 315.
First Subordinate Holder 319 is associated with First Credit 303
using First Subordinate Holder Financial Instrument 321, through
which payments flow from First Credit 303 to First Subordinate
Holder 319. First Senior Holder Financial Instrument 317 and Second
Senior Holder Financial Instrument 321 may be structured to provide
for the priority of payments from First Credit 303 to First Senior
Holder 315 prior to payments from First Credit 303 to First
Subordinate Holder 319.
[0090] Further, as shown in FIG. 3, each of second through fourth
Senior Holders and Subordinate Holders are associated with
respective Credits through respective Financial Instruments. The
various Financial Instruments may be structured as described above
with reference to the priority of payments between corresponding
Senior Holders and Subordinate Holders.
[0091] In the event that First Credit 303 enters the default state
any payments available from First Credit 303 are first applied to
First Senior Holder 315 (at the expense of First Subordinate Holder
319). To the extent that the payments to First Senior Holder 315
are still not sufficient to cover the obligation of First Credit
303 then payments due Second Subordinate Holder 327 are used to
cover the obligation to First Senior Holder 315 (this is shown by
the dashed line marked A in FIG. 3).
[0092] Further, to the extent that the payments to First Senior
Holder 315 which had been due Second Subordinate Holder 327 are
insufficient to fulfill the obligation of First Credit 303 the
payments due Third Subordinate Holder 335 and Fourth Subordinate
Holder 343 may be used (shown by the dashed lines marked C and D in
FIG. 3). Thereafter, to the extent that any benefit remains in the
obligation of First Credit 303 to First Senior Holder 315, and to
the extent that payments due Third Subordinate Holder 335 and
Fourth Subordinate Holder 343 had been directed to First Senior
Holder 315, Third Subordinate Holder 335 and Fourth Subordinate
Holder 343 are provided such remaining benefit (this is shown by
the dashed lines marked E and F in FIG. 3). Finally, to the extent
that any benefit remains in the obligation of First Credit 303 to
First Senior Holder 315 after Third Subordinate Holder 335 and
Fourth Subordinate Holder 343 have been made whole, Second
Subordinate Holder 327 is provided such remaining benefit (this is
shown by the dashed line marked B in FIG. 3).
[0093] Of note is the fact that the operation of Sub-Pool 311 is
similar to the operation of Pool 101 of FIG. 1. Also of note is the
fact that any remaining benefit may not be applied to Second
Subordinate Holder 327 (associated with a Credit in the same
Sub-Pool as the defaulting Credit) until Third Subordinate Holder
335 and Fourth Subordinate Holder 343 (associated with a Credit in
a different Sub-Pool than the defaulting Credit) have been made
whole. In another example, if a Credit other than First Credit 303
enters the default state then an analogous operation is carried out
with regard to each Subordinate Holder, each Senior Holder, and
each Credit.
[0094] Referring now to FIG. 4, a flowchart showing a method
according to another embodiment of the present invention is shown.
This embodiment is similar to the embodiment of FIG. 3 and elements
of FIG. 3 corresponding to elements of FIG. 4 will not be described
again in detail. The principle difference between the embodiments
of FIGS. 3 and 4 is that in the embodiment of FIG. 4 each
associated Senior Holder Financial Instrument and Subordinate
Holder Financial Instrument is included within a Master Financial
Instrument. The two embodiments otherwise operate in a similar
manner.
[0095] Referring now to FIG. 5, a flowchart showing a method
according to another embodiment of the invention is shown. As seen
in this Fig., Pool 501 contains First Credit 503, Second Credit
505, Third Credit 507, Fourth Credit 509 and Fifth Credit 511.
Second Credit 505 and Third Credit 507 are included within
Mini-Pool 512 which in turn is included within First Sub-Pool 513.
First Credit 503 is also included within First Sub-Pool 513.
Further, Fourth Credit 509 and Fifth Credit 511 are included within
Second Sub-Pool 515. Each of First Credit 503, Second Credit 505,
Third Credit 507, Fourth Credit 509 and Fifth Credit 511 includes
an obligation to make specified payments and each of First Credit
503, Second Credit 505, Third Credit 507, Fourth Credit 509 and
Fifth Credit 511 can be in a non-default state if a respective
obligation is met or a default state if the obligation is not
met.
[0096] First Senior Holder 517 is associated with First Credit 503
using First Senior Holder Financial Instrument 519, through which
payments flow from First Credit 503 to First Senior Holder 517.
First Subordinate Holder 521 is associated with First Credit 503
using First Subordinate Holder Financial Instrument 523, through
which payments flow from First Credit 503 to First Subordinate
Holder 521. First Senior Holder Financial Instrument 519 and First
Subordinate Holder Financial Instrument 523 may be structured to
provide for the priority of payments from First Credit 503 to First
Senior Holder 517 prior to payments from First Credit 503 to First
Subordinate Holder 521.
[0097] Further, as shown in FIG. 5, each of second through fifth
Senior Holders and Subordinate Holders are associated with
respective Credits through respective Financial Instruments. The
various Financial Instruments may be structured as described above
with reference to the priority of payments between corresponding
Senior Holders and Subordinate Holders.
[0098] In the event that Second Credit 505 enters the default state
any payments available from Second Credit 505 are first applied to
Second Senior Holder 525 (at the expense of Second Subordinate
Holder 529). To the extent that the payments to Second Senior
Holder 525 are still not sufficient to cover the obligation of
Second Credit 505, payments due Third Subordinate Holder 537 are
used to cover the obligation to Second Senior Holder 525 (this is
shown by the dashed line marked A in FIG. 5). Further, to the
extent that the payments to Second Senior Holder 525 which had been
due Third Subordinate Holder 537 are insufficient to fulfill the
obligation of Second Credit 505, payments due First Subordinate
Holder 521 may be used (shown by the dashed line marked C in FIG.
5).
[0099] Further still, to the extent that the payments to Second
Senior Holder 525 which had been due First Subordinate Holder 521
are insufficient to fulfill the obligation of Second Credit 505,
payments due Fourth Subordinate Holder 545 and Fifth Subordinate
Holder 553 may be used (shown by the dashed lines marked E and F in
FIG. 5).
[0100] Thereafter, to the extent that any benefit remains in the
obligation of Second Credit 505 to Second Senior Holder 525, and to
the extent that payments due Fourth Subordinate Holder 545 and
Fifth Subordinate Holder 553 had been directed to Second Senior
Holder 525, Fourth Subordinate Holder 545 and Fifth Subordinate
Holder 553 are provided such remaining benefit (this is shown by
the dashed lines marked G and H in FIG. 5). Next, to the extent
that any benefit remains in the obligation of Second Credit 505 to
Second Senior Holder 525 after Fourth Subordinate Holder 545 and
Fifth Subordinate Holder 553 have been made whole, and to the
extent that payments due First Subordinate Holder 521 had been
directed to Second Senior Holder 525, First Subordinate Holder 521
is provided such remaining benefit (this is shown by the dashed
line marked D in FIG. 5).
[0101] Finally, to the extent that any benefit remains in the
obligation of Second Credit 505 to Second Senior Holder 525 after
First Subordinate Holder 521, Fourth Subordinate Holder 545 and
Fifth Subordinate Holder 553 have been made whole, Third
Subordinate Holder 537 is provided such remaining benefit (this is
shown by the dashed line marked B in FIG. 5).
[0102] Of note is the fact that the operation of Mini-Pool 512 is
similar to the operation of both Sub-Pool 311 of FIG. 3 and Pool
101 of FIG. 1. Also of note is the fact that: a) any remaining
benefit may not be applied to Third Subordinate Holder 537 (which
is associated with a Credit in the same Mini-Pool as the defaulting
Credit) until First Subordinate Holder 521 (which is associated
with a Credit outside the Mini-Pool with the defaulting Credit) has
been made whole; and b) any remaining benefit may not be applied to
First Subordinate Holder 521 (which is associated with a Credit in
the same Sub-Pool as the defaulting Credit) until Fourth
Subordinate Holder 545 and Fifth Subordinate Holder 553 (which are
associated with Credits outside the Sub-Pool with the defaulting
Credit) have been made whole.
[0103] Of course, if a Credit other than Second Credit 505 enters
the default state then an analogous operation is carried out with
regard to each Subordinate Holder, each Senior Holder, and each
Credit.
[0104] Referring now to FIG. 6, a flowchart showing a method
according to another embodiment of the present invention is shown.
This embodiment is similar to the embodiment of FIG. 5 and elements
of FIG. 5 corresponding to elements of FIG. 6 will not be described
again in detail. The principle difference between the embodiments
of FIGS. 5 and 6 is that in the embodiment of FIG. 6 each
associated Senior Holder Financial Instrument and Subordinate
Holder Financial Instrument is included within a Master Financial
Instrument. The two embodiments otherwise operate in a similar
manner.
[0105] Referring now to FIG. 7, a block diagram of a software
program according to another embodiment of the present invention is
shown. As seen in this Fig., Software Program 701 includes: 1)
Database Module 703 for storing data concerning each credit, each
senior holder, each subordinate holder, each senior holder
financial instrument, each subordinate holder financial instrument,
the transaction pool, each sub-pool, and each mini-pool; 2)
Allocation Module 705 for allocating sub-pools to the transaction
pool, for allocating mini-pools to each of the sub-pools, and for
allocating credits to each of the mini-pools, sub-pools, and
transaction pool; 3) Association Module 707 for associating a
senior holder and a subordinate holder with each of the credits by
associating a) a senior holder with a respective senior holder
financial instrument through which payments from a respective
credit flow to the senior holder and b) a subordinate holder with a
respective subordinate holder financial instrument through which
payments from a respective credit flow to the subordinate holder;
and 4) Crediting Module 709 for: i) crediting payments from each
subordinate holder financial instrument associated with credits
within the same mini-pool as a defaulting credit to perform the
obligation of the senior holder financial instrument associated
with the defaulting credit for the benefit of the senior holder to
the extent that payments due the senior holder associated with the
defaulting credit are not available; ii) crediting payments from
each subordinate holder financial instrument associated with
credits outside the mini-pool with the defaulting credit but within
the same sub-pool as the defaulting credit to perform the
obligation of the senior holder financial instrument associated
with the defaulting credit for the benefit of the senior holder to
the extent that the payments of each subordinate holder financial
instrument associated with credits within the same mini-pool as the
defaulting credit which were used for the benefit of the senior
holder do not cover the obligation of the defaulting credit; iii)
crediting payments from each subordinate holder financial
instrument associated with credits outside the sub-pool containing
the defaulting credit to perform the obligation of the senior
holder financial instrument associated with the defaulting credit
for the benefit of the senior holder to the extent that the
payments of each subordinate holder financial instrument associated
with credits within the same sub-pool as the defaulting credit
which were used for the benefit of the senior holder do not cover
the obligation of the defaulting credit; iv) crediting each
subordinate holder associated with credits outside the sub-pool
containing the defaulting credit with the benefit of the obligation
of the defaulting credit to the associated senior holder to the
extent that the payments due each subordinate holder associated
with credits outside the sub-pool containing the defaulting credit
were used to perform the obligation of the defaulting credit; v)
crediting each subordinate holder associated with credits within
the same sub-pool as the defaulting credit with the benefit of the
obligation of the defaulting credit to the associated senior holder
to the extent that payments due each subordinate holder associated
with credits within the same sub-pool as the defaulting credit were
used to perform the obligation of the defaulting credit and to the
extent that a benefit exists after any benefit is provided each
subordinate holder associated with credits outside the sub-pool
containing the defaulting credit; and vi) crediting each
subordinate holder associated with credits within the same
mini-pool as the defaulting credit with the benefit of the
obligation of the defaulting credit to the associated senior holder
to the extent that payments due each subordinate holder associated
with credits within the same mini-pool as the defaulting credit
were used to perform the obligation of the defaulting credit and to
the extent that a benefit exists a) after any benefit is provided
each subordinate holder associated with credits outside the
sub-pool containing the defaulting credit and b) after any benefit
is provided each subordinate holder associated with credits outside
the mini-pool containing the defaulting credit and within the
sub-pool containing the defaulting credit.
[0106] Referring now to FIG. 8, a block diagram of a system
according to another embodiment of the present invention is shown.
As seen in this figure, Computer 801 includes Memory 803 for
storing a software program (not shown) and CPU 805 for processing
the software program. Monitor 807, Keyboard 809, Mouse 811, and
Printer 813 are connected to Computer 801 to provide user
input/output. The software program stored in Memory 803 and
processed by CPU 805 may of course be the software program of the
present invention. In any case, the details of each of Computer
801, Memory 803, CPU 805, Monitor 807, Keyboard 809, Mouse 811, and
Printer 813 are well known to those of ordinary skill in the art
and will not be discussed further.
[0107] Referring now to yet another embodiment of the present
invention, credit tranches may be created by having an issuer's
bonds (hereinafter "Issuer Bonds" or "IBs") deposited in a trust
which in turn issues various classes of securities (hereinafter
"Trust Bonds" or "TBs"). Such Trust Bonds may be related to the
Issuer Bonds and may be issued to the public and/or to any other
appropriate group. It is believed that this approach may work to
permit credit tranching for securities, such as General
Obligations, for which the issuer may not have authority to create
tranches directly. In the event of a payment of less than all of
the amount due on the Issuer Bond(s), the entire amount received on
the Issuer Bond(s) would go first to secure payment of debt service
on the related senior Trust Bond(s) with any balance going to pay
the debt service on the subordinate Trust Bond(s). FIG. 9 shows a
diagram of such a flow of funds (debt service is abbreviated as
"D/S" in this Figure).
[0108] In one example of the present embodiment the terms of the
Trust Bonds, such as, for example, amount, payment dates, and
redemption provisions, but excluding interest rates, would
substantially mirror the provisions of the related Issuer
Bond(s).
[0109] For any Issuer Bond(s) for which there is express provision
for the application of available monies to pay debt service in the
event of a shortfall, in one example, this approach may create high
grade credit tranches and/or credit tranches with high
coverage.
[0110] It is noted that outside of the housing sector, senior bonds
are traditionally assigned only a slightly higher rating than the
subordinate bonds. This suggests that either: i) there is still a
perceived risk that notwithstanding the provisions for
apportionment of monies in the event of a shortfall, no payment
will be made; or ii) the portion of an issue that could be assigned
a high grade rating using the traditional senior/subordinate
approach is significantly smaller generally than is the case in
housing. A possible explanation is that the percentage change in
the revenues of the issuer necessary to result in a non-payment of
the senior bonds is not sufficiently different from that necessary
to cause a non-payment of the subordinate bonds to provide a
materially higher level of protection. However, for issuers with a
heavy debt burden, it is believed that the difference should be
material.
[0111] With respect to the risk of non-payment, in the case of
Issuer Bonds according to the present invention which are secured
by a net revenue pledge, the other creditors are provided for prior
to the payment of any debt service. So, given an explicit provision
on the allocation of funds in the event of an insufficiency, the
risk of non-payment should be insignificant. Consequently, a gross
pledge of revenues may present a greater risk that there could be a
period of non-payment while a court determines how much gets
applied to the cost of operations. Even so, the risk to the senior
Trust Bonds would predominantly be with respect to the timing of
payment rather than with respect to payment itself.
[0112] In this regard, one method of reducing the timing risk to
the senior TBs would be to find a reserve for them as soon as a
payment default occurred on the IBs and prior to the payment of
debt service on the subordinate TBs. This process would effectively
result in application of the entire reserve (hereinafter "debt
service reserve fund", or "DSRF") to secure the senior TBs and, for
a typical situation, provide protection with respect to timeliness
of payment for a period of, for example, 1.5 to 2 years (depending
on the proportion of senior TBs). Of note is the fact that there
may be tax issues with respect to the use of the reserve in this
manner. Also, the aforementioned approach of funding a reserve
would increase the probability of an actual non-payment with
respect to the subordinate TBs (since they would not get any
benefit from the DSRF).
[0113] If no special reserve is created for the senior TBs, then
there is substantially no difference in the probability of a
non-payment event between the Issuer Bonds and the Trust Bonds.
However, in the event of a non-payment event, the severity of the
non-payment event is more severe for the subordinate TBs than for
the IBs, and less severe for the senior TBs.
[0114] Referring now to yet another embodiment of the present
invention, an approach which addresses concerns regarding the
timeliness of payment of senior TBs may be accomplished as follows:
pool together two or more Issuer Bond credits such that amounts
available after payment of the senior TBs for each credit are used
to secure the payment of the other senior TBs in the event that the
amounts received for payment of the related Issuer Bonds are not
sufficient to pay the senior TBs. In other words, payments
allocable to each series of subordinate TBs are applied first, to
the extent needed, to pay unpaid amounts on any of the senior TBs.
FIG. 10 shows a diagram of the credit structure of such an approach
(debt service is abbreviated as "D/S" in this Figure).
[0115] In one example, the following discussion of the
aforementioned pooling approach assumes that substantially equal
amounts of bonds are issued for each credit, that the bonds are
issued substantially simultaneously, and that the bonds are payable
on substantially the same dates.
[0116] In any case, it is noted that if the ratio of senior to
subordinate TBs is 2-to-1 (i.e., 66% senior TBs), then the senior
TBs of each credit are fully secured by the sum of the amounts
allocable to the subordinate tranches for the other two credits.
However, the ratio of total senior obligations to the total amounts
securing them is 1 to 1.33.
[0117] Further, if the ratio of senior to subordinate TBs is 1-to-1
(i.e., 50% senior TBs), the senior TBs of each credit are
over-collateralized 2.times.. by the sum of the amounts allocable
to the subordinate tranches for the other two credits. Also, the
ratio of total senior obligations to the total amounts securing
them is 1 to 2.
[0118] Applying the principles typically applicable to
two-party-pay situations, the senior TBs should be rated from A to
triple-A, depending on such criteria as the percentage of senior
debt, the strength of the underlying credits, and the degree of
correlation between the underlying credits. Each of the senior TB
tranches would have both: i) an underlying rating determined on the
basis of the tranching of the individual credit; and ii) an
enhanced rating based on the impact of pooling.
[0119] On the other hand, each of the subordinate TBs could be
rated as low as the weakest rating (without regard to pooling) of
any of the senior TB tranches. The credit impact of the proposed
structure on the subordinate TBs could be mitigated by: i) first
applying amounts related to the same underlying credit; and ii)
then applying amounts securing the weakest of the other underlying
credits (thereby reducing the possibility that the subordinate TBs
related to the stronger underlying credit would be affected).
[0120] In one example, if the senior tranches can achieve at least
double-A category ratings, it is believed that the savings from
this structure could accrue both from lower interest rates on the
senior bonds as well as from the avoided cost of bond insurance on
the senior bonds. Those savings would be reduced in part by any
increase in yield necessary to market the subordinate TBs and by
any increase in the costs of bond insurance. However, the net
benefit could be used to reduce the issuer's cost of funds.
[0121] Further, it is noted with regard to the present example that
if the underlying ratings of all three credits are the same, the
subordinate TBs would arguably have the same ratings as the Issuer
Bonds while the senior TBs should receive significantly higher
ratings. As mentioned earlier, the probability of a non-payment
event would be substantially the same for both the Issuer Bonds and
the subordinate TBs. However, if such an event did occur, the
severity of the event could be greater for the subordinate TBs.
(This runs counter to the idea that the issuer would not make any
payment in the event of a shortfall).
[0122] A specific example of a pooled Trust Bond embodiment of the
present invention will now be described with reference to the
credit tranching and pooling of three New York City credits. More
particularly, the discussion will be a simplified analysis of the
credit tranching and pooling of the General Obligation credit
("NYCGO"), the Municipal Water Finance Authority ("NYCWFA"), and
the Transitional Finance Authority ("NYCTFA").
[0123] In one example, the analysis assumes that the MOODYS,
STANDARD & POORS, and FITCH ratings of the bonds secured by the
credits are as shown in Table 1:
TABLE-US-00001 TABLE 1 NYCWFA NYCGO NYCTFA MOODYS A1 A3 Aa3
STANDARD & POORS A A- AA FITCH AA- A- AA+
[0124] Moreover, the analysis assumes that the pool includes
two-thirds senior and one-third subordinate TBs. Therefore, as long
as not more than one credit defaults at any time, the defaulting
senior Trust Bonds will be fully secured by amounts allocable to
the subordinate TBs of the other two credits. Also, the credit
tranching within each credit provides protection except during any
period in which the issuer is making no payments on that credit. In
essence, the only time that there could be a problem with payment
of the senior TBs in this example would be in the situation where
the City (i.e., the credit issuing entity) was simultaneously
making no payments on two of the three credits.
[0125] Accordingly, it is believed that even though the TBs are not
fully covered by the obligations of two parties, given: i) the low
correlation among the three credits (other than with respect to
general economic conditions); and ii) the fact that the
diversification of the credits and credit tranching would allow the
structure to accommodate significant simultaneous payment
shortfalls (up to 50%) with respect to two credits without a
non-payment of senior TBs, application of the two-party pay
criteria in assessing the impact of the structure on the ratings of
the senior Trust Bonds should be appropriate.
[0126] Note that for each senior TB to be fully secured by two
credits, the senior TBs could not exceed 50% of each series. Given
the ratings of the three NYC credits, a literal application of the
two-party pay criteria would result in triple-A ratings on
two-thirds of the senior Trust Bonds and double-A ratings on the
remaining third. As in the case of the 66% senior TBs, the
structure cannot withstand total non-payment of two of the credits
at the same time. With 50% senior bonds, the structure could
withstand a simultaneous 75% payment shortfall by two of the
credits. However, this would result in a structure having a larger
amount of subordinate TBs. Minimizing the amount of subordinate TBs
is important (unless the underlying credits all have the same or
very similar ratings) since the rating of the subordinate TBs may
be the lowest common denominator of the three credits. Minimizing
the amount of subordinate TBs also spreads the benefit of the
higher ratings on the senior tranche across a larger amount of
bonds.
[0127] Applying, for example, MOODY's two-party pay criteria to the
scenario with two-thirds senior bonds results in the senior TB
ratings indicated in FIG. 11 (debt service is abbreviated as "D/S"
in this Figure). The two-party pay criteria were applied assuming a
medium correlation among the credits. Further, for each senior TB
series, the two-party pay criteria were applied using the related
underlying credit together with the weakest of the other two
credits.
[0128] Interestingly, given the Trust Bond ratings in this example,
the City would be selling substantially the same amount of
A3/A-/A-Trust Bonds as it would have been selling NYCGO's with the
same rating. However, it is believed that the present system would
enhance the ratings on all of the other bonds. Possibly these
"natural" double-A Trust Bonds could trade flat to or through
insured bonds. The benefit of the bond issue to the City (or other
credit issuing entity) would be the sum of: i) avoided cost of bond
insurance on the senior TBs; plus ii) the interest savings
attributable to the credit spread between the ratings on the senior
TBs and the underlying ratings on any related Issuer Bonds; minus
iii) any increase in the interest cost or cost of bond insurance
for the subordinate TBs as compared with what such costs would have
been for the underlying bonds.
[0129] Moreover, by separately applying the two-party pay criteria
to the portion of each series of senior TBs that is secured by each
of the other series, it should be possible to assign an even higher
rating to at least half of the senior TBs.
[0130] It is noted that the examples discussed above do not take
into account a variety of issues, including: i) relative size of
issuance among the different credits; ii) different timing of
issuance among the different credits; iii) intra-period timing
issues with respect to debt service payments on the different
categories of Issuer Bonds; iv) differences in the shape of debt
service among the different credits; v) disclosure issues raised by
the structure (e.g., disclosure on all three credits could be
material to every series of both senior and subordinate bonds); vi)
tax issues; and vii) legal authority of the Issuer to implement the
structure, but these can be provided for in the present system to
the extent that they are applicable.
[0131] Another example of a slightly different application of the
present invention would be for the issuing entity, e.g., New York
City to: i) have a single class of TB tranches for each of the GO,
WFA and TFA credits; and ii) have the amounts allocable to the GO
and WFA TBs secure payment of TBs issued for the TFA. Since the TFA
is rated higher, the exposure to the TFA credit should not hurt the
ratings of the GO and WFA TBs. However, the TFA TBs should be rated
triple-A.
[0132] Referring now to another example of a pooled Trust Bond
embodiment of the present invention, a credit structure combines
the revenues from two or more systems as part of a single security
package. More particularly, a trust could hold senior lien
obligations from the two or more systems. In one example, the trust
may be single purpose trust. The trust could have the authority to
issue securities against those securities held in the trust. Each
system could be legally responsible for their respective
obligations to the trust. The trust, in turn, could issue
securities to the public in a senior/subordinate structure. The
revenue stream flowing out of the trust from the obligations of the
two or more systems (e.g., a water system and a sewer system),
which could mirror the principal and interest on the publicly held
debt, could provide bondholder security. The senior/subordinate
structure could allow the trust to tranche the securities with
differing coverage ratios. Such tranched securities could allow for
the senior lien obligations to be rated higher than the underlying
obligations on their own.
[0133] A more specific example of the aforementioned embodiment of
the present invention is as follows: A water system and a sewer
system could each issue bonds in the total amount of $200 million
to the trust (i.e., $100 million each). The trust could then issue
bonds to the public consisting of $100 million senior lien bond(s)
and $100 million junior lien bond(s). Bondholders in general would
benefit because the revenues used to pay debt service would be
coming from both the water and sewer systems. In addition, the
senior lien bondholders would benefit because their bonds would
have coverage of two times (at least $200 million in revenues to
pay $100 million in senior lien obligations). If there were to be a
default by either the water or sewer system to the trust, the
senior lien bondholders would be secured because the non-defaulting
system's revenues would cover the senior lien obligations. A
structure like this should allow the senior lien bond(s) to achieve
a rating of at least Aa2/AA (by STANDARD & POORS, for example),
while the junior lien bonds would receive ratings at the lower of
the water or sewer system ratings.
[0134] While a number of embodiments of the present invention have
been described, it is understood that these embodiments are
illustrative only, and not restrictive, and that many modifications
may become apparent to those of ordinary skill in the art. For
example, while the present invention has been described with
reference to each credit being associated with a single senior
holder financial instrument and a single subordinate holder
financial instrument any desired number of tiered seniority senior
holder financial instruments and/or tiered seniority subordinate
holder financial instruments could be used. Further still, while
the present invention has been described with reference to each
senior holder financial instrument and each subordinate holder
financial instrument being associated with a single respective
senior holder and a single respective subordinate holder any
desired number of senior holders and/or subordinate holders could
be associated with each respective senior holder financial
instrument and subordinate holder financial instrument. Further
still, each TSB holder (i.e., each senior holder or each
subordinate holder) could directly own the respective underlying
credit or have a pass-through interest in the form of ownership of
an interest in a mutual find, trust, partnership, or corporation
(either debt or equity). Further still, the obligation of
subordinate holders to cover for senior holders could be in the
form a guarantee, an insurance policy, or an agreement to purchase
(either all payments or defaulted payments). Further still, each
credit and associated senior holder financial instrument and/or
subordinate holder financial instrument could be incorporated into
a single instrument. Further still, the present invention may be
implemented with or without the cooperation of a credit issuer.
Further still, the pooled credits could be from related issuers
and/or from separate issuers. Further still, the pool may have a
relatively large number of credits (a larger pool should allow for
smaller subordinate TB tranches.) Further still, even for a large
pool of general infrastructure type credits (excluding bonds such
as appropriation bonds, with significant event risk), it should be
valid to assume that not more than two or three credits would ever
be in a non-payment mode at the same time.
Further Embodiments
[0135] As used herein, the terms "component", "computer based
component" or "computer implemented component" refer to hardware or
software executed by and combined with hardware, including software
stored in tangible processor readable media. The hardware can be a
device using a computer processor, a specialized processor such as
an application-specific integrated circuit (ASIC), or the like. As
used herein, the term "debt" or "obligation" refer to bonds,
mortgages, loans, or any other obligation which requires payments
by debtor of the principal of the debt and at least some interest,
and wherein the payments occurs at a plurality of times over a time
period. Such debt obligations, and the terms for the debt,
including the amount of principal, interest, payment amounts,
payment times, time period, or the like, may be specified in a
financial instrument, such as an electronic financial instrument.
While various embodiments of the invention are directed to insuring
bonds, applications to other types of debt are also within the
scope of the invention.
[0136] While the descriptions refers may refer to insuring bonds or
debts and/or insured bonds or debts, generally the systems,
processes, media, devices, and components described herein can be
adapted to manage trust bonds or support bonds (in place of
insuring bonds) and supported bonds (in place of insured bonds),
without departing from the scope of the invention. Generally, where
appropriate, the term "trust bonds" or "support bonds" can be used
interchangeably with the terms "insuring bonds" or "insuring debts"
and the term "supported bonds" can be used interchangeably with the
terms "insured bonds" or "insured debts."
[0137] The various processes, systems, apparatuses, and media
described herein are operated by a processor and/or computer based
systems and can produce a tangible results and transformations of
the attributes of the computer based components described herein,
including an improved credit rating, additional funds, improved
resources for issuers to borrow funds and provide services.
[0138] Further embodiments of the invention are directed to a
computer-implemented method, system, apparatus, and media for
minimizing a risk associated with an anticipated value of an
investment. An insurer establishes a capital structure within a
computer memory of a computer system, the capital structure
designed to minimize risk and structured with regulatory capital
and a cash stream that is pledged to fund a default on payments
associated with the investment. Establishing the capital structure
can include allocating regulatory capital based on a coverage
factor multiplied by an average annual depression scenario default
percentage for the investment and determining a portion of the
capital structure for a pledged insuring investment that produces
at least a portion of the cash stream. A determination of whether
the established capital structure is sufficient to obtain a minimal
target credit rating for the insurer is generated. The desired
target rating is electronically provided based on the
determination.
[0139] Other aspects of the invention are directed to a method,
system, apparatus and media for managing debt, including managing
insurance of debt. Insuring for a default of a debt is managed by
establishing an insuring debt related to an insured debt of a
debtor based on an insured debt amount of the insured debt. The
debts can be bonds issued by a municipality. A first loss class and
a second loss class can be allocated in an insuring trust. A first
class holder can be entitled to a payment from the insuring debt
based on a debt owed to the first class holder from an established
insuring fund of the insuring trust. The insuring fund is used to
insure for a default of the insured debt. If the insured debt is
not in default, the payment is allocated to the first class holder.
Otherwise, the payment is intercepted, and an insuring payment from
the insuring fund is paid to a holder of the insured debt to cure
the default.
[0140] At least one objective of the various embodiments of the
invention is to operate the various components described herein in
a way that assures their long-term creditworthiness and viability
including: covering defaults significantly in excess of rating
criteria and for the full term of the Insured Bonds; avoiding
certain event risks that would be permissible under rating agency
criteria; and fully funding capital upon issuance of the Insured
Bonds versus reliance upon uncertain future funding, when needed.
The various aspects of the invention provide advantages that
include significant credit strengths relative to a conventional
cash-based equity structure that will create a pricing advantage
with bond purchasers and increased confidence among bond issuers
e.g., higher default tolerance and for the full term of the bonds;
reduced sensitivity to changes in insured portfolio credit profile;
superior returns on cash equity and greatly reduced risk; and
significant benefits to issuers both to maturity and to the call
date from using insurance.
[0141] FIGS. 12A to 12E, 13, 14A to 14D, 15 to 20, 21A, 21B, 22A,
22B, 23 to 26, 27A to 27H, 28A to 28I, 29A, 29B, 30A to 30C, 31A to
31I, 32A to 32F, and 33A to 33F show various embodiments of
methods, data models and interfaces directed to insuring defaults
on debt obligations, including bond obligations using a computer
implemented Bond Enhanced Capital Model ("BECM") that is operated
by computer systems and electronic exchanges related to the
operations of a BECM management company (the "Company"). As used
herein, the "Company" refers to a company or other organization
that is managing a trust or other transaction pool using the BECM
computer based methodology of the present invention. In various
embodiments, the BECM is embodied in a method, system, apparatus,
and media for funding the capital charges of a bond insurer (i.e.,
funding potential defaults under a depression scenario) that
utilizes a plurality of sources of capital, including [0142] Debt
service payable on pledged bonds (the "Insuring Bonds")
representing a pro-rata portion of each maturity of every Insured
Bond Issue; and/or [0143] Cash capital derived from a public or
private investment.
[0144] As used herein, "Insured Bonds" refers to any bonds that are
the beneficiaries of a Trust Guaranty by the Insuring Trust. Each
Insured Bond Issue can meet certain requirements set forth by the
Company at the time that that any portion thereof is designated as
Insured Bonds. Insuring Bonds includes bonds deposited into to the
Insuring Trust at the direction of the Company and related to a
specified Insuring Certificate. In one embodiment, the Insuring
Certificate can include the various classes of securities issued by
the Trust (e.g., Trust Bonds).
[0145] The "Insuring Trust" or "Trust" refers to any entity holding
the certain trust certificates and obligated to make payments
according to legal obligations using the BECM methods as described
herein.
[0146] "Insuring Certificate" refers to a trust certificate issued
by the Insuring Trust and recorded in computer readable media which
grants based on a computer determination to the holder the right to
receive the following payments ("Insuring Certificate Payments"),
subject to the terms of the trust recorded in computer media and
used to program the computer system of the trust, with respect to
the right and obligation of the Trustee to intercept such payments
to secure each Trust Guaranty made by the Insuring Trust. The
programmed terms can include: [0147] Payments of principal on a
specific Insuring Bond (the "related" Insuring Bond) [0148] A
specified portion of the payments of interest payable on such
related Insuring Bond [0149] A specified portion of the payments of
interest payable (e.g., from a supplemental coupon) on such related
Insuring Bond (the coupons is an obligation of the issuer that is
characterized in computer processing as a debt of instead of a fee
paid by the issuer). [0150] A specified portion of any other
payments of interest payable with respect to the Insured Bonds of
the same Insured Bond Issue (the "related" Insured Bonds) or
Insuring Bonds of the same Insured Bond Issue (the "related"
Insuring Bonds) [0151] Other specified amounts from funds available
to the Trust including: [0152] Debt service payments on related
Insuring Bonds that are received by the Trust and that [0153] are
not payable with respect to a specific Insuring Certificate [0154]
Fees payable to the Trust with respect to the related Insured Bonds
[0155] Investment income or other funds received by the Insuring
Trust
[0156] "Trust Guaranty" refers to a guaranty of the payment of debt
service on designated bonds, which guaranty is programmed to be
secured by the right and obligation of the Trustee: [0157] To
intercept Insuring Certificate Payments in an amount sufficient to
cure any payment default [0158] with respect to such designated
bonds and [0159] To apply such intercepted amounts: [0160] To the
guaranteed payments or [0161] In the event that such guaranteed
payments have been made on behalf of the Insuring Trust from
another source (including, without limitation, by the Company or by
a liquidity provider), to reimburse such amounts and interest
thereon.
[0162] The Trust Guaranty may also include (A) a guaranty of the
payments due with respect to a line of credit or letter of credit,
insurance or reinsurance policy, or similar instrument that secures
payment of such designated bonds and (B) a guaranty of the ongoing
payments (but not termination payments) due on any interest rate
swap or similar interest rate exchange agreement with respect to
such designated bonds. A designation of a bond by the Company of
Insured Bonds can be recorded in computer media as occurring at the
time that the Company enters into a contractual agreement based on
such designation, (in one embodiment, regardless of whether such
agreement is subject to conditions).
[0163] At or around the time that an Insured Bond is designated by
the Company, the related Insured Bond Issue can be determined (or
required) to meet the following requirements: [0164] The rating of
such Insured Bonds can be in one of the four highest rating
categories by each Rating Agency (e.g., Baa, A, Aa, or Aaa) then
rating such bonds [0165] Such Insured Bonds can be categorized as
within [0166] The 1st, 2nd, or 3rd Single Risk categories by
Standard and Poor's. In other embodiments, the 1st and 2.sup.nd
categories may be used. In yet other embodiments, only the 1.sup.st
category may be used. [0167] The 1st, 2nd, or 3rd Municipal Finance
Class by Fitch Ratings, or [0168] Can be determined by each Rating
Agency and the Rating Agency can analyze such bonds to represent an
equivalent credit risk (e.g., Moody's Loss Given Default).
[0169] A "rating" refers to a credit rating assigned to any Insured
Bonds or Insuring Bonds by a Rating Agency. In one embodiment, for
purposes of the Insuring Trust, the rating assigned to any such
bonds may be recorded as no higher than the credit rating requested
by the Company from any such Rating Agency with respect to such
bonds.
[0170] A "Rating Agency" refers to (e.g., with respect to any
series or subclass of Insured Bonds or Insuring Bonds) any
nationally recognized rating agency which has provided a rating for
such series or subclass at the request of the Company.
[0171] In carrying out its business, the Company's computer system
can provide guarantees of bonds or other obligations that benefit
from a Guaranty by the Insuring Trust. In one embodiment, the
provision of guarantees can be performed provided that in the event
that the Company makes a payment with respect to its guaranty, it
will be entitled based on computer code, triggers, etc. to
automatically be reimbursed therefore pursuant to the terms of such
Guaranty by the Insuring Trust.
[0172] In some embodiments, the computer system of the Company and
the Trust may be programmed to exclude the guarantee of [0173]
Accelerated payments of bond principal unless such accelerated
payments (together with the Insured Bond Issue) would meet the
Company's and the Insuring Trust's underwriting standards, [0174]
Swap payments (including accelerated swap termination payments)
unless such payments (together with the Insured Bond Issue) would
meet the Company's and the Insuring Trust's underwriting
standards.
[0175] A computer system of the Company and the Trust can also
provided online access to real time snapshots of the Insured Bond
and Insuring Bond portfolio, thereby providing transparency, and
avoiding of event risk and moral hazard risk, including avoiding
providing Guaranties of appropriation debt.
[0176] Table 2 below is a summary of comparisons of features of the
BECM against an Alternate Monoline like model. In some embodiments,
some of the BECM features may be present and some of the features
may be mixed an/or replaced with the Alternate Monoline like model
without departing from the scope of the invention.
TABLE-US-00002 TABLE 2 Structural Elements Alternate Monoline Like
Model BECM Time period Four to six years Maturity of the Insured
Bond withstand depression scenario defaults Cash Capital First loss
Second loss behind Insuring Bonds Future capital Yes To grow
insured portfolio requirements Insured credit Credit criteria
determined company Investment grade and single risk portfolio
profile by company. categories of the highest quality (in other
embodiments, different BECM entities may be established to
guarantee differing risk categories); Minimize event risk; no:
Appropriation debt, Highly correlated credits (e.g., tobacco
bonds), and Termination payments and/or acceleration. ROE cash
capital Historic ROE of 15% achieved by 15% ROE with previously
stated incorporating non - municipal ratings guidelines. credits
and lower rated municipals. Insurance 100% charged upfront to the
issuer, 25% will be charged upfront with premium refunding bonds
permits no the balance charged over time a as a payments recovery
of insurance premium coupon on the Insuring Bonds. In either before
or after the call date. other embodiments, this 25% may be
variable, changed, or modified as a parameter of the system. The
coupon can be characterized as a debt instead of a fee. BECM has a
much smaller upfront fee requirement because a portion of the
overall fee is paid upfront and the rest of the fee paid over time.
If the bonds are refunded, the issuer captures the savings inherent
to not paying the premium after the call date. The issuer's cost of
insurance to the call date is equal to its cost to maturity.
Benefit of Zero benefit to issuer; all benefits Bond issuer pays
premium to bond unamortized accrues to bond insurer. call date.
insurance Insuring Bonds create possibility of premium due to a
large gain for Insuring early bond Bondholders upon redemption on
an redemptions insured issue. The Insuring Bonds trade as
pre-refunded up until the call date. The Company and Regulatory
Capital retains the full benefit of the upfront portion of the
premium even if bonds are redeemed plus the annual premium while
the bonds remain outstanding. Insuring Bonds N/A Highly dynamic and
resilient to market dynamics market conditions: Wide credit spreads
(current market) provide the necessary premium/inducement to the
Insuring Bonds. When spreads are narrow, the spreads necessary to
induce the Insuring Bondholders will be correspondingly less.
Leverage Ratio Assumptions for rating services BECM dedicates
capital in at least Calculation required cash set asides to cover
two forms: as percentage of debt service in case of a default:
Insuring Bonds equal to a insured par Four year depression -
scenario percentage of the total issue. In one 1.75% defaults each
year embodiment, the percentage is 4%. Coverage factor 1.5 x The
percentage can be as high as Annual debt service equals 1.75% * 3 =
5.25%. 8% of par Allocated cash = Dedicated Capital = 1.75%
defaults each year * 4 years * 1.75 defaults each year * 8% annual
debt service as 1.5 coverage * 8% annual debt percent of par
service as percent of par Dedicated Capital = 4 * 1.75 * 1.5 * 8% =
.84% Insuring Bonds + Allocated Capital Leverage ratio = 1/.84% =
119 x 4% + (1.75% * 8%) = 4.14% Leverage ratio = 1/4.14% = 24x
Years of coverage Debt service can only cover default Debt service
can cover default for for 4 years life of bond (e.g., 20 years)
because there will be constantly new Insuring Bonds added to the
pool which has cash streams which can be intercepted for the debt
service. In one embodiment, the non-defaulting borrower's cash
stream can be used to also cover the default.
[0177] Further differences in the features of the BECM against an
Alternate Monoline like model are described below in Table 3. In
some embodiments, some of the BECM features may be present and some
of the features may be mixed an/or replaced with the Alternate
Monoline like model without departing from the scope of the
invention.
TABLE-US-00003 TABLE 3 Structural Elements Alternate Monoline Like
Model BECM Regulatory (Cash) $500 million to $1.0 billion $200
million Capital Funded as Common Equity Funded as Preferred Equity
requirement Cash Capital First loss Second loss behind exposure
Future additional Yes, pursuant to existing/future Incremental Cash
Capital may Cash Capital rating agency and regulatory be required
above guarantee requirements Cash Capital requirements portfolio of
$120 billion Common Equity Minimum $500 million Common $20 million
Common and/or Equity required for Cash Capital Preferred Equity
used to fund Company's net revenues allocated Company's
infrastructure to $500 million Common Equity requirements holders
Company's net revenues allocated Common Equity diluted by future
to: Cash Capital requirements $20 million Common Equity [$XX]
million existing Common Equity No future Common Equity requirements
and/or dilution Credit criteria of Credit criteria unique to
individual Pre-defined credit criteria: guarantee guarantee
companies Investment grade issuers portfolio Modified at will by
senior Three most conservative single risk management categories
(in other embodiments the two most conservative or the single most
conservative risk categories may be used instead) Not permitted:
Appropriation debt Highly correlated credits (e.g., tobacco bonds)
Payment by 100% charged upfront to the 25% charged upfront with the
municipal issuer issuer balance charged annually as a of Guarantee
Upon bonds being refunded, no supplemental coupon premiums recovery
of insurance premium by Upon bonds being refunded, issuer issuer
after the call date captures the savings inherent to not paying the
premium after the call date Benefits due to Zero benefit to issuer
Bond issuer pays premium to bond early bond All benefits accrue to
bond call date redemptions guarantor Material gain for Trust
Certificates upon refunding Amount of time Four years Final
maturity of the guaranteed Guarantor able to Depression Scenario
covered 1.5 bond portfolio withstand times Depression Scenario
depression scenario default of 1.75% per year Standard & Poor's
AAA requirement Leverage Ratio Assumptions for rating services
Dedicated Capital = Calculation as required Cash Capital to cover
debt 4 years * 1.75 defaults each year * percentage of service in
case of a default: 1.5 coverage * 8% annual debt guaranteed par
Four year depression scenario service as percent of par 1.75%
defaults each year 4 * 1.75 * 1.5 * 8% = .84% Coverage factor 1.5 x
Leverage ratio = 1/.84% = 119 x Annual debt service equals BECM's
dedicated Cash 8% of par Capital comprises: Trust Bonds equal to 5%
of the total issue Allocated cash = 1.75% defaults each year * 8%
annual debt service as percent of par Dedicated Capital = Insuring
Bonds + Allocated Capital 5% + (1.75% * 8%) = 5.14% Leverage ratio
= 1/5.14% = 19x Example: Dedicated Capital cost for Dedicated
Capital Cost $100 million Issue Trust Bond Cost: A - rated City GO
$5.0 mm * 1.25% 20 year level debt $62,500 $7,800,000 annual debt
service Cash Capital Cost: Legacy Insurer ROE - 15% 15% * 1.75% *
$7.8 mm Dedicated Capital Cost: $20,500 7% * $7.8 mm * 1.5x Annual
Cost of Dedicated Capital: $819,000 $62,500 + $20,500 Annual Cost
of Dedicated Capital: 15% * $819,000 $123,000
[0178] As described herein, a computer system can be programmed to
perform actions for managing the BECM, including paying funds,
issuing obligations, credits, or the like. Such financial
transactions include recording data in a tangible readable medium
in accounts of the parties involved in the transactions and/or
transmitting data over a computer network, such recording and
transmitting comprising an electronic exchange.
[0179] FIGS. 12A to 12E show embodiments of systems for managing
debt insurance over a computer network. As shown,
network/communication medium 1206 provides communication to a
plurality of computer based components, including debt holder(s)
1202, guarantor 1204, issuers 1206-108, trust 1220, trust
certificate holders 1216-1217, trustee 1218, and rating agency
1214. The network/communication medium 1206 can be a computer
network, such as a wireless network, Local Area Network (LAN), Wide
Area Network (WAN), or the like, and/or the memory and/or bus of a
computing device. As shown, each of the components of the systems
of FIGS. 12A to 12E are computer implemented components. The
components can communicate with each other using a networking
interface, a networking protocol, in memory operating system calls,
remote procedure calls, or the like. The components may provide a
interface for receiving commands from users and/or providing
information to users. The components can be combined in one device,
separated into several different devices, or the like, without
departing from the scope of the invention. In one embodiments, the
components may be included in or configured as the device of FIG.
13. In one embodiment, the components may use the data models and
user interfaces of FIGS. 14A to 14E, 26 to 33F to perform their
operations. In one embodiment, the components of the systems of
FIGS. 12A to 12E can be perform the processes of FIGS. 15 to
25.
[0180] In one embodiment, the components of FIG. 12A to 12E may be
programmed with parameters and instructions to reflect the
instructions for structuring the various components of the BECM
system in accordance with the requirements of ATTACHMENT A.
ATTACHMENT A shows one example of a definition for implementing the
BECM system.
[0181] Under the BECM, bonds 1211 that an issuer 1208 wants to
insure can be subdivided into two parity series which can be sold
simultaneously: [0182] insured debt 1209 sold with the benefit of
an AAA guaranty by an monoline insurer or similar guarantor to debt
holders 1202 [0183] Insuring debt 1210, representing a pro-rata
portion of every maturity, sold on an uninsured basis
[0184] In general, issuers 1206-1208 can include any computer
implemented component configured for establishing an insured debt
1209 related to an insuring debt 1210 of a debtor based on an
insured debt amount representing at least a proportion of the
insured debt, wherein the proportion is maintained constant for any
redemption from the insured or insuring debts. As shown, issuer
1208 may include insured debt 1209 and insuring debt 1210. Insured
debt 1209 and insuring debt 1210 can comprise any computer based
component, including software executing and combined with hardware,
a database, or the like, configured to maintain records relating to
payment, obligations to debt holders such as those associated with
at least one of debt holder(s) 1202, and other terms (interest,
maturity date, etc.) for the respective debts.
[0185] Debt holder(s) 1202 can include any computer implemented
component configured to assume, retire, or otherwise manage debts
for a holder of debts. Debt holder(s) 1202 can include computer
interface for managing such debts, trading the debts, transferring
funds, amounts paid from coupons, or the like.
[0186] The portion of each maturity represented by the insuring
debt 1210 can be sized so that the debt service thereon exceeds the
level of average annual defaults that can occur under the rating
agencies 1214 four-year depression scenario plus coverage
sufficient to meet the AAA rating criteria. For example, for an A
rated city Governmental (GO) bond 1211, the capital charge is 7%,
representing an annual default of 1.75% per annum over the
four-year period. At a 2 times coverage multiple, the insuring debt
1210 can represent 3.5% of the total bonds of each maturity.
Correspondingly, at a 3 times coverage multiple, the insuring debt
1210 can equal 5.25% of each maturity. In those two examples, the
insured debt 1209 can be sized at 96.5% and 94.75% of the total
bond 1211 issue, respectively.
[0187] In general, rating agency 1214 can include any computer
implemented component configured for receiving, over the network
1206, a credit information record of the insured debt based on
insurance payment structuring for the insured debt; and providing
an increase in a credit rating for the insured debt based on the
received credit information record.
[0188] The proceeds of the Insured Bond 1209 and insuring debt 1210
can equal 100% of the proceeds required by the issuer(s) 1206-108,
just as in the case of an uninsured issue or a conventionally
structured monoline insured issue. In the 2 times coverage example,
approximately 96.5% of the proceeds can be raised from the sale of
the insured debt 1209 while the remaining 3.5% can be raised from
the sale of the insuring debt 1210. The insured debt 1209 can be
priced with an insured coupon and the insuring debt 1210 can be
priced with an uninsured coupon.
[0189] The cost of the credit enhancement can represent a targeted
percentage (e.g., 75%) of the total yield benefit between uninsured
bonds and AAA insured bonds (e.g., insured debt 1209), leaving the
issuer(s) 1206-1208 the remainder of the benefit of (e.g., 25%).
One difference in the BECM approach from the historic monoline
practice is that most of the cost of insurance can be paid by the
issuer(s) 1206-1208 over time. For example, a smaller portion
(e.g., 25% of the 75%) of the cost can be paid up front (step 12016
and 12032) and the remainder (e.g., 75% of the 75%) can be paid
over time (step 12046). The credit enhancement payment over time
can be structured as an additional coupon on the insuring debt
1210, for example, as an additional 250 basis points on each
insuring debt 1210 maturity. This reduction in the upfront cost of
insurance can have a significant benefit to issuers 1206-1208 since
their cost of insurance to the call date can be significantly
reduced. This process may eliminate a significant shortcoming of
traditional monoline insurance--that the issuer's savings to the
call date were significantly lower and, perhaps, nonexistent.
[0190] In addition to the use of two series (one insured and one
uninsured) and the payment of an additional coupon on the uninsured
bonds, there is one other requirement on the issuer that is unique
to the BECM. The issuer(s) 1206-1208 can be configured such that a
redemption of the bonds can be executed pro rata among the Insured
and Insuring Bonds of each maturity so as not to reduce the
percentage of Insuring Bonds in any maturity (step 12606).
[0191] The issuer 1206's insured debt 1209 can be sold to the
public in a typical manner. However, the insuring debt 1210 can be
priced by the issuer 1206 as uninsured bonds, but may not be sold
directly to the public. Rather, the insuring debt 1210 can be
deposited into a trust 1220 (e.g., the Insuring Trust) (step 12022)
in exchange for payment of the proceeds thereof (steps 12024,
12020, 12014, and 12030).
[0192] The Insuring trust 1220 can simultaneously raise an
identical amount of proceeds (steps 12026, 12028) by selling trust
certificates 1216-1217 (step 12026) with respect to the insuring
debt 1210 that may pass through to the purchaser of each
certificate 1216-1217 (a) the following payments made with respect
to a specific corresponding insuring debt 1210: the bond principal
and the bond interest (at the uninsured rate) (step 12044) and (b)
a portion of the bond interest payable with respect to the Insuring
Bonds, which may exceed the interest payable on such specific
insuring debt (steps 12064, 12066).
[0193] In order to permit the insuring debt 1210 sold through the
trust 1220 to be priced efficiently, they can be divided into
various subclasses 1221-1222. In one embodiment, the various
subclasses can be the various sub-pool described above where the
nature of the risk within the sub-pool is similar. There are two
basic types of subclasses: loss position subclasses 1221-1222 and
loss category subclasses. The purpose of the various subclasses is
to create efficient pricing of the insuring debt 1210 by making it
simple for insuring bondholders 1220 (and associated certificate
holders 1216-1217) to understand the risk that their cash flows can
be intercepted (steps 12064, 12066). In particular, the risk to
Insuring Bondholders of having their cash flows intercepted can be
configured to be as similar as possible to the risk of nonpayment
of their underlying bonds. Conversely, the risk that cash flows can
be intercepted to fund a default within a riskier credit type may
be extremely remote. Loss category subclasses are intended to group
Insuring Bonds into subclasses where the underlying bonds have
similar risks. For example, GO bonds and sales tax bonds can be in
different loss category subclasses. Loss position 1221-1222
subclasses are intended to indicate the order in which Insuring
Bond cash flows can be intercepted within the same loss category
subclass.
[0194] For example, the insuring debt 1210 can be divided by the
trust 1220 into several "loss position" subclasses 1221-1222 which
are subject to having their cash flows intercepted (in the case of
a default) in a prescribed order (steps 12064, 12066). The number
of loss classes is not critical and will generally range from 2 to
10 and preferably is 2 to 5. In one embodiment, the insuring
subclasses 1221-1222 do not enhance each other, but only the
insured debt 1209 (steps 12064, 12066). Accordingly, the insuring
subclasses 1221-1222 for each insured issue have two rating
attributes: [0195] The "underlying rating" of the issuer 1208--in
our example above, an A rating; and [0196] The "structure rating"
of the insuring subclass 1221-1222--a separate target rating of the
subclass that reflects the risk that the debt service of the
subclass can be intercepted to fund an insured default. [0197]
Insured Bonds--AAA [0198] 5.sup.th loss--AA [0199] 4.sup.th loss--A
[0200] 3.sup.rd loss--BBB [0201] 2.sup.nd loss--BB [0202] 1.sup.st
loss--NR
[0203] In the event of a default by an issuer 1206-1208 whose bonds
are insured under the BECM, the loss can be allocated, first, to
the insuring debt 1210 of that same issuer 1206 (the "related"
Insuring Bonds) by loss position subclass 1221-1222 (step 12066)
and, second, to the Insuring Bonds of other issuers 1208
("nonrelated" Insuring Bonds), also by loss position subclass
1221-1222 (step 12064). In the event that payments due to a
nonrelated Insuring Bondholder are diverted to cure a default (step
12064), future payments due to the related Insuring Bondholders can
be intercepted to make the nonrelated Insuring Bondholders whole
(step 12064). The subordination of the Insuring Bonds of each
issuer(s) 1206-1208 in the case of a default by that issuer 1206
not only to the insured debt 1209 of that issuer 1206, but also to
all other insured debts, together with a conservative underwriting
approach, as described below, make it highly unlikely that Insuring
Bonds will suffer an ultimate nonpayment (as compared to a
temporary nonpayment) due to a default of a nonrelated issuer
1208.
[0204] In general, trust 1220 can include any computer implemented
component configured for allocating, in an insuring trust, a first
loss class having a first loss class holder associated with one of
debt holder(s) 1202 and a second loss class having a second loss
class holder associated with another one of debt holder(s) 1202. In
one embodiment, trust 1220 is configured to provide the first loss
class holder (of loss class 1221) with an first electronic
certificate in the insuring trust related to the insured debt, and
to provide the second loss class holder (of loss class 1222) with a
second electronic certificate in the insuring trust unrelated to
the insured debt, and wherein the insured and insuring debts are
bonds. As shown, trust 1220 includes loss class 1221-1222. Loss
class 1221-1222 can comprise any computer based component,
including software executing and combined with hardware, a
database, or the like, configured to maintain records relating to
subordination of payments between the loss classes, payment terms
for each loss class, or the like. Loss class 1221-1222 can include
software combined with hardware for routing, over network 1206,
payments from or to trust certificate holders 1216-1217 associated
with the appropriate loss classes 1221-1222. For example, loss
class 1221 may be associated with trust certificate holder 1216,
and loss class 1222 may be associated with trust certificate holder
1217.
[0205] In one embodiment, trust 1220 is configured for routing,
over the computer network 1206, a payment payable from the insuring
debt 1210 to a first class holder in the first class, wherein the
first class holder is entitled to the payment based on a debt to
the first class holder of an insuring fund of the insuring trust
1220, and wherein the insuring fund is for insuring an obligation
to make payments for the insured debt 1209.
[0206] In one embodiment, routing, by trust 1220, to the first loss
class holder the related payment further comprises allocating the
related payment, such that: (a) a portion of a defaulted insured
debt service for a default of an obligation on the insured debt is
deducted from the related payment; and (b) a portion of the
defaulted insured debt service for the default of the obligation is
deducted from the related payment, if another debtor defaults on an
unrelated obligation and the first loss class is junior to the
second loss class; and (c) a portion of the related payment is
added to an unrelated payment, if a portion of a prior unrelated
payment from an unrelated insuring debt was used to fund the
defaulted insured debt service for the insured debt.
[0207] In one embodiment, trust 1220 is configured for routing to
the second loss class holder the unrelated payment for an unrelated
insuring debt, by allocating the unrelated payment, such that: (a)
a portion of the defaulted insured debt service for a default of
the unrelated obligation is deducted from the unrelated payment;
and (b) a portion of the defaulted insured debt service for the
default of the unrelated obligation is deducted from the related
payment, if the debtor defaults on the obligation and the second
loss class is junior to the first loss class; and (c) a portion of
the unrelated payment is added to the related payment, if a portion
of a prior related payment from the insuring debt was used to fund
the defaulted insured debt service for the unrelated insured
debt.
[0208] Trust certificate holders 1216-1217 can include any computer
implemented component configured to assume, retire, or otherwise
manage certificates of trust 1220 for a holder of certificates.
Trust certificate holders 1216-1217 can include computer interface
for managing such certificates, trading the certificates,
transferring funds, amounts paid from coupons, or the like.
[0209] Trustee 1218 can include any computer implemented component
configured for receiving, over the network 1206, non-default
principal and interest payments for the insured debt and the
insuring debt from the issuer component; and routing pro-rata
amounts of the non-default payments between holders of the insured
debt and the insuring trust that holds the insuring debt.
[0210] In the case of insured debt 1209 under the BECM, the Insured
Bondholder is protected from the risk of nonpayment both by the
issuer 1206-1208's credit and by the bond insurer 1204's credit.
Although there are two relevant ratings, for bond insurer 1204 and
bond issuer 1206-1208, since both ratings relate to the same risk
(nonpayment of the issuer's bonds), the insured credit and rating
supersede the uninsured credit and rating. However, in the case of
the insuring debt 1210, the underlying rating and structure rating
reflect two distinct credit risks for the trust certificate holders
1216-1217: the risk that the related borrower will not pay and the
risk that the insuring debt 1210's debt service will be intercepted
due to a default by a nonrelated issuer. The Insuring Bondholder
1220 (and related certificate holders 1216-1217)'s direct exposure
to the underlying credit discourages adverse selection in the
composition of the insured portfolio. Since the Insuring
Bondholders 1220 (and related certificate holders 1216-1217) of
each issuer 1206-1208 are primarily responsible for a default by
that issuer, they are incentivized to make prudent decisions with
respect to purchasing insured debt, which can in turn affect the
viability of including weaker credits in the insured portfolio.
[0211] Although permitted to be insured under current monoline
rating criteria, in one embodiment, the insured portfolio can
exclude bonds with significant event risk. For example,
appropriation bonds may not be insured by the trust 1220, with the
possible exception of highly structure credits that effectively
eliminate the possibility of non appropriation. The insured
portfolio can be restricted to conservatively selected bonds (e.g.,
GO, special tax and revenue) with underlying ratings of BBB or
better, of which the overwhelming majority can be rated in the A
category. So, under conventional pooled rating criteria, all of the
insuring subclasses 12212 can be rated BBB or higher. However, in
the case of the 1st and 2nd loss position subclasses 1221-1222 the
target structure rating reflects (a) the possibility of a
deterioration in the underlying ratings of the insured portfolio
and (b) the desire to maintain stable ratings for all of the
insuring subclasses 1221-1222, even in the event of such a
deterioration of the portfolio credit quality. Also, the rating
criteria for monoline insurers with target ratings below AAA
include a capital charge for all (or substantially all) insured
debt 1209 with ratings below AAA, even if the rating of the Insured
Bond 1209 is higher than the monoline insurer's target rating.
[0212] For example, an A rated monoline is required to cover the
same assumed defaults as a AAA monoline based on credit type and
rating category. However, the coverage for an A rated monoline is
0.8 times the assumed depression scenario defaults. Moreover, if an
Insured Bond 1209 is rated at or above the target rating of a
monoline insurer's, that coverage requirement is further reduced,
e.g., to 0.25% thereof for a AA rated insured debt 1209 and to 0.2%
thereof for an A rated Insured Bonds 1209. In structuring the
insuring debt 1210, coverage targets can be extrapolated based on
the existing criteria for AA and A rated monoline insurers in order
to create coverage targets for a BBB (0.64 times assumed defaults)
and BB rated monoline insurer (0.56 times assumed defaults).
[0213] Each insuring subclass 1221-1222 can be managed, stored, and
used of as a monoline insurer whose function is to raise the
structure rating of the insured debt 1209 (based on the monoline
criteria discussed above) to the target rating of the next higher
subclass. So, the 1st loss subclass 1221 can contain enough
insuring debt 1210 to meet the capital charges and coverage levels
that can be assessed on a BB monoline insurer that insured the
underlying bonds. Similarly, the 2nd loss subclass 1222 can contain
enough insuring debt 1210, together with the 1st loss subclass, to
meet the capital charges and coverage levels that can be assessed
on a BBB monoline insurer that insured the underlying bonds, and so
on and so forth. However, the insuring subclasses 1221-1222 do not
face the same adverse selection issues that can face a similarly
rated conventional monoline insurer, which may rely on insuring
credits which do may not appeal to more highly rated insurers.
[0214] The Insuring trust 1220 can hold the insuring debt 1210 of
all of the participating issuers 1206-1208. In the event of a
payment default of a particular issuer 1208, the Trust can
intercept the debt service on the insuring class of bonds (in the
order prescribed by the terms of the Insuring trust 1220), first
those issued by the defaulting issuer 1208, and secondly other
unrelated insuring debt 1210 payments from all other issuers 1206,
to fund the payment shortfall of the defaulted Insured Bond debt
service. In one embodiment, no local government are affected by the
default of another issuer(s) 1206-108. The Insuring Bondholders
1220 (and related certificate holders 1216-1217) can be compensated
for taking the first loss position relative to the insured debt
1209 by realizing a higher yield than the Insured Bondholder or a
typical uninsured bondholder. As the loss position subclass
1221-1222 of the insuring debt 1210 gets lower, the higher the
yields that can be paid to the Insuring Bondholders 1220 (and
related certificate holders 1216-1217). The higher yield can come
from the additional coupon paid by the issuer 1207. The portion of
the coupon not paid to the Insuring Bondholders 1220 (and related
certificate holders 1216-1217) can be applied by the trust 1220
either to pay operating expenses of the trust 1220 and guarantor
1204, to fund an appropriate return on the cash equity of the
guarantor 1204, or to provide a profit margin to the trust 1220 and
the guarantor 1204.
[0215] The use of the insuring debt 1210 deposited in the trust
1220 is to pre-fund, as the bonds are issued, an amount of capital
that is sufficient to pay (ignoring timing issues) debt service for
the full life of the portfolio on defaulted insured debt 1209
representing a significantly greater percentage of the insured
portfolio than either (i) the assumed depression scenario defaults
or (ii) the actual level of four-year defaults that have
historically been covered by monoline equity. In other words, the
BECM is much less leveraged than traditional monoline insurers due
both to the higher coverage of assumed defaults and to covering
that higher level of defaults for the life of the bonds. If
permissible under rating criteria, for specific issues of bonds,
the capital required under such criteria (e.g., four years of
depression-scenario defaults at a minimum coverage of 1.25 times)
can be funded with cash only.
[0216] Prior to the issuance of Insured Bonds 1209, the available
capital can meet the capital requirement for existing insured debt
1209 after taking account of management policies with respect to
coverage of assumed defaults and cash equity. For example,
available capital can cover the annual depression-scenario assumed
defaults by at least 2 times with Insuring Bond debt service and 1
time with cash equity. Such Insuring Bonds can inherently cover the
annual depression-scenario assumed defaults by the same margin not
only for the four-year depression period, but for the life of the
insured portfolio.
[0217] If the available capital were to precisely meet such
requirement, then at the time additional Insured Bonds were issued,
additional capital comprised of insuring debt 1210 and equity can
be identified to cover the incremental capital requirement relating
to such additional bonds so that upon their issuance, the available
capital meets the aggregate capital requirements for such insured
debt 1209 and all outstanding insured debt 1209 of the guarantor
1204. In the case of an A rated city general obligation bond (1.75%
assumed annual depression-scenario defaults), Insuring Bonds
representing 3.5% of the issue, together with cash equity
representing 1.75% of annual debt service, can meet the incremental
capital requirement for the aggregate insured portfolio.
[0218] Note that while the insuring debt 1210 of each issue fund an
amount of capital that helps to provide the incremental capital
required to add such issue to the insured portfolio, such insuring
debt 1210 may not provide the credit enhancement that enables the
related insured debt 1209 to be rated AAA. Rather, the source of
the AAA rating for such related Insured Bonds can be derived from
the portfolio of nonrelated insuring debt 1210 whose debt service
can be intercepted by the Insuring trust 1220 in the event of a
default of the related borrower.
[0219] The extent to which the very defaults for which protection
is sought can adversely affect the protection provided by the
Insuring trust 1220 can be directly quantified. As noted, the
insuring debt 1210 can represent a multiple of the assumed defaults
under the rating criteria. However, assume that in the overall
portfolio the actual defaults equal the same percentage as the
insuring debt 1210, e.g., the insured debt 1209 equal 3.5% and the
actual defaults equal 3.5% (2 times the assumed defaults). Under
those assumptions, 3.5% of both the insured debt 1209 and insuring
debt 1210 can default. So, the non-defaulting insuring debt 1210
can be 96.5% of 3.5% of the portfolio and the defaulting insured
debt 1209 can equal 3.5% of 96.5% of the portfolio. In other words,
even given defaults much higher than the assumed worst case, the
non-defaulting insuring debt 1210 can be sufficient to fund the
insured default. If we were to assume a default equal to the
typical default tolerance of a traditional monoline, 1.5 times
1.75% or 2.625%, the non-defaulting insuring debt 1210 can equal
97.375% of 3.5% or 3.408% of the entire issue. The defaulting
insured debt 1209 can equal 97.6% times 3.625% or 3.533% of the
issue. So the non-defaulting insuring debt 1210 can cover the
defaulting insured debt 1209 by 1.34 times. Moreover, a 2.625%
default over four years can wipe out the capital of the traditional
monoline, which may have to raise additional capital to maintain
its claims-paying ability. Whereas, the BECM can continue to have
insuring debt 1210 in subsequent maturity and do not, in one
embodiment, suffer any diminution of its claims-paying ability.
[0220] Cash capital is also required to achieve a AAA rating. In
one embodiment, the cash portion of the BECM capital will be held
by a separate public or corporate entity associated with and
managed by the computer component guarantor 1204. Such cash capital
will be critical to supporting BECM during its start-up phase, when
the insured and Insuring Bond portfolio is too small to compensate
for loss anomalies that can arise within statistically small
portfolios. It will also be needed to cover payment timing
differences between insured debt 1209 and insuring debt 1210 that
are not of the same bond series and payment date. Any draw on the
guarantor 1204's cash capital can be reimbursed by the trust 1220
from intercepted debt service payments on insured debt 1210.
Consequently, the risk to cash capital under the BECM is far lower
than in a traditional monoline structure since such capital is
protected by the insured debt 1210, which are structured at a level
in excess of the rating agency(s) 1214's AAA criteria.
[0221] In one embodiment, the initial amount of cash equity (e.g.,
$200 million) can meet the rating agency(s) 1214's historical
criteria for awarding a AAA rating to a start-up monoline insurer.
Although the overall leverage of Insuring Bond and cash capital is
much less that under a traditional monoline structure, the amount
of leverage viewed against cash only is much higher. The amount of
cash equity which may be appropriate to allocate to each insured
credit, in one embodiment, equals the amount of one year's assumed
defaults, or 1.75% in our A-rated example above. By contrast the
capital allocation under a conventional monoline structure can be
1.5 times 1.75% for a four-year period, or six times the allocated
cash equity under the BECM. Accordingly the bond insurance capacity
under the BECM per dollar of cash equity is a multiple of the
insurance capacity per dollar under a traditional approach.
[0222] Guarantor obligations to insured bondholders 1202 in the
event of a borrower default are payable to the issuer(s) 1206-108's
bond trustee 1218 or paying agent and can be covered by available
assets in the following priority order: [0223] Payments on related
and unrelated insuring debt 1210 made available by the trust 1220
[0224] Draws on liquidity facilities of the guarantor 1204 or
Insuring trust 1220; such facilities can be secured by the trust
1220's right to intercept debt service payment on the insured debt
1210 [0225] Draws on cash capital of the guarantor 1204 to the
extent needed to (a) address payment timing differences of insuring
debt 1210 and insured debt 1209 of different series and (b) support
guarantor 1204 payment claims in the remote likelihood that
insuring debt 1210's funds are depleted.
[0226] In general, guarantor 1204 can include any computer
implemented component configured for guarantying a default by
issuers 1206-108. Guarantor 1204 can include databases or other
software combined with hardware for using over network 1206 for
sending and receiving notifications of a sufficiency of funds in
trust 1220, a need for paying an insured amount, interest or fees
for guaranteeing the payment, or the like. In one embodiment,
guarantor 1204 may be configured for receiving, over the network
1206, a payment by the trust 1220 for insuring the insured debt
1209; receiving an insuring trust payment in an amount of the
defaulted insured debt service; and routing to the trustee
component, based on the received insuring trust payment, a default
amount sufficient to satisfy the obligation on the insured debt
1209. In one embodiment, guarantor 1204 may be configured for
receiving, over the network 1206, an upfront payment from the
issuer component 1208 for guarantying the insured debt; pre-funding
at least a portion of the insuring trust 1220 with funds from the
first loss class holder of loss class 1221 that are received in
exchange for a first electronic certificate (e.g., held by trust
certificate holders 1216-1217) for the first loss class 1221;
receiving a contractual record indicating a right to receive a
portion of the principal and interest in the insuring debt 1210's
cash flow, if the default occurs; sending, to the insuring trust
component 1220, a portion of the upfront payment, wherein the
portion of the upfront payment is configured to be paid by the
insuring trust component 1220 into the defaulted insured debt
service if the default occurs. In one embodiment, guarantor 1204
may be configured for receiving, over the network 1206, a portion
of interests in at least one of a plurality of debts managed by the
insuring trust component 1220.
[0227] FIG. 12B shows a process and data flow between the various
components upon issuance of insurance of the debts. The data
transfers shown can be performed over network 1206 between computer
based components. As shown in FIG. 12B, issuer 1206 may issue "one"
issue of bond 1211 with two series, by sending bonds information
for 100% of bonds to component 1211 using data transfer 12012. Bond
component 1211 may issue a percentage of the bonds (e.g., 97%) to
series A insured debt 1209 using data transfer 12010. Series A
insured debt 1209 issues the bonds (e.g., 97% of the bond 1211) to
public bond holders 1202 using data transfer 12006. Public bond
holders 1202 then pays the net proceeds (e.g., 97% of the proceeds
for bond 1211) to series A Insured Bonds using data transfer 12008.
Series A insured debt 1209 then sends the net proceeds to bonds
1211 using data transfer 12010.
[0228] Bond component 1211 may issue another percentage of the
bonds (e.g., 3%) to series B insuring debt 1210 using data transfer
12020. Series B insuring debt 1210 then issues the bonds to BECM
insuring trust 1220 using data transfer 12022. BECM insuring trust
issues certificates associated with at least some of the bonds to
trust certificate investors 1216 (and/or 1217) using data transfer
12026. Trust certificate investors 1216 pays net proceeds (e.g., 3%
of the proceeds for bond 1211) for the trust certificates
(associated with the Insuring Bonds) to BECM insuring trust 1220
using data transfer 12028. BECM insuring trust 1220 pays the net
proceeds to series B insuring debt 1210 using data transfer 12024.
Series B insuring debt 1210 pays the net proceeds to bond 1211
using data transfer 12020. Bond component 1211 then pays the 100%
of net proceeds by combining the net proceeds from series A insured
debt 1209 and series B insuring bonds 1210 to issuers 1206 using
data transfer 12014.
[0229] Issuers 1206 may send an upfront premium (CES) to guarantor
1204 using data transfer 12016. Guarantor 1204 may send a portion
of the upfront premium paid to the BECM insuring trust 1220 using
data transfer 12032. BECM insuring trust 1202 may retain the
portion of the upfront premium and may create a record indicating a
right to receive a portion of the principal and interest of
Insuring Bonds, including series B insured debt 1210, in the vent
of default of at least one of Insured Bonds, including series A
Insured Bonds. BECM insuring trust 1202 may send the record
indicating the right to guarantor 1204 using data transfer 12030.
In response, guarantor 1204 may create a guarantee record for use
in guaranteeing a debt, including series A Insured Bonds 1209.
Guarantor 1204 may send the guarantee record to issuers using data
transfer 12018.
[0230] Issuers 1206 may send information to the guarantee record
for the series A insured debt 1209 to guarantee 1203 using data
transfer 12002. Guarantee 1203 may then monitor and manage the
guarantee of the series A Insured Bonds and may route appropriate
payments to pay the interest, coupons, principal, or other
obligation for series A Insured Bonds 1209. Guarantee 1203 may send
a mechanism for receiving the guarantee to series A insured debt
1209 using data transfer 12004. The mechanism may include a
password, identifier, or the like, to identify the guarantee
obligation to series A Insured Bonds 1209.
[0231] FIG. 12C shows a process and data flow between the various
components during the on-going cash flows of the BECM. As shown,
issuers 1205 pays principal and interest to trustee 1218 using data
transfer 12034. Trustee 1218 pays the insured principal and
interest payments to series A insured debt 1209 using data transfer
12036. Series A insured debt 1209 pays the repayment to the public
bond holders 1202 for the bonds using data transfer 12038. Trustee
1218 also pays the uninsured principal and interest and interest
payments to series B insuring debt 1210 using data transfer 12040.
It should be noted that the upfront CE premium plus the interest on
the uninsured bonds are similar or even equivalent to the monoline
insurance premium and may equal a targeted percentage of the
benefit of insuring the issuer's entire bond issue. The series B
Insuring Bonds sends the payments to BECM insuring trust 1220 using
data transfer 12042. The BECM insuring trust 1220 sends repayments
to trust certificate investors 1216 using data transfer 12044. The
BECM insuring trust 1220 also sends a portion of the interest paid
to the guarantor 1204 using data transfer 12046.
[0232] FIG. 12D shows a process and data flow between the various
components upon issuer default. In this scenario, one of issuers
1208 defaults on a payment for insured debt 1209. Issuers 1206 pays
non-defaulted principal and interest payments if any to trustee
1218 using data transfer 12050. Trustee 1218 pays a pro rata share
of the non-defaulted uninsured principal and interest payments to
series B insuring debt 1210 using data transfer 12054. Series B
insuring debt 1210 pays a pro rata share of payments to BECM
insuring trust 1220 using data transfer 12062. BECM insuring trust
1220 pays payments equal to the defaulted insured debt service to
guarantor 1204 using data transfer 12060. BECM insuring trust 1220
may also pay a payment due less defaulted insured debt service to
the related trust certificate holders 1216 who hold the insuring
debt 1210 that are related to defaulted Insured Bonds 1209. BECM
insuring trust 1220 may also pay a payment due less defaulted
insured debt service net of payments made for related Insuring
Bonds (e.g., previously made) to the non-related trust certificate
holders 1217 who hold the Insuring Bonds that are related to
defaulted Insured Bonds 1209. Guarantor 1204, using at least a
portion of the payments received using data transfer 12060, sends a
payment to make up deficiencies in the series A bonds' payments to
trustee 1218 using data transfer 12058. Trustee 1218, using the
received payment from data transfer 12058, sends pro rata share of
non-defaulted insured principal and interest payments to series A
insured debt 1209 using data transfer 12052. Series A insured debt
1209 sends a pro rata share of repayments to public bond holders
1202 using data transfer 12056.
[0233] FIG. 12E shows a process and data flow between the various
components of another embodiment of the BECM system. This system
configuration is similar to the systems described above, except
that the system includes BECM (BECM) holding company computer
system 1230, BECM (BECM) Management LLC computer system 1232.
Holding company 1230 holds a plurality of companies/guarantors.
Moreover, BECM Acceptance Company (Guarantor) 1204 is configured to
operate as a regulated company for insurance law purposes and holds
adequate regulatory capital as required by insurance law.
Guarantor/regulated company 1204 is paid an upfront insurance
premium by issuer 1206.
[0234] BECM Capital Trust (BECM insuring trust) 1220 also includes
additional sources of liquidity 1243, rating agency capital 1242
that is sufficient to satisfy a rating agency's amount of capital
to rate the trust a pre-determined rating (e.g., AAA), and default
determination mechanisms 1241. Proceeds from the sale of the trust
certificates 1216/1217 are paid, for each trust bond(s) 1210, to
the issuer 1206. Trust 1220 is configured as a special purpose
vehicle.
[0235] In operations, issuer 1206 issues (from qualifying
investment grade municipal bond issue) supported bond(s) 1209 and
trust bond(s) 1210. Supported bond(s) 1209 pays proceeds to issuer
1206. The trust bond(s) 1210 is held in trust by trust 1220.
Guarantor/company 1204 is pre-funded with capital, and trust 1220
is pre-funded with liquidity 1243 and/or regulatory and rating
agency capital 1242. Issuer 1206 pays coupons to supported bond(s)
1209 and trust bond(s) 1210. Issuer 1206 also pays a supplemental
coupon. Issuer 1206 also pays principal on the two bonds. The trust
bond(s) 1210's coupons and supplemental coupons are received by the
trust 1220, because the trust 1220 is the bond holder for the trust
bond(s) 1210. At least a portion of the supplemental coupons are
intercepted to pay the annual guarantee premium. At least a portion
of the annual guarantee premium may be diverted to fund rating
agency capital 1242. A remaining portion of the annual guarantee
premium is sent to the Guarantor/regulated company 1204 (e.g., for
operations, profits, and/or dividends). Any dividends (e.g., from
return on investment on regulatory capital or profits) are also
paid by regulated company 1204 to holding company computer system
1230.
[0236] The unenhanced and supplemental coupons, and principal flow
through a default determination mechanism 1241. If it is determined
that the issuer 1206 did not default, the unenhanced and
supplemental coupons, and principal flow directly to the
certificate holders of the trust certificates 1216-1217.
[0237] If it is determined that the issuer 1206 defaulted on paying
the supported bond(s) 1209, the unenhanced and supplemental
coupons, and principal are intercepted and sent to the
guarantor/company 1204. Additional rating agency capital 1242 and
additional liquidity 1243 may also be taped and used if the
intercepted amounts are inadequate to pay the default. The amounts
to cover the default are sent to guarantor/regulated company
1204.
[0238] Guarantor/regulated company 1204 then adds more regulatory
capital 1244, if there is insufficient funds in the received
amounts to cover the default. The aggregate amounts are paid to the
supported bond(s) 1209's holders.
[0239] If the mechanism of Trust 1220 and/or Guarantor/regulated
company 1204 were used to cover the default on payments to holders
of the supported bonds 1209, issuer 1206 pays a recovery or
repayment for to the trust bond(s) 1210's holder and to the trust
certificates 1216-1217's holders.
[0240] Based on the ability to cover projected defaults, the trust
1220 is determined to have a high rating, for example, a AAA
counterparty rating 1245. The rating flows to company/guarantor
1204 to give company/guarantor 1204, for example, AAA financial
strength rating (supported rating) 1246.
[0241] Management company computer system 1232 provides portfolio
and operating services and third-party administration and receives
management fees from company/guarantor 1204. Services are provided
to manage trust 1220, company/guarantor 1204. In turn, management
fees are paid by company/guarantor 1204 to management company 1232.
In one embodiment, management company 1232 can be trustee 1218.
[0242] FIG. 13 shows a device for managing the BECM process,
issuing insurance for debt, and the like. Device 1300 includes
input/output control 1302, processor/memory 1310, display 1304,
issuer manager component 1312, guarantor component 1314, debt
insurance component 1316, certificate holder component 1318, trust
fund component 1306, rating manager 1308, and network interface
1320. Trust fund component 1306 includes loss class fund 1341-1342.
As shown, the components of device 1300 are in communication with
each other, over, for example, a bus, a network, or the like. The
components are also in communication with other devices over
network interface 1320.
[0243] In one embodiment, the various components performs
corresponds to similar components of FIG. 8. The various components
may include a software program(s) comprising processor readable
instructions that are stored on processor and/or computer readable
media, such as the software program of FIG. 7. The instructions may
be stored within memory 1310 and executed by processor 1310. In one
embodiment, the various components are configured to perform at
least some of the steps of the methods of FIGS. 1 to 6, 9 to 11,
and 15 to 26.
[0244] In one embodiment, the components of FIG. 13 may be
programmed with parameters and instructions to reflect the
instructions for structuring the various components of the BECM
system in accordance with the requirements of ATTACHMENT A.
ATTACHMENT A shows one example of a definition for implementing the
BECM system.
[0245] In one embodiment, input/output control 1302 may receive
input to initiate managing a components using the BECM methodology
described herein. Display 1304 may display various interfaces for
managing BECM components, such as user interfaces of FIGS. 28 to
32. Issuer manager component 1312 can receive and manage
information related to an issuer, such as a municipality.
Information about the insured debts can be received and managed by
component 1312. Component 1312 can size the appropriate insuring
debt based on the insure debt, for example. Component 1312 can
maintain issuer contact information and information related to the
details of the bonds (interest, principal, period, etc.) Component
1312 may perform some of the operations of issuer(s) 106.
[0246] Guarantor component 1314 can receive and manage information
related to maintaining sufficient capital structure to be able to
insure the defaults of insured debts (bonds). Guarantor component
1314 may perform some of the operations of guarantor 104.
[0247] Certificate holder component 1318 can receive and manage
information related to certificate holders, and can track the
obligations to the certificate holders. Component 1318 may perform
some of the operations of trustee 118 and/or BECM insuring trust
120.
[0248] Trust fund 1306 can receive and manage information related
to the moneys (funds) flowing in, out-of, and/or maintained on
behalf of the certificate holders related to various Insuring
Bonds. In one embodiment, the funds may be separated in computer
memory based on loss classes such as loss class funds 1341-1342.
Component 1318 may perform some of the operations of BECM insuring
trust 120.
[0249] Debt insurance component 1316 can receive and manage
information related to insuring the possible defaults of an Insured
Bonds. Component 1316 may monitor whether a default has occurred,
may intercept coupons for an Insuring Bonds, and send the coupon
payments to holders of an Insured Bonds, for example. Component
1316 may request information about certificate holders from
component 1318, intercept funds from trust fund 1306 based on the
information about certificate holders of the insuring trust,
request information about bond holders for the appropriate insured
trust from component 1316, and send the intercepted funds to the
appropriate bond holders. In one embodiment, component 1318 may
perform some of the operations of trustee 118 and/or BECM insuring
trust 120.
[0250] Rating manager component 1308 can determine the projected
and actual credit ratings of various BECM components based on the
capital adequacy of the BECM components. Data about the capital
adequacy can be received from issuer manager component 1312,
guarantor component 1314, debt insurance component 1316, trust fund
1306 and/or certificate holder component 1318. Rating manager
component 1308 can examine the capital adequacy and determine the
credit ratings using for example, the process of FIG. 20 and/or
FIG. 23, or any of the other credit rating determination processes
described herein.
[0251] FIGS. 14A to 14E, and 15 to 25 show underlying data
processes, models, and algorithms for managing insurance of debt.
In one embodiment, the steps of the processes of FIGS. 14A to 14B
and 15 to 25 can be performed by the components of FIGS. 7 to 13,
and/or can use the data modules and/or user interfaces of FIGS. 29A
to 33F.
[0252] FIG. 14A shows an example user interface for managing debt
insurance and the application of the BECM to an example data
scenario. This scenario includes various assumptions. The portfolio
comprises 5-year bullet maturities. The Insuring Bond event-trigger
requires a payout in year 5. There are 33% current credit spreads:
(3.75%-2.55%)*33%=1.2%*0.33=40 basis points (bps). Insured Bonds
are configured as "AAA" Insured, $970,000 per GO Issue, MMD Scale,
paying over 5 years at 2.55%. The Insured Bond Portfolio includes a
$97,000,000 Portfolio of 100 Issues. Insuring Bonds are configured
as "A" GO, $30,000 per GO Issue, MMD Scale, paying over 5 years at
3.75%, with 10 bps of insurance premiums dedicated to coupon
(3.23%). The Insuring Bond Portfolio includes a $3,000,000
Portfolio of 100 Issues. As shown, several issues (1 to 100) of
Insured Bonds and Insuring Bonds pay their coupons over a period of
years. Insuring Bonds pays both a coupon (e.g., 3.75%) and a coupon
(3.23%). The coupons from the Insuring Bonds can be intercepted to
pay any defaults for the insured coupons as described herein. The
Insured Bonds have two ratings, a "A" underlying rating for the
issuer, and a "AAA" insured rating due to the pledged Insuring
Bonds payable in event of default.
[0253] FIG. 14B shows another example user interface for managing
debt insurance and the application of the BECM to an example data
scenario. As shown, the insured is configured to be a "AAA"
guarantee with $1,000,000 par amount, AA GO MMD Scale Proxy, with a
5 year period at an annual 2.25% interest. The pledged or trust or
Insuring Bonds are rated at an "A2" GO, $50,000 par amount, MMD
Scale, with a 5 year period at an annual 3.25% interest and an
additional supplement coupon at an annual 2% interest. As shown,
for a plurality of years, the AAA Insured Bonds pay a coupon, and
pays additionally a principal amount at year 5. The A2 Credit
Moody's expected loss at each year is also shown along with an
Baaa3 Credit Moody's expected loss. Also shown are the pledged or
trust or Insuring Bonds and their coupons paid over a period of
years. The available intercept amount per single bond for each year
is also shown, along with the available intercept for all issues of
bonds (e.g., 1000). In this example, the available intercept is
much greater than the expected loss for each issue of Insured
Bonds. Thus the amount of available intercept is sufficient to
cover the expected loss, as described herein.
[0254] FIG. 14C shows another example cash flows between the BECM
components, including flows between Company, cash capital of the
Trust, the different Insuring Bonds and different Insured Bonds.
The example scenarios show how Insuring Bonds' cash flow are first
used to cure the default of the related Insured Bonds and how
Insuring Bonds in a lower loss class are used to cure defaults
before those in a higher class. The cash flows of the Insuring
Bonds can include a plurality of types of coupons, and/or even the
principal of the Insuring Bonds. FIG. 14C shows insured bond 1 with
related insuring bond 1 in the first loss class and related
insuring bond 1 in the second loss class, and insured bond 2 with
related insuring bond 2 in the first loss class and related
insuring 2 in the second loss class. More insured bonds and related
insuring bonds and loss classes can be used without out departing
from the scope of the invention.
[0255] At year 0, the Company is paid premiums into the BECM funds
to set up the bond insurance for two bonds--bonds 1, and 2. Each of
the bonds has two issues each, one for Insuring Bonds, and one for
Insured Bonds. For simplicity, the loss class includes the loss
position or category as described herein, but many more loss
classes can be used. The cash flows of a first Insuring Bonds 1 and
2 are placed in the same loss class 1. The cash flow of the a
second Insuring Bonds 1 and 2 are placed in loss class 2. Also at
year 0 cash capital is established. The cash capital can be funded
with proceeds from the sale of trust certificates that entitles the
holders of the certificates to the cash flow of Insuring Bonds 1,
2.
[0256] At year 1, all the Insuring Bonds pay a part of their
coupons to the Company funds. Over the course of the years, if an
Insuring Bond's issuer does not default or the cash flow of the
Insuring Bond is not intercepted, a portion of the cash flow of the
Insuring Bonds are paid into the Company funds. A remaining portion
of the cash flow is paid to those entitled to receive the cash
flow, e.g., certificate holders in the Insuring Bonds.
[0257] At year 2, the issuer of Insured Bond 1 partially defaults.
The cash flow of each of the Insuring Bonds 1 in loss class 1 and
loss class 2 are intercepted and used to pay the Insured Bond 1's
holder because the identity of each of Insuring Bonds 1 are
associated to the identity of Insured Bond 1. If the intercepted
funds are inadequate to cure the default of insured bond 1, the
cash flow of unrelated Insuring Bonds 2 are also intercepted and
used to pay the Insured Bond l's holder. The interception of
unrelated insuring bonds 2 are intercepted from loss class 1 before
loss class 2.
[0258] Although the cash flow of the intercepted Insuring Bonds are
shown as being immediately intercepted in conjunction with this
FIG. 14C, in other embodiments, the capital used to pay the Insured
Bond holders can be drawn from cash capital or other sources of
additional liquidity, and these draws can be secured by the cash
flow of the intercepted cash flow. In one embodiment, the cash
capital is used to pay defaults, and is the first to be paid back
from the Insuring Bonds cash flow.
[0259] At year 3, a portion of the cash flow of Insuring Bond 1 in
loss class 1 is intercepted to pay the bond holder of Insuring Bond
2 in loss class 1 to make them whole for having their cash flow
intercepted at year 2.
[0260] At year 7, the issuer of Insured Bond 2 fully defaults.
Accordingly, there is no cash flow for insuring bonds 2 to
intercept. Instead, the cash flow of both the Insuring Bonds 1 in
loss class 1 and loss class 2 are intercepted, with loss class l's
bonds intercepted first. Because the intercepted insuring bonds
funds are inadequate to cover the default, cash capital is
partially drained to pay the full default of Insured Bond 2.
[0261] At year 8, the cash flow of Insuring Bonds 2 are intercepted
to replenish the cash capital that was used to pay the default by
the issuer of Insured Bond 2.
[0262] At year 9, the cash flow of Insuring Bonds 2 are intercepted
to make whole the bond holders of Insuring Bonds 1 for having their
cash flows intercepted at year 6. This payment can be paid
pro-rata, or one before the other in a pre-defined order. As shown,
cash capital is paid before Insuring Bond holders 1 are paid.
[0263] FIG. 14D shows a calculation for an Aggregate Loss Subclass
Percentage. "Aggregate Loss Subclass Percentage" means, for each
Loss Position Subclass and with respect to each maturity of each
Supported Bond Issue or Supported Transaction, the Average Annual
Assumed Default multiplied by the Loss Subclass Minimum Coverage
multiplied by the Loss Subclass Discount Percentage multiplied by
the Loss Subclass Coverage Factor. This represents the sum of the
Loss Subclass Percentage Requirements for each Loss Position
Subclass and all of the lower Loss Position Subclasses. For
example, as shown, initially, for an A rated city or county general
obligation bond issue, the Aggregate Loss Subclass Percentage for
the 4th Loss Position Subclass equals 1.75% multiplied by 1
multiplied by 100% multiplied by 2.4, or 4.2%. Correspondingly, the
Aggregate Loss Subclass Percentage for the 3.sup.rd Loss Position
Subclass equals 1.75% multiplied by 0.8 multiplied by 25%
multiplied by 2.4, or 0.84%.
[0264] FIG. 15 shows a flow chart for a process for managing debt
insurance. The process begins at step 1502, where an insuring debt
related to an insured debt based on an insured amount of the
insured debt is established. The issuer can receive 100% of the
proceeds from both sets of bonds, thereby replicating the accepted
underwriting process by banks and guaranty role of a monoline bond
insurer.
[0265] Also to replicate the accepted underwriting process, yields
of the insured and Insuring Bonds can be computed to keep the
proceeds the same for the Insuring Bonds. That is, the yields can
be paid in the amount as if the Insuring Bonds have the same yield
characteristics as the Insured Bonds and to also to take into
account an increase in each year with additional basis points or
coupons to account for the added risk of the Insuring Bonds.
[0266] BECM's novel computer controlled capital structure reduces
the insurer's leverage ratio from 100 to 1 to less than 30 to 1 by
integrating Insuring Bonds into the capital mix rather than cash
set asides, the practice of all other insurers. Traditional bond
insurance technology requires $200 million of regulatory capital
for guaranty protection on roughly $20 billion of municipal bonds.
The same $200 million of regulatory capital can support
approximately $125 billion of municipal bonds using BECM
technology.
[0267] The Company's computer system and data for using the BECM's
credit underwriting criteria can be pre-established or determined
dynamically in computer memory for all guarantee commitments. The
Company can be configured establish other subsidiaries for future
"pools" with differing credit criteria in fully isolated guarantee
companies. The underwriting criteria can encompass two screens: (i)
credit ratings and (ii) risk categories. Using the BECM
methodology, issues can be rated investment grade and can be
restricted to the ratings services' most conservative risk
categories, to include the information shown in TABLE 4:
TABLE-US-00004 TABLE 4 General Obligations Tax-Supported Debt
Essential Service Utilities * State and City * State-wide Public
Universities * School Districts * Guaranteed Guaranteed Student
Entitlements Loans * Community Colleges Personal Income Tax Federal
grant secured
[0268] The underwriting credit criteria data can exclude bond
issues subject to annual appropriation, in one embodiment.
[0269] In one embodiment, as described herein, the BECM uses two
sources of capital to fund potential defaults: debt service payable
on pledged bonds (e.g., the Insuring Bonds) representing a pro-rata
portion of each maturity of every Insured Bond issue; and cash
capital derived from a public or private investment. Bond issues
that benefit from the BECM can be subdivided into two parity series
which will be sold simultaneously: Insured Bonds sold with the
benefit of a Aaa guaranty; and Insuring Bonds, representing a
pro-rata portion of every maturity, sold on an uninsured basis to
an Insuring Trust, which would hold the Insuring Bonds of all
participating issuers. The Aaa guaranty can be provided by a
monoline insurer or similar public or private entity (e.g., the
Guarantor), whose credit will be supported by an Insuring
Trust.
[0270] In one embodiment, the issuer's Insured Bonds can be sold to
the public in a typical manner. The Insuring Bonds would be priced
by the issuer at an uninsured interest rate, but not sold directly
to the public. In addition to the rate, the Insuring Bonds can also
bear a interest coupon reflecting the annual portion of the cost of
insurance. In one embodiment, Insuring Bonds can be deposited in
the Insuring Trust in exchange for payment of the proceeds thereof.
The Insuring Trust would simultaneously raise an identical amount
of proceeds by selling trust certificates with respect to each
Insuring Bond that pass through all payments of principal and
interest and a portion of the coupon payments. Additional details
for this step 1502 are described in more detail in conjunction with
FIG. 16.
[0271] At step 1504, at least one loss class for the Insuring Trust
is allocated. In one embodiment, to permit Insuring Certificates
and Insuring Bonds to be priced efficiently, Insuring Certificates
and corresponding Insuring Bonds can be grouped and sized into
various subclasses. Additional details for this step 1504 are
described in more detail in conjunction with FIG. 17.
[0272] At step 1506, an insuring fund of the insuring trust for
insuring an obligation to make payments for the insured debt is
established. Portfolio credit characteristics can be computed based
on a risk appetite and underwriting discipline as well as trends in
performance of the insured portfolio. An upfront fee (e.g., part of
the premium) can be received from the issuer for insuring the
Insured Bonds. In one embodiment, the premium can be paid partially
upfront and partially overtime. In yet other embodiments, the fee
may be paid fully upfront or fully overtime.
[0273] In one embodiment, the debt insurance may be directed to a
municipal-only issuer with significant additional limitations
versus rating criteria: (a) portfolio will overwhelmingly be
general obligation, special tax and revenue bonds rated A or Baa
with issuer concentration limits; (b) credits involving event risk
will be avoided, e.g., appropriation indebtedness other that highly
structured credits that practically eliminate non-appropriation
risk; (c) no market value termination payments or principal
accelerations will be insured that can turn a credit slide into a
credit cliff.
[0274] Capital adequacy can reflect the ability to meet claims over
time at a given confidence level to meet regulatory minimums and to
maintain investor confidence. The BECM's system can create capital
by structuring Insuring Bonds, whose debt service can be
intercepted to fund an insured default, into every maturity of
every insured issue. For example, BECM's portfolio of Insuring
Bonds can create cash flow coverage that is available to fund
insured defaults for the full life of the portfolio. Unlike a
conventional monoline approach, BECM capital (including all or
substantially all of the capital) that may be required can be fully
funded at the time of issuance.
[0275] For example, capital can be reduced as bonds are retired or
refunded, i.e., in relation to a reduction in the capital
requirements. The BECM may require cash equity for startup capital,
for liquidity, and to address runoff risk. However, the amount of
cash equity needed is greatly reduced and the cash equity is
protected from nonpayment risk by the Insuring Bonds
[0276] In one embodiment, the level of defaults can be structured
such that the defaults can be covered by the Insuring Bonds with a
significant cushion. For example, in sizing the Insuring Bonds for
all credit types, a deterioration of the portfolio credit quality
can occur and the BECM system can apply 1.6 times coverage to those
conservative capital charges. Such coverage of potential defaults
can be net of the impact of any issuer defaults on the Insuring
Bonds. In one embodiment, an even higher coverage level can be
used: 3 times the assumed defaults for A rated GO bonds and 4 times
such levels for Baa rated GO bonds.
[0277] Profitability can impact the capital adequacy and ability to
access the capital market on reasonable terms. Since under the
BECM, capital can be pre-funded with Insuring Bonds and cash for
the full life of the insured portfolio, the impact of future
profitability on the BECM credit may be much less than on a
conventional monoline insurer. Additional cash capital would be
required in order to grow the insured portfolio beyond the level
supported by the existing cash capital. Because the need for cash
equity is reduced, the amount of insurance capacity per dollar of
cash equity can be much higher. That is, the BECM can operate with
less dependence on profitability, as compared to monolines.
[0278] Because less cash equity may be needed and due to the
efficiency of the BECM, the returns on cash equity under the BECM
can be higher than for a conventionally capitalized monoline. Such
returns can be achieved even though (1) the risk to the cash equity
is significantly lower than under a traditional monoline structure
and (2) without the need to benefit from the early redemption of
Insured Bonds.
[0279] At step 1508, an obligation owed by the insuring fund trust
to a first class holder is established. In one embodiment, a trust
certificate is recorded in computer memory and the obligation can
trigger payments on a periodic basis and/or as incoming funds for
an associated insuring debt is received.
[0280] At step 1510, payment payable from the insuring debt to a
first class holder is routed based on the obligation owed to the
first class holder. Briefly, if a default of a related or unrelated
insured debt occurs, the payment is intercepted, based on the
priority described herein. Details for this step 1510 are described
in more detail in conjunction with FIG. 18.
[0281] At step 1512, a credit rating of insured debt is increased
based on the established insuring fund. A computer implemented
algorithm can be used to compute the increase in credit rating
based on the available debt service for the insured debt and other
insured debt managed by the insuring fund. The algorithm can
increase the credit rating based on a comparison of the amount of
debt service to a projected annual depression-scenario assumed
defaults percentage. For example, if the debt service is greater
than a multiple, the rating can be increased to AAA.
[0282] At step 1514, financial flexibility of entities using the
BECM system can be improved, thus providing a tangible result and a
transformation of the attributes of the BECM components. For
example, the BECM may provide improved creditworthiness of the
entities (e.g., issuer, guarantor, trust, etc.) which can lead to
lower interest rates for the entities when they issue debt, for
example. Financial flexibility reflects a company's ability to
access liquidity and capital in times of material stress, including
issuer, guarantor, or trust's ability to access liquidity.
Financial flexibility can be computer as a rate of access to
capital. An increase in the flexibility can increase this rate. The
calculated rate can be provided through a computer. Since under the
BECM, capital can be pre-funded with Insuring Bonds and cash for
the full life of the insured portfolio, the need for sufficient
capital of the various components of the BECM in times of stress
can be fully addressed. The Insuring Bond cash flows represent a
pledged revenue stream that can also be used to obtain additional
liquidity in the form of lines or letters of credit. A conventional
monoline structure has no comparable source of liquidity. The
Insuring Bond cash flows also protect BECM cash equity which will
make it easier to attract additional cash equity. In the event of a
significant credit event, future Insuring Bonds can be insulated
from the impact thereof so that the ability to fund capital for
future Insured Bonds will not be affected.
[0283] Various aspects of the BECM address other shortcomings
identified in the existing monoline structure. For example, the
BECM underwriting standards can avoid pools of credits with
unusually correlated default risk and will be significantly more
stringent than those of existing monoline insurers. The placement
of the 1st loss from a defaulted issuer on that issuer's Insuring
Bonds can provide protection against adverse selection in the
insured portfolio and can provide protection to both unrelated
Insuring Bonds and BECM cash equity from the risk of an ultimate
nonpayment. The pre-funding of capital can avoid the risk that
management will fail to recapitalize in a time of stress. The
critical underwriting and capitalization decisions of BECM
management can be analyzed and assessed on an ongoing basis based
on computer implemented algorithms.
[0284] The use of the BECM Insuring Bond structure implemented with
higher coverage margins can provide greatly enhanced ability to
deal with assumed annual defaults and with broad declines in
portfolio credit quality. The capital of the BECM (including
Insuring Bonds and cash equity) may be much less leveraged than the
capital of existing monoline insurers since BECM capital can
provide coverage of assumed defaults that is higher than under a
traditional monoline approach and that runs for the life of the
portfolio. The lower leverage and greater credit stability of the
CES can make it a much less fragile and less confidence-sensitive.
The BECM can offer a higher level of both profitability and
security than a conventional capital structure. Computing then
continues to other steps for further processing.
[0285] FIG. 15 may be modified with alternate steps, embodiments,
and implementations as explained below. In one embodiment, at step
1502, the credit enhancement approach described herein relates to
allocating risks among a class of investments so that the return to
one or more "insured" subclasses is guaranteed through the
diversion, if necessary, of amounts that may otherwise be payable
to one or more "insuring" subclasses. This general method may
differ from a classic CDO approach (in which both the insured and
insuring subclasses represent horizontal tranches of a pool of cash
flows) as a result of several variations described herein, which
can be employed separately or together and can be employed in
combination with elements of a classic CDO approach. In an
embodiment, the BECM system can be configured to perform various
operations. For example, the BECM system can be configured for
employing pooling technology to create CDO-like credit enhancement
in the primary, rather than secondary market. In yet another
embodiment of implementing the BECM Structure, the credit
enhancement can be provided by the borrowers themselves.
[0286] At step 1504, the insuring subclasses can be structured or
allocated in computer media so that any losses (shortfalls in the
actual return relative to the guaranteed return) on an insured
investment may be borne by the holder(s) of an individual insuring
investment or subclass of insuring investments that is "related" to
the investment with respect to which the insured loss is payable.
So, rather than simply allocating the loss across one or more
horizontal tranches in order of their loss position, the BECM
Structure can limit the loss (to the extent possible) to the
related investment or subclass (a limited vertical portion of the
full potential horizontal tranches across which losses can
potentially be allocated). In effect, investors that hold insuring
investments which are related to a particular insured investment
are primarily responsible for a failure of such investment to
produce the guaranteed return. The nonrelated insuring investors
are secondarily liable in the event that the related insuring
investments are insufficient to produce the guaranteed return. The
connection between the insured investment and an insuring
investment or subclass that makes them "related" is that the
holders of such related insuring investments have specifically
accepted an investment risk that is the same as or similar to the
investment risk on the insured investment on which the loss is
payable. The acceptance of such risk can be either through the
purchase of an insuring investment with an identical or similar
underlying risk or by otherwise agreeing to provide a guarantee of
an insured investment with such risks. Insuring investments that
are not related to a particular insured investment are intended to
provide marketing enhancement for the insured investment and not to
bear any material risk from the failure of the insured investment
to achieve the guaranteed return. However, without the secondary
guaranty of the non-related insuring investments, the
creditworthiness of the guaranty may not be sufficiently strong to
optimize the pricing of the insured investments. If the risks to
non-related insuring investors can be minimized and if an insuring
obligation is identical to its related insured obligation, the
insuring investor can realize a substantial increase in yield by
taking essentially the same risk as if it purchased the underlying
investment directly. In the context of municipal bonds, this is
possible, both because municipal defaults are extremely rare and if
they occur, they are likely to be temporary--involving timeliness
of payment rather than a failure to pay. The increase in yield
derived from being an insuring investor is achievable because of
the marketing enhancement provided by the non-related insuring
investors. The mere subordination of an individual related investor
may produce a modest benefit and so may result in a modest increase
in yield to the insuring investor who agrees to be
subordinated.
[0287] At step 1506, the insured subclasses can be structured in
computer media so that the holder of a particular insured
investment cannot suffer a loss unless (a) the performance of that
particular investment is insufficient to achieve the guaranteed
return, (b) the performance of the related insuring investment is
insufficient to fund the shortfall, (c) the enhancement provided by
each related subclass of insuring investments is insufficient fully
to fund the losses on the insured investments related to such
subclass, and (d) the enhancement provided by all insuring
subclasses is insufficient fully to fund the losses on all insured
investments. The insured subclasses, in one embodiment, can be
excluded from any trust or similar structure and can be marketed
without any yield penalty relative to the trading level of the
underlying security (whether or not insured).
[0288] At step 1508, the insuring subclasses may be deposited
electronically into a computer account of a trust or similar
structure in order to secure the guarantee. Such a structure might
be representative of a public authority, 501(C)(3) or other
tax-advantaged entity. The return enhancement is provided by
configuring algorithmically the insured bonds the beneficiary
(either directly or indirectly, e.g., by using the credit
enhancement to secure more traditional return enhancement such as
bond insurance) of the credit enhancement provided by the trust.
The difference between the unenhanced and enhanced returns on the
insured subclass is electronically diverted to the insuring
investor without depositing the insured investment into a trust
(e.g., having the diversion done by the issuer of the underlying
security by providing for a higher interest coupon on the insuring
subclass). In one embodiment, the impact of the higher coupon on
the inflation-adjusted return of the Insuring Obligations for
first-loss Insuring Obligations include an increase in the real
return that can range from 20% to over 100%
[0289] Both the investor whose return can be guaranteed and the
investor whose investment is used to secure the guarantee are
owners of the underlying investments either directly (particularly
in the case of the former) or indirectly through a trust,
partnership, public entity, 501(c)(3), or similar structure.
[0290] Computer readable media can record and configure that the
issuers of the underlying investments agree to divert a portion of
the savings realized through the guarantee of the return of the
insured investments to the owners of the investments that secure
the guarantee. There may be a reallocation of a part of such
portion of the savings among the subclasses of the investors whose
investments secure the guarantee based on various factors such as
the degree of risk taken by such subclasses.
[0291] In yet another alternate embodiment, the trust certificates
can be funded with a supplemental coupon on the Trust Bonds. At
least an annual portion of the Insurance Premium is funded as a
separate series of Bonds--Series C--(e.g., small series) on parity
with the Supported Bonds (Series A) and Trust Bonds (related to
Series B). If sold to the public in order to fund the insurance
premium, Series C would be a typical municipal issue. Series C
would be delivered to the Trust in payment of the annual portion of
the insurance premium. The BECM enabled computer system can be
configured so that the unamortized portion of the Series C bond
could be callable by the issuer without payment on any call date on
which the Supported Bonds and Trust Bonds were called.
[0292] In this embodiment, splitting interest is avoided, because
Series C could have small denominations (e.g., $1000 or $100 or $1)
such that the bonds (together with the interest thereon) can be
allocated among various uses (i.e., supplemental certificate
payments and net annual BondModel Premium) without splitting
interest coupons. For example, the Supported Bonds could be $95,
the Trust Bonds $5, and the Series C Bonds $1 million. Certificate
Holders would pay $5 million to purchase the Trust Bonds and 40% of
the Series C Bonds in the total amount of $5,400,000. The different
Loss Position Subclasses of Trust Certificates would own different
percentages of the $400,000 so as to create different effective
yields to the various loss positions.
[0293] In yet another embodiment, rather than using a separate bond
issue (Series C) to fund the Supplemental Coupon, the size of
Series B could be increased to accomplish a similar result. In one
embodiment, the Series B bonds can be discounted bonds.
[0294] In an alternate embodiment, the process of FIG. 15 can be
modified such that the use of a trust or similar structure may be
avoided completely (so the investors whose investments secure the
guaranteed can own such investments directly) by imbedding the
mechanism through which the guarantee is provided in the legal
documents of the issuers of the insuring investments. Alternately,
the pooling of the insuring investments can be done through a
public entity. In another alternate embodiment, the process of FIG.
15 of allocating risk can also be applied to other types of
investments (such as equities) to produce (a) insured" subclass(es)
of investments with returns that are lower than the expected return
on the underlying investments, but are also more certain and (b)
"insuring" subclasses of investments with leveraged returns.
[0295] The variations described above can be utilized so that (1)
any losses funded by "insuring" investors are imposed to the extent
possible on the holders of investments that are "related" to the
investment on which the insured investor's loss is realized and (2)
an individual "insured" investor's risk of loss requires the
failure to produce the guaranteed return of both the related
investment (including the insuring portion thereof) and the
enhancement provided by the related and non-related insuring
subclasses. Application to a particular class of investments may be
configured such that the related insured and insuring investments
will produce the guaranteed return on the insured investment and
that the entire class of insured and insuring investments will
produce the guaranteed return on the class of insuring investments.
In yet another embodiment, an application in the context of
equities may be to take a set of stocks of companies with strong
expectations of earnings growth and have the insuring securities
insure the earnings growth allocated to the insured securities.
[0296] In the embodiment, at step 1514, the resulting insured
investment will result in characteristics like insured bonds.
[0297] In yet another embodiment, the BECM system can be configured
to utilize a structured credit enhancement approach to compete with
municipal bond insurers in the primary market.
[0298] For GO bonds, because the required size of the insuring
tranches is small, the benefit of the credit enhancement (which is
realized only on the principal amount of the insured tranches) is
maximized relative to the benefit of bond insurance which is
realized on the full amount of bonds. In fact, given working
estimates of the additional yield required to be paid to the
insuring bonds, a structured credit enhancement product may be
significantly more efficient than bond insurance for such credits,
which represent the largest segment of the market. For credits like
hospital bonds, the structured approach may produce returns that
are still superior to bond insurance. The ability to produce
superior results across the full range of credits is a
transformation of resources of the BECM and a tangible result.
[0299] FIG. 15 may be modified with alternate steps, embodiments,
and implementations as explained below. At step 1502, in yet
another embodiment, the objective of the BECM structure
("Structure") is to provide credit enhancement of a substantial
portion of specified bond issues (Included Issues) sold by
borrowers by additionally securing such portions (Insured
Obligations) with payments that may normally be payable to the
holders of all or a portion of the remaining bonds of the Included
Issues (Insuring Obligations). A portion of the bonds (Non
Obligations) may be neither Insured Obligations nor Insuring
Obligations, i.e., an unenhanced and unburdened portion of the
issue.
[0300] The holders of Insured Obligations (Insured Owners) may have
several levels of security. First, each Insured Owner may own a
bond (the "related" bond) of a borrower (the "related" borrower)
who sold an Included Issue (the "related" issue). Second, each
Insured Owner may have a priority in the payments received from the
related borrower over the holders ("Insuring Owners") of (i)
Insuring Obligations of the related Included Issue (the "related"
Insuring Obligations) and (ii) both Insured and Insuring
Obligations of any other (i.e., a "nonrelated") borrower. Third,
each Insured Owner may be additionally secured by the credit
enhancement provided by Insuring Obligations of nonrelated
borrowers (i.e., "nonrelated" Insuring Obligations). The credit
enhancement provided by the BECM Structure may operate similarly to
municipal bond insurance in that an Insured Owner could not
experience a payment default without both (a) a default by the
related borrower on the bond owned by the Insured Owner and (b) the
credit enhancement provided by the Insuring Obligations also being
insufficient. (In some circumstances, the Insuring Obligations
related to particular Insured Obligations may be from a different
bond issue and may be obligations of a different borrower.)
[0301] At step 1504, Insuring Obligations can be structured by
tranching them into classes in a traditional CDO fashion--i.e., 1st
loss through nth loss--with appropriate returns for each class.
Distinctions from the traditional context in which CDOs have been
structured are, first, that most, if not all, of the tranched
securities will be investment grade or better on their own, without
the benefit of tranching, second, that additional securities will
be continually added to the CDO tranches on an ongoing basis, and,
third, that all of the tranches (including the bottom or first loss
tranche) may be securitized and sold to the public, rather than
having the bottom tranche owned by an equity holder.
[0302] The traditional approach can be implemented by, first,
sizing the aggregate amount of Insuring Obligations according the
requirement to maintaining AAA ratings on the Insured Obligations.
A portion of the Insuring Obligations can also be (1) Insured
Obligations at the AA level, rather than the AAA level, (2) Insured
Obligations at the A level, (3) Insured Obligations at the BBB
level, and (4) Insured Obligations at rating levels below
investment grade. In the traditional context, it may not be normal
to view the AA obligations as both insured and insuring since they
are simply entitled to receive cash flows available from the
underlying portfolio of securities after the AAA obligations are
paid.
[0303] In one embodiment, to maintain the interest on the Insuring
Obligations, the obligation holders are configured to own or have
rights to the cash flows from particular bonds (not just the rights
to a certain priority in the aggregate cash flows) (e.g., step
1508). Thus, the Insuring Obligors are configured to have the right
to the cash flows from a particular security and a contingent
obligation to permit those cash flows to be diverted to ensure the
payment of Insured Obligations at step 1510. Second, the underlying
bonds will in most cases have investment grade ratings and unlike
the investments that are typically securitized in CDOs, can be sold
to the public on an unenhanced basis.
[0304] In one embodiment, the market identity of the individual
Insuring Obligations or subclasses thereof are retained. Also,
because of the underlying ratings and the municipal context
(extremely low probability of default and high probability of
resumed payments even if a default occurs) the amount of Insuring
Obligations necessary to support AAA ratings on the Insured
Obligations is small. These factors may allow AA-rated tranches of
Insuring Obligations to be constructed either with or without (in
the case of AA underlying securities) such tranches being enhanced
by lower-rated tranches of Insuring Obligations.
[0305] The result of structuring the Insuring Obligations (in
addition to supporting AAA ratings on the Insured Obligations) may
be either to maximize the ratings or minimize the cost of funds on
the Insuring Obligations or, correspondingly, to minimize the
impact of the BECM Structure on the ratings and cost of funds of
the Insuring Obligations as compared to the ratings and cost of
funds of the underlying bonds if sold on an unenhanced bases (i.e.,
as Non Obligations).
[0306] Under a traditional approach, the cost of the BECM Structure
might be minimized, relative to the cost of unenhanced bonds, by
allocating Insuring Obligations related to a particular underlying
bond to rating subclasses equal to and higher than the underlying
rating on such bond. The cost can further be minimized by
allocating as much as possible to the rating class(es) higher than
the underlying rating. However, to enhance the ability of the BECM
Structure to withstand downgrades of the underlying portfolio under
severe economic conditions, it may be prudent to allocate a portion
of the Insuring Obligations related to particular bonds to one or
more lower rating categories. This may be in effect another form of
coverage. Under normal circumstances there may be downgrades and
upgrades occurring simultaneously.
[0307] Because the underlying bonds are individually rated,
approaches to structuring the Insuring Obligations based on the
rating of the underlying related bond can be developed. For
example, rather than having the AA Insuring Obligations be enhanced
by the lower rated Insuring Obligations, the AA Insuring
Obligations can simply be related to bonds with ratings in the AA
rating category. Thus, no enhancement may be necessary to achieve
the AA rating level provided that the use of such Insuring
Obligations to enhance the AAA Insured Obligations did not
adversely affect their ratings. No adverse impact may occur if the
Insuring Obligations rated below AA were sufficient to enhance all
of the lower-rated Insured Obligations (i.e., with underlying
ratings below AA) at least to the AA level.
[0308] In one embodiment, the Insuring Obligations related to bonds
can be included in a particular rating category in the same rating
category of Insuring Obligations. Thus, the tranche of BBB Insuring
Obligations may be in an amount corresponding to the Insuring
Obligations for which the related Insured Obligations have BBB
underlying ratings and may have a lower loss position than the
tranche for A-rated Insured Obligations. The tranche of A-rated
Insuring Obligations may be in an amount corresponding to the
Insuring Obligations for which the related Insured Obligations have
A underlying ratings. The loss position of the A-rated Insuring
Obligations may in turn be lower than that for the AA Insuring
Obligations. Under this structure, each rating level of Insuring
Obligation may achieve its rating without the benefit of any
enhancement by the lower-rated Insuring Obligations.
[0309] A step 1512, the ratings of particular Insuring Obligations
can be configured from two distinct perspectives: [0310] First, the
rating of the underlying bonds that are the source of security for
the Insuring Obligations ("Underlying Ratings"), and [0311] Second,
rating resulting from the obligations imposed on such Insuring
Obligations by the BECM Structure to enhance Insured Obligations
and, if applicable, other (senior) Insuring Obligations and, if
applicable, the obligations imposed on other (subordinate) Insuring
Obligations to enhance such Insuring Obligations ("Structure
Ratings"). The Structure Ratings of the tranches of Insuring
Obligations may generally correspond to their loss positions in the
event of a default on a bond related to an Insured Obligation,
i.e., the lower the BECM Structure Rating, the lower the loss
position. So, the lowest rating category may have the first loss
position. [0312] With respect to particular Insuring Obligations,
the BECM Structure Ratings (the credit impact of the BECM Structure
on the Insuring Obligation) can be at a higher or lower rating
level than the Underlying Rating. If Insuring Obligations only
enhance Insured Obligations and do not enhance other Insuring
Obligations, from a marketing perspective, the rating of a
particular Insuring Obligation may be the lower of its Structure
Rating and its Underlying Rating. So, if all of the Insuring
Obligations relating to a particular bond are allocated to rating
subclasses at or above its Underlying Rating, the credit impact of
the BECM Structure may be minimal. Note that the loss position, and
therefore the BECM Structure Rating of particular Insuring
Obligations can either be fixed at issuance or can float with the
Underlying Rating. [0313] If Insuring Obligations do enhance and
are enhance by other Insuring Obligations, the BECM Structure
Rating may govern.
[0314] In yet another embodiment of FIG. 15, based on the S&P
bond insurer rating criteria, the amount of credit enhancement
necessary to enhance the ratings of BBB or below bonds to the A
level is only a portion of the credit enhancement required to
achieve AAA ratings (step 1502). However, the portion of the credit
enhancement required to achieve AAA ratings that is necessary to
achieve A ratings is greater than the amount required to achieve
the AA level which is also greater than the portion necessary to
achieve the AAA level.
[0315] At step 1504, the Insuring Obligations added with additional
series of Insured Obligations can be allocated among various
Structure Rating categories of Insuring Obligations based on the
minimum requirement at each rating level to maintain the ratings of
the next higher rating category of Insuring Obligations. At each
rating level, the Insuring Obligations in or below that rating
category may have to be sufficient to enhance the ratings of the
Insured Obligations with underlying bonds at or below that rating
level to the next higher rating (1510). For example, the Insuring
Obligations in or below the BBB Structure Rating category may have
to be sufficient to enhance the ratings of the Insured Obligations
with underlying bonds rated BBB or below to the A rating category.
Thus, the inclusion of bonds rated BBB or below may not affect the
BECM Structure Ratings of Insuring Obligations in the A or AA
categories.
[0316] At step 1504, the use of both Underlying and Structure
Ratings (i.e., lower-rated subclasses of Insuring Obligations do
not enhance the higher-rated subclasses) may allow Insuring
Obligations to be priced based on spreads to a related bond sold on
an unenhanced basis. The virtue of assigning a AA Structure Rating
to an Insuring Obligation with a BBB Underlying Rating is that the
credit impact of the BECM Structure on the holder of such
obligation may obviously be minimal, so that the additional yield
required by such holder (relative to an uninsured bond of the
related issuer) for participating in the BECM Structure may also be
minimal. The lower the BECM Structure Rating, the higher the spread
that may be required relative to an uninsured bond. However, if the
BECM Structure Rating is no less than the Underlying Rating,
arguably, the spread to uninsured may be modest, even for a low
(e.g., BBB) Structure Rating.
[0317] If the Insuring Obligations with lower Structure Ratings, in
addition to enhancing the AAA Insured Obligations, also enhance the
Insuring Obligations with higher Structure Ratings, the Underlying
Rating is subsumed and the rating of the Insuring Obligations may
be the BECM Structure Ratings (a "Structure Enhanced Rating"). In
this CDO-like approach, the ratings (Structure Enhanced) of the
Insuring Subclasses may be maximized. The lowest loss position
subclass associated with a particular Insured Obligation may be
configured to be rated at the same level as the related bond. Some
of the insuring subclasses, related to a particular Insured
Obligation other than the lowest loss subclass, can be insured with
traditional bond insurance. The use of Structure Enhanced Ratings
for the Insuring tranches can result in the ratings of the Insuring
Tranches (even conceivably the lowest tranche associated with an
underlying obligation) being fixed at the time of issuance. This
rating stability may allow the pricing of Insuring Tranches to be
optimized. To fix the rating of a BBB tranche, it may be necessary
to have a non-investment grade tranche supporting it.
[0318] At step 1508, a method of allocating Insuring Obligations by
Structure Rating subclass may be to allocate portions of the
related Insuring Obligations to each rating category at or higher
than the rating on the underlying bonds
[0319] A related, but more conservative approach is to allocate
portions of the Insuring Obligations related to each rating
subclass from the subclass with the rating immediately below the
rating of the underlying bonds to the AA Structure Rating subclass.
This may provide protection in the event of a severe economic
downturn from the credit enhancement not being sufficient to
maintain the BECM Structure Ratings of the Insuring Obligations.
Under this approach, allocating an equal portion of Insuring
Obligations to the next lower rating category may be unduly
conservative. (Building a coverage factor over rating agency
capital requirements into the amount of Insuring Obligations
created with respect to Insured Obligation addresses the potential
impact of an economic downturn on the AAA Insured Obligations and
also provides protection for the BECM Structure Ratings of the
Insuring Obligations.)
[0320] Another variation (that may also address the potential
impact of adverse conditions on the ratings of the Insuring
Obligations) is to tie the BECM Structure Rating category/loss
position of Insuring Obligations to the rating of the underlying
borrower to which they are related. In the event that the
underlying ratings on an Insured Obligation were changed, the loss
position of the related Insuring Obligation can be changed to
reflect the change. That may mitigate against adverse selection of
the credits included within the BECM Structure by either rewarding
or penalizing the related Insuring Obligor for any changes in the
credit. However, given the significant differences between the
credit spreads for Insuring Obligations in different rating
categories, that approach might create volatility in the market
price of Insuring Obligations.
[0321] Another variation on having separate Underlying and
Structure Ratings, which may also mitigate against adverse
selection, is to keep the BECM Structure Rating categories/loss
positions static (based on the initial allocation of Insuring
Obligations to various rating categories) with respect to a default
by an nonrelated borrower, but, with respect to a default by a
borrower, to make the related Insuring Obligors bear the cost of
the default before any loss is allocated to non-related Insuring
Obligations. In one embodiment, this does not materially affect the
Underlying Ratings of the Insuring Obligations since it is
equivalent to normal subordination which typically has a one-notch
impact at most. However, using this approach may make even more
remote the possibility of any Insuring Obligor incurring a loss due
to a non-related borrower.
[0322] Also, at step 1508, there may be various subclasses of
Insuring Obligations including for example subclasses (Loss
Position Subclasses) that are required to absorb the dollar amount
of a loss in a specified order. So for example, the first loss
subclass might be required to assume all losses up to the full
amount of the payments owed to it. Any additional losses may then
be allocated to the second loss subclass, and so on and so
forth.
[0323] The subclasses can also include subclasses (Loss Category
Subclasses) that are required to assume certain types of losses
before any portion of the loss is allocated to other nonrelated
Insuring Obligations. For example, various types of credits might
be divided into separate subclasses based on the underlying credit
type and/or rating agency risk category (Credit Subclasses). So,
any loss on Insured Obligations that are hospital bonds might be
allocated as follows:
[0324] First to the related Insuring Obligations (i.e., Insuring
Obligations that are part of the Defaulting Issue), if applicable
[0325] Second to nonrelated Insuring Obligations for which the
underlying bond is also a hospital bond (i.e., Insuring Obligations
in a "related" Loss Category Subclass--the Hospital Loss Category
Subclass) [0326] Third, to nonrelated Insuring Obligations that are
part of the same risk subclass (e.g., the subclass consisting of
bonds in the same "risk category" using S&P risk categories for
determining the capital requirement for bond insurers). Such
Insuring Obligations may also be part of a "related" Loss Category
Subclass with a higher loss position than the Hospital Loss
Category Subclass. [0327] Fourth, to Insuring Obligations that are
part of a nonrelated Loss Category Subclass (e.g., Insuring
Obligations that are GO bonds or water and sewer bonds).
[0328] Loss Category Subclasses may be further subdivided into Loss
Position Subclasses (e.g., within a particular Loss Category
Subclass such as Hospital Bonds, subclasses of Insuring Bonds that
are required to absorb the dollar amount of losses in a specified
order). The number of Loss Position Subclasses can vary across Loss
Category Subclasses and even within a Loss Category Subclass.
[0329] In order to minimize the impact of the BECM Structure on the
ratings of Insuring Obligations, there can be distinct Loss
Category Subclasses (Rating Subclasses) for each rating category of
bonds, e.g., AA, A, BBB, and non-rated
[0330] The percentage of obligations that are Insuring Obligations
(the "Insuring Obligation %") can vary across Loss Category
Subclasses (e.g., Credit Subclasses) and, perhaps, within a Loss
Category Subclass (e.g., different Insuring Obligation %'s for
different Rating Subclasses within the same Credit Subclass).
[0331] In a fully developed structure, each Loss Category Subclass
might independently achieve AAA ratings for the Insured Obligations
of that subclass without taking into account the credit enhancement
provided by the Insured Obligations of nonrelated Loss Category
Subclasses.
[0332] Thus, in the event of defaults on bond issues within the
General Obligation Bond Subclass, no portion of the default might
be allocated to nonrelated Loss Category Subclasses (such as the
Hospital Bond Subclass) unless without such contribution from the
non-related Insuring Bonds, AAA-rated Insured General Obligation
Bonds may otherwise default.
[0333] At step 1512, each Rating Subclass can achieve the
immediately higher rating category so that the
cross-collateralization provided by Insuring Obligations of one
Loss Category Subclass to the Insured Obligations of another Loss
Category Subclass may have minimal or no impact on the ratings of
such Insuring Obligations.
[0334] The one potential obstacle to having each Loss Category
Subclass independently achieve the immediately higher rating is
borrower concentration. If the rating of a large issuer like NYC
falls into a new rating category, it could create a concentration
problem for the receiving subclass. The new S&P pool rating
criteria make this problem much easier to deal with since the move
away from a strict 10% of pool criteria for determining borrower
concentration. A virtue of using the credit enhancement structure
as reinsurance is that the bond insurer can take any such
concentration risk. As new borrowers are added to the receiving
subclass, the concentration issue may quickly disappear. Also,
additional cash capital can be allocated to mitigate the
concentration issue.
[0335] At step 1514, benefits/issues for issuers include better
pricing than traditional bond insurance. Also, since a portion of
the cost of credit enhancement may be funded with annual payments
to Insuring Owners and since in the event of a refunding, no
payments may be made on the Insuring Obligations after the call
date of the bonds, the issuer may automatically avoid that portion
of the cost of enhancement in the event of a refunding. The portion
of the cost of credit enhancement that goes to the program can be
funded either with ongoing payments or upfront payments. Also,
ongoing payments can be reflected in higher interest payments on
the bonds related to the Insuring Obligations than are actually
passed through to the Insuring Owners.
[0336] Other benefits include more credit enhanced bonds since the
BECM Structure may facilitate the enhancement of bonds that the
bond insurers may not insure directly. Since bond insurers have the
right to approve amendments to issuer's bond documents, it is
important for the same capability to exist within the structure.
Processing then continues to other steps.
[0337] FIG. 15 may be modified with alternate steps, embodiments,
and implementations as explained below. At step 1502, in yet
another embodiment of the structure of the BECM, in pricing bonds,
the issuer establishes two sets of coupons and yields for each
maturity: (a) One set of coupons and yields for Insured
Obligations--typical of coupons and yields on typical insured
bonds; (b) A separate set of coupons and yields for Insuring
Obligations to compensate them for providing credit enhancement of
the Insuring Obligations.
[0338] Issuer pays an additional insurance premium either up front
or over time. Combination of two sets of coupons/yields plus
insurance premium produces a lower all-in cost for the issuer than
the cost produce by conventionally structured bonds with bond
insurance. Issuer agrees to use pro rata redemptions when calling
Insured and Insuring Obligations to maintain the strength of the
credit enhancement.
[0339] There are several unique characteristics of Insuring Bonds
from an Issuer's perspective, that is provided by the BECM system,
method, and structuring. Insuring Bonds are bonds of the same
maturity as related Structure Insured bonds if they are priced
simultaneously. However the Insuring Bonds of each maturity can
have a distinct yield from the BECM Structure Insured Bonds because
they are priced as uninsured. They can have an additional coupon
that increase the yield, but not the price of the Insuring Bonds.
They can be called for redemption if they are called pro rata with
the BECM Structure Insuring Bonds or the same maturity. They can be
issued in smaller denominations than the BECM Structure Insured
bonds. For small loans, the BECM system can be configured either to
have very small denominations or term bonds comprised of
installments with different yields.
[0340] In one embodiment, denominations can be configured: (a) for
smaller issues, the structure may require different denominations,
rounding, and terming conventions for insuring bonds; (b) $100
denominations; (c) rounding to the nearest $1; and/or (c) Term
bonds might have different yields on amounts amortized in various
years
[0341] At step 1512, credit enhancement provided by Insuring
Obligations, together with a reduced amount of cash capital, as
compared to municipal bond insurers results in AAA ratings on
Insured Obligations. Issuer realizes additional savings relative to
bond insurance upon a refunding by recapturing the additional yield
on the Insuring Obligations after the call date. Insuring
Obligations achieve ratings similar (within one notch) of the
ratings on the underlying bonds.
[0342] Alternatively, Insuring Obligations can be given two
separate ratings, one to reflect the rating of the related bond (a
"Underlying Rating") and another to reflect the impact of the
structure on the credit of the Insuring Obligation (a "Structure
Rating"). In that case, the yield spreads for Insuring Obligations
versus the related bonds might be based primarily on the BECM
Structure Rating, e.g., a low spread for a AA Structure Rating and
high spread for a BBB Structure Rating. Insuring bondholder
receives significantly higher return than uninsured bonds--analyses
performed assume 50 to 200 basis points, depending on the credit
and on the bondholder's loss position.
[0343] At step 1514, the spread to insured bonds can range from 57
basis points to 300 basis points. Analyses performed include at
least two subclasses of Insuring Obligations--the first and second
loss position subclasses--with average spreads to uninsured bonds
ranging from 75 to 150 basis points. Thus, the average spreads to
insured bonds range from 82 to 250 basis points. In each case the
analyses performed assume the same spreads for all maturities of
Insuring Obligations. Upon a defeasance of the bonds, the insuring
bondholder realizes a significant gain. For bonds refunded
immediately like the Commonwealth of Mass bonds, the incremental
gain over the gain realized if uninsured bonds are refunded might
range from 5 points to 15 points. The return on cash capital under
the structure ranges from two to three times the return on capital
for bond insurance, depending on the (a) specific type of credit
and (b) how much is required to fund fixed charges. Generally, the
better the underlying credit, the higher the return on capital for
bond insurance. So, better credits result in higher incremental
returns for the structure.
[0344] FIG. 16 shows a flow chart for a process for managing debt
insurance. At decision step 1602, it is determined if an underlying
credit rating for the insured debt is BBB or better. The rating can
be determined by a computer based analysis of the history of the
issuer, the type of industry of the issuer, the financial condition
of the issuer, or the like. The rating can be received over a
network from a rating agency such as Moody's.
[0345] At step 1604, an insuring debt amount of the insuring debt
is determined based on an annual depression-scenario assumed
defaults percentage for the debtor times a multiple. In one
embodiment, the Insuring Bond portion of each maturity can be sized
so that the debt service thereon exceeds the level of average
annual defaults that would occur under a depression scenario. The
Insuring Bonds can be further sized to take account of an computed
downgrade function of a portion of the insured portfolio plus
coverage (e.g., 1.6 times the amount previously calculated). The
downgrade function is described in more details in conjunction with
FIG. 24 and FIGS. 29A and 29B. Proceeds of the insured and Insuring
Bonds can equal 100% of the amount required by the issuer, just as
in any Insured Bond issue. For example, if the Insuring Bonds equal
3.5% of the bond issue, 96.5% of the proceeds would be from the
insured issue and the balance from the Insuring Bonds. Of the cost
of insurance (e.g., 75% of the benefit), a portion (e.g., 25% of
the 75%) would can paid up front, with the balance paid annually as
a interest coupon on the Insuring Bonds.
[0346] At step 1606, a proportion of the insured debt amount to the
insuring debt amount is maintained constant, for any payment
(redemption) from the insured or insuring debts. In an alternate
embodiment, the debt service for the insured debt that is based on
the insuring debt (intercepted coupons, principal, etc. of the
insuring debt) is maintained constant for any payment from the
insured or insuring debts. In one embodiment, at least a portion of
the Insuring Bonds deposited in the Trust are used at least in part
to pre-fund, as Insured Bonds are issued, capital sufficient to pay
(ignoring timing issues) debt service for the full life of the
portfolio on Insured Bonds in an amount greater than either:
assumed depression scenario defaults; or the actual level of
four-year defaults that have historically been covered by monoline
equity. Insuring Bonds of each issue can fund an amount of capital
in excess of the incremental capital charge associated with adding
such issue to the insured portfolio. However, the Insuring Bonds
related to a specific issue may not alone provide the credit
enhancement that enables the related Insured Bonds to be rated Aaa.
The source of that rating may be based on the portfolio of
non-related Insuring Bonds held by the Trust whose debt service can
be intercepted in the event of a default by the related
borrower.
[0347] At step 1608, the insuring fund is pre-funded with cash
equity in an amount of the annual depression-scenario assumed
defaults percentage for the debtor times another multiple (e.g.,
between 1 and 3). The pre-funding of capital and the significant
level of default protection for the life of the portfolio can
eliminate concerns with obtaining additional capital under stress
scenarios, can remove the concern with profitability as a critical
metric of the rating assessment, and can eliminate the risk of
capital removal other than in a runoff scenario. In a runoff
scenario, the Insuring Bonds and cash equity can provide protection
for the life of the portfolio (e.g., 20 years) and are reduced only
in proportion to reductions in the insured portfolio.
[0348] Computing then continues to other steps for further
processing.
[0349] FIG. 17 shows a flow chart for a process for managing debt
insurance. At step 1702, a loss category subclass for at least one
of the trust issued debts is established. Loss category ("LC")
subclasses are configured to group insuring certificates into
groups where the bonds have similar risks to ensure that: (a) the
risk to insuring certificate holders is as similar as possible to
the risk of nonpayment of their underlying bonds; conversely, the
risk that cash flows will be intercepted to fund a default within a
riskier credit type may be extremely remote; and (b) the credit
strength of Insured Bonds of stronger credit types is not weakened
by the enhancement of Insured Bonds of weaker credit types.
[0350] Loss category subclasses can ensure: (a) the risk to
insuring certificate holders is as similar as possible to the risk
of nonpayment of their underlying bonds. Conversely, the risk that
debt service can be intercepted to fund a default within a riskier
credit type may be extremely remote; (b) the credit strength of
Insured Bonds of stronger credit types is not weakened by the
enhancement of Insured Bonds of weaker credit types. Loss position
subclasses are intended to indicate the order in which insuring
certificate cash flows will be intercepted within the same loss
category subclass.
[0351] At step 1704, a loss position subclass for at least one of
the trust issued debts is established. Loss position ("LP")
subclasses are configured to indicate the order in which insuring
certificate cash flows will be intercepted within the same loss
category subclass.
[0352] At step 1706, a desired credit rating for at least one trust
issued debt is determined. In one embodiment, the insuring
certificates (and the corresponding Insuring Bonds) will enhance
the Insured Bonds, but not other insured certificates (or Insuring
Bonds). So, the Insuring Bonds can have two distinct rating
attributes: (a) the "underlying rating" of the issuer of the
corresponding bond (e.g., Aaa, Aa, A, etc.); and (b) a "structure
rating" or desired credit rating of the insuring LP subclass--a
separate rating that reflects the risk that debt service of such
subclass can be intercepted to cure a borrower default. The various
loss position subclasses of insuring certificates and their target
ratings are:
[0353] 5th loss position--Aa
[0354] 4th loss position--A
[0355] 3rd loss position--Baa
[0356] 2nd loss position--Ba
[0357] 1st loss position--NR
[0358] At step 1708, the loss class for the at least one trust
issued debt is sized based on the loss class subclass, the loss
position subclass, and the desired credit rating. Although the
insured portfolio can consist of conservatively selected bonds
rated Baa or better, of which the overwhelming majority will be
rated A or better, the target structure ratings of the 1st and 2nd
LP subclasses can be below Baa. Such ratings reflect the
possibility of a deterioration in the credit quality of the
portfolio; the desire to maintain stable ratings for all of the
insuring subclasses; and rating criteria for monoline insurers with
target ratings below Aaa, which include a capital charge for
Insured Bonds with ratings higher than the monoline insurer's
target rating. In one embodiment, at least some of the LP subclass
of Insuring Bonds can be configured as a monoline insurer with a
target rating equal to its structure rating. The function of each
loss position subclass is to raise the rating of the portfolio of
Insured Bonds to the target rating of the next higher subclass and,
in the case of the 5th LP subclass, to Aaa
[0359] Since each LP subclass will be sized to raise the structure
rating of the Insured Bonds to the structure rating of the next
higher subclass, the structure related risk to each subclass is the
rating of the Insured Bonds achieved by the lower LP subclasses.
One embodiment of subclass sizing include: [0360] 1. The 1st to 5th
LP insuring subclasses will be sized in aggregate to raise the
structure rating of the Insured Bonds to Aaa [0361] 2. The 1st to
4th LP insuring subclasses will be sized in aggregate to raise the
structure rating of the Insured Bonds to Aa. So, the structure risk
to the 5th LP subclass is a Aa quality risk [0362] 3. The 1st to
3rd LP insuring subclasses will be sized in aggregate to raise the
structure rating of the Insured Bonds to A. So, the structure risk
to the 4th LP subclass is an A quality risk [0363] 4. The 1st LP
insuring subclass will be sized to raise the structure rating of
the Insured Bonds to Ba. So, the structure risk to the 2nd LP
subclass is a Ba quality risk
[0364] In sizing each of the LP subclasses, the same assumed
defaults are used (including assumed portfolio deterioration and
coverage) as are used to support the Aaa rating of the Insured
Bonds. However, the coverage required to support the structure
rating of each of the LP subclasses is lower as appropriate for its
target rating: [0365] 5th LP (Aa)--1 time [0366] 4th LP (A)--0.8
times [0367] 3rd LP (Baa)--0.64 times [0368] 2nd LP (Ba)--0.52
times
[0369] The coverage for each LP subclass is also affected by the
relationship between the rating of the underlying bond and the
target subclass rating. If the underlying bond is rated at or
higher than the subclass rating, the coverage requirement is a
fraction of the multiple stated above: [0370] Same rating
category--25% [0371] 1 rating category higher--20% [0372] 2 rating
categories higher--15% [0373] 3 rating categories higher--10%
[0374] 4 rating categories higher--0%
[0375] For example, assume that startup cash equity is $200 million
for both the BECM and a conventionally structured monoline insurer
and that both capital allocated to an insured issue and capital not
yet allocated are available to cure a defaults. The BECM can have
significantly greater capital (i.e., capacity to withstand
defaults) at every point in time from the issuance of the first
Insured Bond until the monoline insurer's startup capital is fully
allocated. The bond portfolio is assumed to consist of A and Baa
rated City GOs. The monoline insurer's capital is fully allocated
when $19.6 billion of bonds have been insured whereas the cash
equity available under the BECM will support the enhancement of
$136 billion. The BECM's default tolerance significantly exceeds
that of the conventional monoline at every point in time both over
a four-year depression scenario and over the term of the bonds
[0376] At step 1710, electronic certificates are issued to the
first and second classes based on the credit rating of the classes,
wherein holders of the electronic certificates are entitled to
satisfaction from the insuring trust for the trust held debt. The
number of electronic certificates can be issued based on the sizing
of the loss class, and the payments recorded as an obligation in
computer media that is due to the holder of the electronic
certificate is based on the a function that increases as the loss
class position decreases. For example, a holder of 2nd LP is paid a
higher premium for assuming more risk than a 3rd LP holder.
Computing then continues to other steps for further processing
[0377] FIG. 18 shows a flow chart for a process for managing debt
insurance. FIG. 18 shows an alternate embodiment of at least a
portion of the processes of FIGS. 1 to 6.
[0378] Generally, FIGS. 18 and 19 show a process where portions of
the payments to certificate holders (e.g., the first and second
class holders) are partially or fully used to cover defaults of
related insured debt associated with a related insuring debt and a
first class holder and/or an unrelated insured debt associated with
an unrelated insuring debt and a second class holder. In one
embodiment, an insuring payment for an insured debt is provided
based on intercepted payment payable from an insuring debt. In one
embodiment, if a default occurs, the Insuring Trust can intercept
payments due on the insuring trust certificates (first class
holders and second class holders) to cure the default. In one
embodiment, Insuring Bonds can fund a net default equal to their
percentage of the total portfolio of insured and Insuring Bonds.
For example, assume that insured and Insuring Bonds equal 96.5% and
3.5% of each maturity within the total portfolio and there is a
default of issuers representing 3.5% of the portfolio. In this
scenario, the non-defaulting Insuring Bonds equal 96.5% of 3.5% of
the portfolio, which is sufficient to cover the defaulting Insured
Bonds, 3.5% of 95.5% of the portfolio. So, the Insuring Bond
percentage of the aggregate outstanding bonds represents the
Trust's default tolerance capacity net of a like amount of borrower
defaults. In one embodiment, because the BECM can cover a higher
level of defaults and will do so for the life of the portfolio, it
is much less leveraged that the capital of a traditional monoline
insurer. A borrower may not be affected by the default of another
issuer.
[0379] In general, upon a default, debt service of insuring
certificates can be intercepted to the extent needed in the
following intercept order: [0380] 1. Insuring certificates of the
same issuer and credit ("related" certificates) [0381] 2. Insuring
certificates of the same (i.e., a "unrelated") loss category
subclass [0382] 3. Insuring certificates of other (i.e.,
"unrelated") loss category subclasses
[0383] Making insuring certificate holders primarily responsible
for defaults of the issuer of the related Insured Bond is
configured to: (a) discourage adverse selection of bonds in the
insured portfolio and (b) make it highly unlikely that insuring
certificate holders will ever suffer a nonpayment (as distinct from
a delayed payment) due to a default by a nonrelated issuer and/or
nonrelated issuer in a different loss category subclass.
[0384] Referring to FIG. 18, at step 1802, it is determined if a
debtor defaulted on an obligation to make payments for a related
insured debt. To make this determination, a computer based
monitoring system can monitor cash flows for payments, can receive
a signal indicating default over a network, or the like. If the
debtor defaulted, processing continues to step 1804. Otherwise,
processing continues to step 1818 where a payment from the insuring
debt is routed to the first class holder. The process of step 1818
is described in more detail in conjunction with FIG. 19.
[0385] At step 1804, a payment payable from a related insuring debt
in a particular loss class that is related to the defaulting
insured bond are intercepted. Upon a default, debt service of
insuring certificates can be intercepted to the extent needed based
on the above described intercept order. Future payments by of the
defaulted amounts can be applied to reimburse insuring certificate
holders in the reverse of the intercept order.
[0386] A portion of the intercepted payments is added to the
insuring payment to cure the default. In other embodiments,
insuring funds from cash capital, other unrelated payments, or the
like can also be added to the insuring payment.
[0387] At decision step 1806, it is determined if the related
insuring fund's intercepted payment is sufficient to meet the
defaulted obligation of the related insured debt. A comparison
between the amount of the default and the intercepted payment is
performed. If the determination is yes, processing branches to step
1816. Otherwise processing continues to step 1808.
[0388] At decision step 1808, it is determined if the next loss
class has a related insuring fund. If so, processing loops back to
step 1804. Otherwise, processing continues to step 1810. A computer
memory can record the ordering of the classes in a rating scale,
e.g., within a database, or the like. Thereby, the related insuring
funds in a lower loss class are intercepted before related insuring
funds in a higher loss class. The determinations of junior or
senior holder of financial instruments (loss classes) are described
in more details in conjunctions with FIGS. 1 to 6.
[0389] At step 1810, a payment payable from an unrelated insuring
debt in a particular loss class that is unrelated to the defaulting
insured bond are intercepted. Future payments by of the defaulted
amounts can be applied to reimburse insuring certificate holders in
the reverse of the intercept order. A portion of the intercepted
payments is added to the insuring payment to cure the default. In
other embodiments, insuring funds from cash capital, other
unrelated payments, or the like can also be added to the insuring
payment.
[0390] At decision step 1812, it is determined if the unrelated
insuring fund's intercepted payment is sufficient to meet the
defaulted obligation of the insured debt. A comparison between the
amount of the default and the intercepted payment is performed. If
the determination is yes, processing branches to step 1816.
Otherwise processing continues to step 1814.
[0391] At decision step 1814, it is determined if the next loss
class has a related insuring fund. If so, processing loops back to
step 1810. Otherwise, processing continues to step 1816. A computer
memory can record the ordering of the classes in a rating scale,
e.g., within a database, or the like. Thereby, the unrelated
insuring funds in a lower loss class are intercepted before
unrelated insuring funds in a higher loss class. The determinations
of junior or senior holder (loss classes) of financial instruments
are described in more details in conjunctions with FIGS. 1 to
6.
[0392] At step 1816, the insuring payment is provided. In one
embodiment, the insuring payment is provided over a network, in a
computer account, over an exchange, or the like. The insuring
payment is provided to at least one debt holder of the insured debt
to cure any defaults by an issuer of the insured debt to fulfill an
obligation to pay the debt holder. Computing then continues to
other steps for further processing.
[0393] FIG. 19 shows a flow chart for a process for managing debt
insurance. FIG. 19 shows an alternate embodiment of at least a
portion of the processes of FIGS. 1 to 6. At step 1902, a payment
based on an obligation to pay interest or principal on the insuring
debt is determined for the first class holder based on the
obligation owed to the first class holder. The obligation recorded
in computer memory for payments from the insuring debt triggers a
first payment based on configured parameters. The payment can then
be allocated, and set aside for payment to the first class holder
based on the recorded obligation (e.g., electronic trust
certificate) to pay the first class holder. The allocation and
payment, if a trigger occurs, can be recorded in computer memory
and can cause a computer system to make the payment as described in
the steps below. Payments can be made over an exchange, in a
computer account, or the like.
[0394] At step 1904, a portion is deducted from the payment to the
first holder to cover the default of unrelated debt. When a debt
that is unrelated to the insuring debt but that is insured by
another insuring debt defaults, and the other insuring debt's
intercepted funds are insufficient to cover the default, the
portion to cover the default is deducted from the payment to the
first holder. In one embodiment, the portion covers the default
completely. In another, the portion can be combined (e.g.,
pro-rata) with other unrelated insuring debts that are in the same
loss class to cover the default. Additional details for this step
1904 are described in more detail in conjunction with FIG. 18.
While FIG. 18 describes the operations with respect to the first
class holder that is associated with the related insured debt, FIG.
18 can be readily applied to the second class holder that is
associated with the unrelated debt.
[0395] At decision step 1906, it is determined if a prior payment
from an unrelated insuring debt was used to fund a prior insuring
payment for the related insured debt. In one embodiment, the
unrelated insuring debt's payments are obligated to be paid to the
second class holder. This situation can occur if, for example, the
related insured debt defaulted on a payment and the intercepted
funds from the insuring debt was insufficient to cover the default,
and other unrelated insuring debt payment was interpreted to pay
the default. If the determination is yes, processing continues to
step 1908. Otherwise, processing continues to 1910.
[0396] At step 1908, a portion is deducted from payment to pay the
second class holder. The portion can be some or all of the amount
that was paid by the unrelated insuring debt to previously cure the
default of the related insured debt. The deducted portion can be
provided to the second class holder over a network, exchange, or
the like. The deducted portion can be used to reimburse insuring
certificate holders. In one embodiment, future payments by of the
defaulted amounts can be applied to reimburse insuring certificate
holders in the reverse order of the intercept order.
[0397] At step 1910, the remaining portion of payment is provided
to the first class holder. The portion remaining after the
deduction described above are provided to the first class holder
over a network, exchange, or the like. The portion of the remaining
debt service (e.g., coupons) can be paid as a pass through to the
certificate holder of the loss position for the Insuring Bonds. The
amounts can be stored as an obligation in computer memory by the
trustee of the insuring trust to pay the certificate holders. In
one embodiment, the amounts are not held by the trust, but rather
passed through to the certificate holder. A computer based
mechanism can be programmed to track the fund obligations and
payments. Computing then continues to other steps for further
processing.
[0398] FIG. 20 shows another embodiment of a process flow for
managing a BECM system. At step 2002, the Company's computing
resources and system for managing BECM components are established.
Briefly, an insurer establishes a capital structure within a
computer memory of a computer system, the capital structure
designed to minimize risk and structured with regulatory capital
and a cash stream that is pledged to fund the default. In one
embodiment, computer operations to manage components of the BECM
are established, underwriting requirements of BECM components are
determined, insuring fund intercept functions and conditions are
established, and monoline functions may also be performed. In one
embodiment, computer resources related to these operations such as
database triggers, comparisons, data, or the like are recorded in
computer readable media. Data associated with Insured Bonds,
Insuring Bonds, liquidity providers, insuring certificates,
regulatory capital, payments, and the operations of the company are
initiated. The operations of step 2001 are described in more detail
in conjunction with the process of FIG. 21A.
[0399] At step 2004, the credit rating(s) of various components
that uses or performs BECM methodology is determined. Briefly, a
determination of whether the established capital structure is
sufficient to cover a depression scenario period to obtain a
minimal target credit rating for the insurer is generated, and the
target rating based on the generated determination is
electronically received. In one embodiment, the target credit
rating is AAA, wherein the investment comprises an Insured Bond
issued by an issuer, and the cash stream is produced from an
Insuring Bond issued that is related to the Insured Bond and that
is issued by the issuer. In another embodiment, the investment
comprises at least one of a debt, a bond or a loan, wherein the
cash stream is produced from the investment, or a dividend or an
account receivable associated with the investment. In yet another
embodiment, the investment comprises a previously issued bond
issued by an issuer, and the cash stream is produced by an
investment unrelated to the issuer and is used as re-insurance for
the previously issued bond. In yet another embodiment, determining
the credit rating can include increasing in the at least one
computer memory the credit rating for a first credit based on an
increased likelihood that a payment default can be fully absorbed,
wherein the credit rating is representative of a probability of a
party owing the first obligation to make specified payments for the
first credit to meet the first obligation.
[0400] In one embodiment, various capital parameters are examined
by the computer system. Capital pre-funding is examined, capital
adequacy of the insurer based on the period at the end of a
depression scenario is examined, capital adequacy of the insurer
based on the period during the depression scenario is examined, and
a credit rating of the BECM components are determined based on
these various electronic examinations. One embodiment of the
operations of step 2004 are described in more detail in conjunction
with the process of FIG. 23.
[0401] At step 2006, Insuring Bonds can be appropriately sized for
the Insured Bonds. In one embodiment, sizing can include receiving
from an issuer, data about the Insured Bond for minimizing the
Insured Bond's risk of default; and sizing, by the computer system,
an Insuring Bond based on the received data about the Insured Bond,
wherein the sized Insuring Bond produces the cash stream that
provides the capital structure necessary to achieve the target
credit rating. In one embodiment, the pledged bonds, (e.g., the
Insuring Bonds), can represent a portion of at least some and in
one embodiment every maturity and are sized in a computer readable
media using the computer implemented processes described based on
the following computer readable parameters: [0402] Projected
depression scenario defaults, [0403] Current underlying ratings of
the Insured Bond issues, [0404] A downgrade function of a portion
of the Insured Bonds, and [0405] Coverage at or above the level
typically provided by monoline insurers.
[0406] This sizing of the Insuring Bonds can also be a tangible
result and transformation provided by the computer system such that
the use of the sized amount creates efficiencies for the insurer.
In one embodiment, no additional funds need be raised with the
proper sizing, and such proper sizing can maintain the appropriate
amount of funds available for insurance so that an appropriate
increase in credit rating can be achieved for the Insured
Bonds.
[0407] In one embodiment, in the event of an insured default
determined electronically by a computer system, debt service on
Insuring Bonds otherwise payable to the Insuring Certificate
holders (e.g., the Insuring Certificate Payments) is intercepted
within the at least one electronic exchange by the Insuring Trust
in an amount sufficient to cure the default. Insuring Bonds is
recorded in computer readable media to not be able to be sold by
the Trust. Intercepted Insuring Certificate Payments are recorded
as available to cure defaults. The operations of step 2006 are
shown in further details with respect to FIG. 24.
[0408] At step 2008, trust certificates for Insuring Bonds are
established based on loss classes. In one embodiment, loss category
subclasses are established, a type of the loss category subclasses
are determined, Insuring Bonds are pledged, and trust certificates
for the Insuring Bonds are issued. In one embodiment, establishing
can include establishing, by the computer system, a trust
certificate, wherein a payment from the Insuring Bond is pledged to
be paid to a holder of the trust certificate.
[0409] In one embodiment, the computer system allocates a first
credit having a first obligation to make specified payments and a
second credit having a second obligation to make specified
payments, each of the first credit and second credit being in a
non-default state when a respective obligation is met and being in
a default state when a respective obligation is not met. In one
embodiment, the computer system associates a first senior holder
and a first subordinate holder with the first credit using (a) a
respective first senior holder financial instrument through which
payments from the first credit flow to the first senior holder and
(b) a respective first subordinate holder financial instrument
through which payments from the first credit flow to the first
subordinate holder. In one embodiment, the computer system
associates a second senior holder and a second subordinate holder
with the second credit using (a) a respective second senior holder
financial instrument through which payments from the second credit
flow to the second senior holder and (b) a respective second
subordinate holder financial instrument through which payments from
the second credit flow to the second subordinate holder. In one
embodiment, the computer system structures the first senior holder
financial instrument and the first subordinate holder financial
instrument in the computer memory to give priority to payments due
the first senior holder prior to payments due the first subordinate
holder in the event the first credit enters the default state.
[0410] In one embodiment, it is determined, in the computer memory,
for the trust certificate, a type of the loss category subclass,
wherein a type comprises (i) a horizontal loss position subclass
wherein a loss that obligates payment is allocated based on a
position within a plurality of loss position subclasses, with each
of the loss position subclasses allocating the loss based on a
category rating within that loss position subclass, or (ii) a
vertical loss position subclass, wherein the loss is allocated
based on another position within a plurality of categories, with
each category allocating the loss based on a loss position rating
within that category. In one embodiment, establishing can include
establishing a plurality of loss category subclasses; and
determining a yield above a coupon amount for the Insuring Bond for
each position in the loss category subclasses, wherein the yield
increases as the position decreases. The operations of step 2008
are shown in further details with respect to FIG. 25.
[0411] At step 2009, the issuer sells the insured bonds.
[0412] At step 2010, the Insuring Bonds may be received, by, for
example, the Company, the Insuring Trust, or the like. The Insuring
Bonds may be issued by the issuer, segmented from pre-existing
debt, or the like.
[0413] At step 2012, coupons for Insured and Insuring Bonds are
determined and paid. In one embodiment, in addition to the coupons
payable on Insured and Insuring Bonds, the issuer pays over the at
least one electronic exchange a coupon on Insured (and optionally
Insuring Bonds) representing an annualized portion (e.g., 75%) of
the bond insurance premium. The premium coupons on Insured Bonds
are detached and assigned (within a computer memory) to the
Insuring Trust at the time the bonds are issued. In another
embodiment, the upfront premium may go to the Regulated Company and
not the Insuring Trust. (This discussion assumes, however, that the
coupon is payable solely on Insured Bonds, but other scenarios may
be used without departing from the invention.) The balance of the
issuer's insurance premium (e.g., 25%) is paid upfront at issuance
over the at least one electronic exchange.
[0414] In one embodiment, the Insuring Trust sends the at least one
electronic exchange a portion of the annual premium payments as a
supplemental coupon on the Insuring Certificates. The supplemental
coupon is based on the additional risk that the Insuring
Certificates Payments may be intercepted (e.g., this obligation is
recorded in computer readable media) to take the first loss as
described in the paragraph below. The balance of the premium
payments, together with the upfront premium and earnings thereon,
is paid over the at least one electronic exchange to the Company
for operating expenses and return on BECM cash capital. After these
payments, the remaining annual insurance premiums represent the net
revenue to the Company.
[0415] At step 2016, it is determined if the debt service payments
(e.g., coupons and/or principal) of Insuring Bonds should be
intercepted. In one embodiment, the determination of whether the
payments of the Insuring Bonds should be intercepted is based on a
legal obligation recorded in computer memory. In one embodiment, in
the event that the Trustee receives notice from the Company's or
from a paying agent of an Insured Bond Issue's computer system,
based on a determination of the computer system, that insufficient
funds are available from the issuer to make timely payment of
amounts coming due, the Trustee's computer system can be triggered
to intercept Insuring Bond Payments thereafter received by the
Insuring Trust. The interception software routines can determine
the interception in the amounts sufficient to assure payment of all
amounts payable pursuant to the Guaranty. If it is determined that
the payments should be intercepted, processing continues to step
2018. Otherwise computing continues to step 2020.
[0416] At step 2018, at least a portion of the debt service
payments (e.g., coupons and/or principal) of the Insuring Bonds
(e.g., that is configured to be paid to certificate holders) is
intercepted. In one embodiment, debt service payments are
constrained by the computer system of the payment to the holder of
the trust certificate based on a legal obligation to pay secured
holders of a plurality of Insured Bonds, which includes the Insured
Bonds, wherein the legal obligation is recorded in the computer
memory. The computer system can intercept the payment, based on the
recorded legal obligation; and electronically send the payment to
the secured holders, based on the recorded legal obligation. In one
embodiment, the computer system uses payments from the second
subordinate holder financial instrument to perform the first
obligation of the first credit for the benefit of the first senior
holder to the extent that the first credit enters the default state
and payments due the first senior holder are not available, wherein
both the first subordinate holder and the second subordinate holder
are junior to the first senior holder.
[0417] In one embodiment, the Trustee's computer system can
intercept payments received with respect to such Insuring Bonds and
in such amounts as can be specified by the Company (e.g., through a
user interface) in accordance with the terms of the Trust. For
example, the user interface will allow inputs based on the terms of
the Trust recorded in computer readable media.
[0418] At step 2020, a recovery or repayment amounts from the
issuer are managed. If a default of an insured bond of the issuer
was covered by the operations of the BECM system as described
herein, the issuer pay repay the covered amounts to the Company
and/or the Trust. The recovery or repayment amounts may be received
over a network, stored in computer memory and/or credited to an
electronic account.
[0419] At step 2022, any (early) redemption of bonds are managed
and savings provided to the issuer for such redemptions. In one
embodiment, it is determined if the bonds are redeemed early. The
issuer may send an electronic message to the trust or the Company
that the bonds should be redeemed early. The issuer may compute
that this early redemption will save on both fees paid to insure
the Insured Bonds as well as interest payments due to factors such
as reduced interest rates, or the like. If the bonds are not
redeemed early, processing continues to other steps, including
looping back to step 2016 until the end of the term of the
insured/insuring bonds.
[0420] Otherwise, the bonds are redeemed and a savings of fees for
insurance are provided to the issuer. In one embodiment, based on
an early redemption of the Insured Bonds, the issuer realizes
savings of fees that are not paid to the insurer for insuring the
Insured Bonds in a remaining period for the Insured Bonds. In one
embodiment, the early redemption benefit to issuer is that the
issuer does not have to make large upfront payment as compared to a
monoline scheme, and saves on fees upon redemption. The bonds can
be redeemed all at once, where both insured and Insuring Bonds are
redeemed. In another embodiment, the Insured Bonds may be redeemed
without redeeming the insuring bonds. Computing then returns to
other processing.
[0421] FIG. 20 may be modified with alternate steps, embodiments,
and implementations as explained below. In one embodiment, at step
2002, under the structured approach of the BECM, a portion of the
capital needed to meet rating agency requirements can be provided
by the insuring bondholders (at step 2004). Cash capital is need
primarily for liquidity and in aggregate represents a modest
percentage (at most 25% and, more likely, 25% of 25% or 6.25%) of
the cash capital requirement for bond insurance. Only a modest
percentage of the aggregate cash capital requirement under the
structured approach (e.g., 25%) is actually risk capital, rather
than providing liquidity until funds from the insuring investments
can be intercepted. The return on capital for the structured
approach might be two or more times the return on capital for bond
insurance, even if all of such cash capital were risk capital. If
the returns of risk capital are "leveraged" by providing a lower
return for cash capital that only provides liquidity, the
structured approach provides returns on cash risk capital that are
3 to 5 times the returns on capital for bond insurance. If the risk
capital is given a fixed return at least equal to the typical
target return for bond insurance and the net revenues are retained
as "program revenues" (representing a return on intellectual
capital), such program revenues may be substantial. Note that the
return on risk capital in this structure can both be higher and
more certain than the return on risk capital for bond insurance
while still leaving substantial program revenues.
[0422] A distinction between existing monoline bond insurance and
the new approach is that each new insured credit results in an
increase in the capital and diversification of the structured
enhancement and, therefore, strengthens the structured credit.
Under the monoline insurance model, each new credit increases
diversification but consumes unallocated capital.
[0423] At step 2006, by tranching municipal credits (using either a
classic CDO approach or an alternative approach like the method of
allocating risk described above) and using the credit enhancement
provided by the lower or "insuring" tranches to enhance the higher
or "insured" tranches, it is possible to create a new class of high
yield securities (i.e., the insuring tranches) that are unique in
that they will have a very low probability of default (including
failure to achieve its target investment return).
[0424] In one embodiment, the primary impediment to creating such a
class of securities based on municipal credits is that the credits
which are the best candidates to be included in such a structure
(i.e., the credits with virtually no likelihood of default) are
immediately insured in the primary market (or immediately
thereafter in the secondary market) by the municipal bond
insurers.
[0425] Other obstacles include (I) the difficulty of stripping
interest coupons while maintaining the portion of the original
coupons on the insured securities (i.e., the difference between an
uninsured yield and an insured yield) that are transferred to the
insuring securities in exchange for the credit enhancement and (II)
converting what may have been interest on the insured securities
(if they had been uninsured) to compensation to the insuring
securities (e.g., higher interest coupons thereon) without
affecting the marketability of the insured securities by depositing
them into a trust, partnership or similar entity.
[0426] At step 2008, in one alternate embodiment, the compensation
to the insuring securities can be in the form of a fee or other
payment (paid at step 2018) provided that the credit enhancement is
added in the primary market, instead of payments paid to trust
certificates.
[0427] A close analog is so-called State Revolving Funds (SRFs).
Each state has an SRF which, from a credit perspective, consist of
a pool of municipal loans together with equity held in the form of
either cash or loans. The credit of an SRF is generally dependent
on the ability of the SRF's cash flows to tolerate loan defaults.
S&P has published guidelines setting forth the amount of
assumed defaults that the program cash flows must tolerate to
achieve various rating levels. In general, the more diverse the
loan portfolio, the lower the amount of defaults required to be
assumed in evaluating the pools default tolerance. The number and
types of loans included within an SRF portfolio are less
diversified than in an bond insurer's portfolio, first, because of
the lack of geographic diversity (all borrowers are from the same
state) and second, because, in one embodiment, the credits are
general obligation bonds are water and sewer revenue bonds. Due to
the reduced diversification, as compared to the loan pool for a
bond insurer, the rating agencies assume that the defaults may be
higher on a percentage basis for an SRF than for a bond insurer.
So, the rating agencies impose higher capital charges on SRFs than
on bond insurers. However, using a structured approach to provide
bond insurance, the levels of borrower defaults required are
configured in computer memory to be assumed (and the capital
charges imposed) to be the same as for a bond insurer. Based on
reports of prior discussions with the rating agencies, this issue
is discussed at length below.
[0428] At step 2008, in yet another embodiment, if structured CDO
type tranches of municipal credits (which can be individual credits
or groups of credits) are combined with existing portfolios of bond
insurers, the combination can be configured as a single integrated
portfolio for rating purposes. The bond insurer's capital and the
insuring obligations under the structured approach (collectively,
the "combined insuring obligations") can be configured together as
a single source of credit enhancement. The bonds insured by the
bond insurer and the obligations enhanced by the structure
(collectively, the "combined insured obligations") can similarly be
configured together and configured to be combined insuring
obligations as a source of credit enhancement.
[0429] The bond insurer's capital and the insuring obligations
under the structured approach can be treated as separate subclasses
of the combined insuring obligations, with specific rules for
determining when either subclass is used to fund a payment on the
opposite subclass of combined insured obligations.
[0430] The legal framework enforced by software trigger and
algorithms for creating such combined insuring obligations can be
set forth in a separate agreement database or it can be
self-contained within the document database for establishing the
structured approach.
[0431] The integration of the structured credit with the existing
portfolio can eliminate the startup issues (critical mass of
participating borrowers, portfolio diversification, concentration,
redemption risk, etc.) that can typically be addressed in
contemplating a structured approach to credit enhancement of
municipal credits.
[0432] At step 2008, in yet another embodiment, because the amount
of Insured Obligations may be significantly greater than the
Insuring Obligations, the return on the Insuring Obligations,
particularly, the first-loss Loss Position Subclass, which may
receive a significantly higher return than the normal uninsured
yield on the related bonds. For example if (i) the Insured
Obligations are 85% of the bond issue par of $100, (ii) the benefit
of the credit enhancement/bond insurance is 25 basis points, and
(iii) 70% of the benefit of bond insurance goes to the issuer and
to program costs (leaving 30% to go to the Insuring Owners), then
there are 85.times.25.times.30%=$0.0637 to be allocated among the
$30 of Insuring Obligations.
[0433] Assuming two Loss Category Subclasses and that the
first-loss subclass gets 80% of the benefit: (a) the second-loss
subclass may get $0.0128 and the first-loss subclass may get
$0.051. (b) the yield impact of those dollars on the $15 of bonds
in each subclass may be 34 basis points for the second-loss
subclass and 136 basis points for the first-loss subclass.
[0434] At step 2012, the preferred mechanism for compensating
Insuring Owners (at least the holders of Insuring Obligations,
where possible) is to have the issuer of the underlying bonds
establish a higher interest coupon/yield for the Insuring Bonds at
the time they are initially priced. From the borrower's
perspective, each maturity of an Included Issue may have split
coupons/yields--insured coupons/yields on the Insured Obligations
and higher coupons/yields on the Insuring Obligations--but the
borrower may achieve a lower overall cost of funds. In one
embodiment, such compensation can be structured as a fee or
otherwise and the coupon splitting need not be done at the time of
bond issuance.
[0435] In one embodiment, enhancement premiums (coupons) can be
configured to have separate premiums for refunding and new money
bonds. The establishment of the coupons and yields by the issuer
can allow the creation of a subclass of high-yield securities with
a very low probability of default.
[0436] In one embodiment, if any maturity of bonds is called for
redemption, Insured and Insuring Obligations can be called pro rata
in order to maintain the strength of the credit enhancement
provided by the Structure.
[0437] Having split coupons/yields also should minimize legal
authority issues relating to the issuer making ongoing annual
payments for credit enhancement of its previously issued bonds.
[0438] In an alternate embodiment, the computer system can
structure in computer memory information about a partnership and
configure the Insured and Insuring Obligors to receive
distributions of the appropriate cash flows from the partnership.
However, the sale of Insured Obligations that represent interests
in a partnership may impose an additional cost (estimated at 25
basis points) versus the sale of Insured Obligations that are
bonds. Such a yield penalty versus bond insurance may make it
impossible to be cost-effective versus bond insurance. It may be
more cost-effective (and certainly simpler) simply to pay a higher
yield on the Insuring Obligations.
[0439] If the insured obligations under the structured approach
were also insured by a single bond insurer, each additional issue
of insured and insuring obligations may create the following rights
and obligations for the bond insurer: [0440] At step 2016, an
obligation on the part of the bond insurer in the event that the
amounts available under the structured approach were inadequate to
cover payments due on insured obligations in the event of a bond
default. [0441] At step 2018, a right on the part of the bond
insurer in the event of a default on included credits in it its
portfolio to receive amounts otherwise payable on insuring
obligations. Thus portions of the bond insurer's cash capital
analogous to 2nd through 4th loss insuring obligations may be
protected by the 1st loss insuring obligations under the structured
approach.
[0442] In this construct, the combining of bond insurers' cash
capital and capital representing bond debt service payable on
insuring obligations is analogous to combining SRFs which use the
Reserve model (cash capital) and the Cash Flow Model (equity
invested in loans).
[0443] Also, a portion of a bond insurer's capital might be used to
provide liquidity for the insuring obligations under the structured
approach (which may otherwise require additional cash capital)
without adversely affecting its timely availability to fund
defaults in the bond insurer's portfolio of credits. Thus, the
portfolio integration approach can enable bond insurers to earn an
additional return on otherwise idle capital.
[0444] At steps 2020-2022, the Insuring Owners may realize a
significant gain in market value upon the refunding of the related
Insured and Insuring Obligations since the yield on the
pre-refunded Insuring Obligations may be much higher than the
normal yield on pre-refunded bonds.
[0445] At step 2022, in further embodiments of the BECM system,
various options may be configured and/or modified using computer
implemented mechanisms. Call Provisions can be configured to: use
pro rata between insured and insuring bonds; structure at least the
insuring bonds as noncallable; permit the insured bonds to be
refunded, with the refunding bonds to benefit from the credit
enhancement provided by the insuring bonds.
[0446] In one embodiment, at step 2004, bond insurer ratings
criteria can be applied to the BECM structuring as follows. The
ratings for the components are not "municipal" ratings--e.g., are
instead analogous to corporate ratings; the required default
tolerance is 25% of the default tolerance for a municipal pool. The
ratings can be configured as "insured ratings" obtained for the
BECM Structure, which is designed to compete with bonds insurance
and does not look like a traditional municipal pool or a
traditional CDO structure. If the BECM structure's enhancement
starts with below investment grade borrowers (which may not be
insured by monoline insurers), the Company can seek AAA ratings
from rating agencies other than Fitch, Moody's and S&P, e.g.,
Duff & Phelps or AMBest. The Company can receive underlying
ratings from one or more of the traditional agencies to facilitate
(a) integration of the structure with existing insurer portfolios
and (b) eventual receipt of AAA ratings from at least one of the
traditional rating agencies.
[0447] At step 2004, in yet another embodiment, the ratings can be
configured to incorporate: [0448] Bond ratings [0449] Structure
ratings (traditional CDO where the structure doesn't secure the
higher rated bonds) [0450] Structure ratings where the structure
secures the insured bonds [0451] Underlying Ratings [0452]
Structure Rating--the rating impact of the contribution of
particular Insuring Obligations to the AAA rating of the Insuring
Obligations [0453] Structure Enhanced Rating--the rating produced
by the combination of the credit enhancement provided to a
particular Insuring Obligation by the lower loss position Insuring
Obligations and the credit enhancement provided by that particular
Insuring Obligation both to higher loss position Insuring
Obligations and the Insuring Obligation.
[0454] FIG. 21A shows a process for managing the operations of the
Company for minimizing a risk as to a default on payments
associated with an investment. At step 2102, operations of the
computer system of the Company are established to manage the
activities of various components of the BECM. In one embodiment,
the Company's computer system can be programmed to direct the
various activities of the Insuring Trust, subject to the terms
thereof, for the benefit of: [0455] Insured Bonds--beneficiaries of
the right to be paid from Additional Liquidity Instruments,
regulatory capital, and Insuring Bond Payments, [0456] Liquidity
providers--beneficiaries of the right to be reimbursed from
regulatory capital and Insuring Bond Payments, [0457] Insuring
Certificates--Beneficiaries of the right to receive pass through
payments of principal, interest, and other portion of the Insuring
Certificate Payments, subject to the right and obligation of the
Insuring Trust to intercept such amounts as needed to fund insured
defaults, [0458] Regulatory capital--beneficiaries of the right to
be reimbursed from Insuring Bond Payments, and [0459] The
Company--recipient of the upfront premium and a portion of the
issuer's coupon/premium payments to pay operating expenses and to
provide a ROE on regulatory capital and infrastructure capital,
with the balance thereof to represent net income.
[0460] At step 2103, the capital structure for an insurer
performing the BECM methodology is established. Briefly, regulatory
capital is allocated, an investment criteria for the capital is
selected, additional liquidity sources are determined, and the
capital structure of pledged Insuring Bonds are determined. The
operations of step 2103 are described in more detail in conjunction
with the process of FIG. 22A to 22B.
[0461] At step 2104, underwriting determinations are performed. The
Company's computer system controls underwriting decisions, subject
to parameterized requirements, as to which issues to insure and
determinations regarding the characteristics of Insuring Bonds
deposited into the Insuring Trust, in each case with the parameters
configured for: [0462] Maintaining the creditworthiness of BECM's
insured credit, and [0463] Establishing and maintaining a market
identity and trading levels truly consistent with AAA rating.
[0464] At step 2106, the company's computer system can programmed
in computer memory with conditions of when payments should be
intercepted. Company mandated procedures, as recorded in computer
readable media, and used in determining computer processes
described herein, can direct the trustee to intercept payments or
automatically intercept payments on Insuring Certificates as
required to fund insured defaults.
[0465] At step 2108, the Company's computer system can be
configured to integrate the BECM system into a traditional monoline
structure. One embodiment of the operations of step 2108 are
described in more detail in conjunction with FIG. 21B. In one
embodiment, this step may be optional and not performed. In one
embodiment, monoline based operations are performed. The Company's
computer system can also optionally perform other functions that
are typical of a monoline insurer such as: [0466] Marketing BECM's
credit strength to municipal issuers and bond investors, [0467]
Credit analysis of insurance candidates, and [0468] Surveillance of
the credits in BECM portfolio.
[0469] In yet another embodiment, at step 2108, the integration of
the BECM structure with monoline insurers' portfolios is a
potential response in the event that the rating agencies resist
applying bond insurer rating criteria to the Structure.
[0470] One approach may be to have a monoline insurer with the same
target rating as the insured or insuring Structure subclass insure
that subclass. There may be no capital impact on such monoline
insurers since the BECM Structure more that meets the rating agency
default tolerance requirements. However the use of monoline
insurance may address any rating agency objections that may be
applied to the BECM Structure alone.
[0471] In yet another embodiment, another approach may to be to
have a single monoline insurer credit enhance each (at least all
subclass with the same or a higher target rating than the rating of
the monoline insurer) of the BECM Structure insured and insuring
subclass. Since the structure independently meets the default
tolerance requirements for the target rating for each subclass, the
monoline insurance commitment is really required to address rating
concerns with diversification and commitment.
[0472] In yet another embodiment, at step 2108, an alternative
approach to integrating bond insurance with the BECM Structure may
be to combine the credits under the BECM Structure with the
portfolio or portfolios of one or more existing bond insurers
(and/or reinsurers) with the traditional bond insurers bearing the
same responsibilities with respect to their existing portfolios of
insured credits as the holders of Insuring Obligations may bear
with respect to Insured Obligations under the Structure. Under this
approach the Insuring Obligations may in effect cross-collateralize
the insured bonds in the existing portfolio(s) and the Insured
Obligations under the structure may be cross-collateralized by the
bond insurer(s) capital. The bond insurer(s) may in effect play the
role of non-related Insuring Obligors, but certain portions of the
bond insurer's portfolio might be in a Loss Category Subclass that
is related to the defaulting bond. However, the bond insurers may
fund any payments owed by them with cash capital rather than
through the diversion of payments due on Insuring Obligations. The
objective may continue to be to impose any actual loss up to the
amount of the capital requirement for such credit under the BECM
Structure on the related Insuring Obligor Any loss beyond such
amount may be imposed on the appropriate Loss Category and Loss
Position Subclasses, including both Insuring Obligations under the
BECM Structure and bond insurer capital allocated to such credit
and subclasses
[0473] Integrating insurer or reinsurer portfolios with the
portfolio of a structured credit enhancement product can comprise
integration of insurer/reinsurer portfolios with the portfolio
under the BECM Structure.
[0474] This approach can eliminate issues with regard to ramping up
the BECM Structure since diversity may be achieved immediately and
individual credits under the BECM Structure can easily be added to
the combined portfolio. It may even be possible easily to add bonds
in the secondary market to the Structure, including credits for
which bond insurance/credit enhancement may not otherwise be
available. The Insuring Obligations can either be insured by the
bond insurer or not.
[0475] This approach may enable bond insurers to earn fees from
insuring bonds for which they may not directly provide the risk
capital. This result may be facilitated by the use of "real"
subordination of the Insuring Obligations as discussed above and by
allocating losses first to any related Loss Category Subclass.
[0476] In yet another embodiment, even if the agencies refuse to
apply the bond insurer rating criteria, the same result can be
achieved indirectly (at least for tranches that meet the AAA, AA,
and A rating standards for which rating levels, traditional
monoline bond insurers currently exist) by integrating the relevant
tranche of the BECM Structure into the appropriate bond insurer's
capital structure. The integration of the BECM Structure with an
insurer's capital structure can be accomplished by the use of both
options.
[0477] In one embodiment, the Company's computer system can
configure the insurer components in each rating category insure
only those bonds in the tranche of the BECM Structure with the same
target rating. In the case of insuring tranches, the insurance
applies to the Insuring Obligation related to each bond within the
tranche. So, in performing any default tolerance analysis of the
insurer's portfolio, the BECM Structure will meet all capital
requirements (based on the underlying bond rating) that are
necessary to achieve the insurer's target rating, without requiring
any other source of capital. In one embodiment, the BECM Structure
represents soft capital, which is limited to 25% of an insurer's
capital structure. But, the better answer is that coverage based
capital (which the structure provides in a transparent way) is not
soft. Even in the more rigorously rated municipal rating sector, no
distinction is made between coverage based and cash based default
protection. At every rating level, the source of capital/default
tolerance is the coverage provided by the lower-rated structure
tranches.
[0478] This configuration may be sufficient and addresses concerns
that could be raised about the BECM Structure viewed in isolation:
(a) Portfolio diversification; (b) Institutional commitment; (c)
Liquidity.
[0479] In this embodiment, the capital within the BECM Structure
may not be available to support defaults that occur within the
non-Structure portion of the Insurer's portfolio. But, the insurers
each achieve their target ratings, e.g., AAA. In one embodiment,
the BECM Structure is excluded from the analysis and also pass the
same test if the BECM Structure is included. Also, the BECM
Structure viewed in isolation can sustain a longer duration default
than required for the insurers target ratings.
[0480] In one embodiment, the Company's computer system can
configure to have a single insurer, e.g., an A rating insurer,
insure the A, AA, and AAA Structure subclasses. Note that the
requisite default tolerance is already achieved by the BECM
Structure itself. The monoline insurance commitment provides
liquidity, additional diversity, and addresses the rating agency
concern with institutional commitment.
[0481] In other embodiments, the Company's computer system can be
configured to cross collateralize the insurers non-structure
commitments with the cash flows of the portion of the structure
that is insured by the respective insurer (i.e., the portion which
independently meets the same rating criteria as are applicable to
the insurer's non-structure portfolio).
[0482] Processing then continues to other steps.
[0483] FIG. 21B shows a process for integrating the operations of
the BECM system with a traditional monoline system (the "Integrated
Structure"). Under the integrated approach, the insured bonds 1209
under the Integrated Structure can be enhanced by the monoline
insurer and both the cash capital of the insurer and the insuring
bonds 1210 under the Integrated Structure are available to offset
defaults with respect to either set of insured bonds 1209.
[0484] In this embodiment, insuring bonds 1210 are not a debt of
the monoline insurer or soft capital. The Integrated Structure is
most similar to collateralized trust funds used as a means to
enhance reinsurance. Insuring bonds 1210 are assets that are set
aside and legally pledged (not a contractual promise to provide
support) to meet the insurer's obligations. In this embodiment,
insuring bonds 1210 are akin to the insurer taking cash capital and
investing it in a municipal portfolio, for example. That would
ordinarily be inefficient, versus investing in Treasuries, because
the claims-paying impact of the municipal portfolio would have to
be discounted to reflect potential defaults. Given that under the
Integrated Structure, the credits in the insuring municipal
portfolio can be the same as those in the insured liability
portfolio, there may no different default assumptions in connection
with the asset portfolio than in connection with the liability
portfolio. Under the Integrated Structure, it is efficient to have
the insuring assets invested in a municipal portfolio (even taking
account of the impact of assumed defaults). Also, the use of a
portfolio of insuring tranches of municipal issues on the asset
side, results in superior claims paying ability to the claims
paying ability achieve by using cash under the conventional
approach.
[0485] The portfolio and capital of the monoline insurer, viewed
separately, can achieve AAA ratings. When the insurer's liability
portfolio and capital are integrated with the insured bonds and
capital (insuring bonds) under the Integrated Structure, the
integrated entity also would meet the monoline AAA ratings
criteria. A portion of the monoline insurer's cash capital meets
its statutory capital requirement. Assuming that the statutory
requirement must be met with cash, the statutory capital structure
for insured bonds under the Integrated Structure can be met with
the insurer's cash capital that is above its existing statutory
requirement.
[0486] A tangible transformation and result of the integrated
structure is to distribute credit risk so that the aggregate risk
to each insuring bondholder resembles as closely as possible the
credit risk the bondholder would assume by purchasing its
particular underlying bond. Exposure to certain risks in the
monoline insurer's portfolio can be very remote from the
perspective of the insuring bondholders, e.g., CDO exposure.
[0487] Referring to FIG. 21B, the insurer 2124's liability
portfolio can be segmented into (I) a portion for which the
Integrated Structure capital (intercepted insuring bond debt
service) is the last capital applied (the "remote risk portfolio"
2126) and (II) a portion in which the insuring bonds are more
directly exposed to the insured risk of the monoline (the "primary
risk portfolio" 2128). With respect to credits in the remote risk
portfolio, the insuring bonds 1210's exposure is to a AAA monoline
credit 2122 in that the monoline is rated AAA without the
Integrated Structure and the insuring bonds 1210 would be the last
capital applied to cure a default in the remote risk portfolio.
Similarly, with respect to defaults within the Integrated Structure
and the primary risk portfolio 2128, the allocated capital,
including the insuring bonds 1210, can be required to be exhausted
prior to touching capital associated with the remote risk portfolio
2126.
[0488] The size, diversity and capital associated with the primary
risk portfolio 1218 can be such that it, together with the
Integrated Structure insured bonds 1209 and insuring bonds 1210,
independently meets the requirements for a AAA monoline rating.
This is not necessary for the purpose of the AAA monoline rating,
but may be needed to permit distinct ratings to be established for
different subclasses of the insuring bonds as described below.
[0489] The subdivision of the insurer and structure capital into
different classes can allow the cost of capital (at least within
the Integrated Structure) to be more efficiently priced. The
capital allocated to the primary risk portfolio and the insuring
bonds can be segmented into subclasses that are applied to cure
defaults in a predetermined order. The subclasses could be
identified by their loss position, e.g., the subclass of capital
with the 1st loss position would be tapped to cure, a default
before any capital belonging to a subclass with a higher loss
position would be utilized. Each subclass can consist of similar
proportions of cash equity and insuring bonds. The creation of the
subclasses may allow different ratings to be assigned to the
insuring bonds within the various subclasses based on their loss
position, which determines the degree of risk that such subclass
may be impacted by an insured default.
[0490] Each such subclass ("loss position" or "LP" subclass) can be
sized so that it, together with the lower subclasses contains
sufficient capital to meet the requirements to enhance the insured
bonds within the primary risk portfolio and the Integrated
Structure (collectively the "Insured Bonds") to a particular rating
level.
[0491] The criteria for the ratings analysis can be the rating
agency criteria for monoline insurers of various target ratings.
However, it may not be necessary to get ratings on the subclasses
of insuring bonds from all three rating agencies. The subclasses
can include: [0492] 4th LP subclass--sized to support AAA Insured
Bond ratings [0493] 3rd LP subclass--sized to support AA Insured
Bond ratings [0494] 2nd LP subclass--sized to support A Insured
Bond ratings [0495] 1st LP subclass (senior tranche)--sized to
support BBB Insured Bond ratings [0496] 1st LP subclass (junior
tranche)--sized to support BB Insured Bond ratings.
[0497] With respect to the 1st through 3rd LP subclasses, the size,
diversity, and credit quality of the insured bond portfolio, the
business strategy for acquiring additional business, and the access
to capital are significantly superior to those of a traditional
non-AAA monoline insurer. Currently, the business strategy for a
non-AAA monoline insurer must inherently rely on insuring more
risky credits that no AAA monoline will insure. Using the
Integrated Structure, however, the fundamental characteristics of
even the BB LP subclass are the same as for a traditional AAA
monoline.
[0498] In analyzing the required size of the insuring subclasses
relating to a particular credit, an issue arises relating to the
capital charge (i.e., assumed defaults) for a LP subclass when the
insured bond has a higher rating than the target rating of the
subclass. Under the traditional rating approach to pooled municipal
credits, if the target rating of a pool were an A rating, no
defaults would be assumed for bonds rated at A or higher. However,
a capital charge may be assessed, even if the insured bond were
more highly rated than the insuring entity. For example, if the
bond is rated one category higher than the monoline, the capital
charge can be 20% of the normal capital charge and the charge can
be 25% of the normal charge if the bond and insurer have the same
rating.
[0499] The credit quality of each LP subclass (its "structure
rating") is determined, not by the rating level that it supports
for the insured bonds 1209, but by the ratings that would be
supported for the insured bonds 1209 solely by the lower
subclasses. For example, the 4th LP subclass is exposed to the risk
that the 3rd and lower subclasses may not be sufficient to cure all
insured defaults, which is a AA risk. Under this approach, each
insuring bond 1210 can have two ratings: the underlying rating of
the bond and the Integrated Structure rating of the LP subclass of
which such bond is a part.
[0500] This presence of distinct ratings is different from a
traditional CDO approach under which the insuring subclasses each
enhance the higher insuring subclasses, and so there is one rating,
analogous to the Integrated Structure rating. That traditional
approach might be implemented as part of the Integrated Structure
at the point at which the size of the Integrated Structure
portfolio is sufficient to support ratings on the higher LP
subclasses without being integrated with the cash equity associated
with the cash portfolio. The reason that it can work in the
Integrated Structure portfolio is that debt service on insuring
bonds that is not needed to fund defaults on Insured Bonds gets
paid to the insuring bondholder and does not remain as a part of
the capital under the Integrated Structure. So, any amounts that
are not needed to fund defaults on insured bonds 1209 could be used
to fund defaults that affect insuring bonds without any adverse
affect on the insured bonds 1209.
[0501] An advantage of having distinct underlying and structure
ratings is that the insuring bonds 1210 for each bond issue (even
those that are part of the 4th LP subclass) can take the first loss
if that bond issue defaults, even before the any bonds in the 1st
loss LP subclass that are part of non-defaulting bond issues. This
reduces the possibility that insuring bondholders associated with a
non-defaulting issue will bear the burden of funding a default on
another bond issue.
[0502] Under the S&P monoline rating criteria, the assumed
defaults for a portfolio of insured credits (which must be covered
by the monoline insurer's capital) are based on the credit quality
and credit type of the underlying bonds held in the portfolio (See
FIG. 26). The assumed defaults have the same starting point,
regardless of the target rating of the monoline insurer. However,
if the insurer's target rating is below the underlying rating of an
insured bond, a discount is applied to the normal assumed defaults.
As a result of this discount, for any insured bond, the LP subclass
with the largest capital requirement will be the subclass whose
structure rating is the same as the underlying bond rating. The LP
subclass with the same structure rating, together with the lower LP
subclasses, are sized to support the next higher rating for the
insured bonds 1209, i.e., sized to cover the assumed defaults
without any discount.
[0503] Different minimum coverages of the applicable assumed
defaults by the insurer's capital are required, depending on the
monoline insurer's target rating (or in our case, the target
structure rating of the LP subclass), e.g., 1.25x for a AAA rating,
1.0x for a AA rating, 0.80x for an A rating. In practice, the
monoline insurers have capital in excess of the minimum
requirement.
[0504] Since all of the Insured Bonds under the Integrated
Structure and in the primary risk portfolio are likely to be
investment grade, the practical risk to the holders of the below
investment-grade insuring LP subclasses can be minimal.
[0505] Within each LP subclass, credits could be further grouped
into subclasses based on credit types ("loss category" or "LC"
subclasses). The loss categories might be based on the various
categories of credits for which the rating agencies have
established different assumed defaults (i.e., capital charges)
based on their perceptions of the degree of risk associated [0506]
General obligation bonds [0507] States; Cities and counties; and
Schools [0508] Tax-supported debt [0509] Sales, gas, excise, gas,
and vehicle registration: Local or Statewide--Health care [0510]
Utilities [0511] Special revenue: Airports, Ports, Parking, Toll
roads [0512] Housing.
[0513] A default of an Insured Bond within a particular loss
category subclass could be allocated, within each LP subclass,
first to the cash capital and insuring bonds within the same loss
category and then, if needed to the capital of different loss
category subclasses. This would have little to no rating impact,
but would reduce the risk that an insuring bondholder could be
affected by a default on a riskier credit-type. An example of
different loss positions and categories and the segmented between
(1) the monoline's portfolio and cash capital and (2) the insuring
bonds 1210 are shown in TABLE 5 below. In some embodiments, local
sales tax may be split between the monoline's portfolio and cash
capital and the insuring bonds.
TABLE-US-00005 TABLE 5 Monoline Cash Capital Insuring Bonds 4th
Loss State GO City GO Local sales tax Airport 3rd Loss State GO
City GO Local sales tax Airport 2nd Loss State GO City GO Local
sales tax Airport 1st Loss (senior) State GO City GO Local sales
tax Airport 1st Loss (junior) State GO City GO Local sales tax
Airport
[0514] The segmentation of (A) the cash capital into the primary
and remote risk portfolios and of (B) the cash capital and insuring
bonds into the LP and LC subclasses may have little or no adverse
credit or other impact. The segmentation is used to determine the
order in which various portions of the capital structure are
applied to cure defaults. The segmentation is sued further for:
[0515] In the case of the remote risk portfolio, mitigating market
concerns about exposure of the insuring bonds to riskier credit
types. [0516] In the case of the LP subclasses, enabling the
various LP subclasses to meet the monoline rating criteria for
specific target ratings. [0517] In the case of the LC subclasses,
allocating risk of various credit types first to insuring bonds of
the same credit types. All of the cash and insuring bond capital
would be available as needed to cure any insured defaults.
[0518] The various types of segmentation can facilitate efficient
pricing of the insuring bonds versus pricing all insuring bonds
based on the lowest common denominator--the risk that single
default may occur within a strong credit type or that defaults may
occur within a riskier credit type. The result is that the insuring
bondholders can provide marketing enhancement and need not take any
material credit risk different than the risk of owning their
underlying bonds.
[0519] A (small) amount of cash equity 2130 may also be required
under the Integrated Structure. The reason for the cash equity 2130
would be to provide the required capital at the final maturity of
the insuring bonds. If all of the bond issues in the Integrated
Structure portfolio matured on the same date, it would be possible
to intercept insuring bond 1210 debt service to meet any insured
defaults on that date. However, the bonds insured using the
Integrated Structure will mature on many different dates and will
have many different payment dates.
[0520] Timing issues relating to having different payment dates
within each year can be addressed by the use of liquidity
facilities. However, cash equity 2130 is needed to address the
issues at final maturity given the different payment dates. Even if
all of the insured bonds matured in the same year, it might be
possible that the bonds that defaulted would be the last bonds to
mature. In that case, (absent some ability to retain insuring bond
debt service in the final year), cash would be needed to cover the
assumed defaults.
[0521] However, under S&P's monoline criteria, the assumed
defaults/capital charge in the year a bond issue matures is 25% of
the normal requirement. So, the assumed defaults to be covered with
cash equity is equal 1.25 times 25% of the amount of assumed
(annual) defaults for the issue. Since the assumed defaults for an
issue equal 25% of the total monoline capital charge (given the
assumption of a 4 year default), the minimum cash equity
requirement under the Integrated Structure is 25% of 25% (i.e.,
6.25%) of the cash equity requirement under a conventional monoline
capital structure, assuming the same target coverage of assumed
defaults (e.g., 1.50 times). Under the Integrated Structure, fewer
bonds are insured that would be insured under a conventional
approach (e.g., 95 to 97%). So, the cash equity 2130 under the
Integrated Structure will be closer to 6% of what it would have
been if the same bond issue had been insured by a conventional
monoline insurer.
[0522] In one embodiment, the cash equity 2130 can be sufficient if
it equals 1.25 times 25% (i.e., 31.25%) of the normal level of
assumed 1 year defaults. The cash capital 2130 would also be
available to meet the rating agency 4 year depression-scenario
stress test. Over 4 years, the Integrated Structure cash capital
2130 would be sufficient to cover at least a 7.81% of the assumed
annual defaults. If cash capital were funded at 1.50 times the
assumed defaults in the final year, it would cover 37.5% of the
normal level of assumed 1 year defaults and would be sufficient
over 4 years to cover 9.38% of the assumed annual defaults.
[0523] There is much less risk associated with the cash equity 2130
under the Integrated Structure than with the cash equity of a
conventionally structured monoline insurer. In the event of a
default, the cash equity 2130 would be used only after available
insuring bond 1210 debt service has been applied, and the cash
equity 2130 could be reimbursed by insuring bond 1210 debt service
when received. In essence, the cash equity 2130 under the
Integrated Structure is more akin to equity, except in the case of
a default at final maturity of the bond issue.
[0524] Also, there may be no need for cash equity for bond issues
which finally mature earlier that a substantial number of other
bond issues under the Integrated Structure. The ability to
intercept debt service on the later maturing bonds obviates the
need for cash equity on the earlier maturing bond issue.
Accordingly, over time, the aggregate amount of cash equity
required under the Integrated Structure can be substantially less
than 6.00% of the normal monoline cash equity requirement.
[0525] Rating agencies may take into account to the presence of
municipal risk in both the liability and asset portfolios of the
monoline insurer in determining credit ratings 2122 under the
Integrated Structure. The total amounts of assumed defaults for
which the combined portfolio and capital of the monoline and the
Integrated Structure will be stressed are known pursuant to the
monoline insurer rating criteria. For example, the assumed
defaults/capital charge for a BBB city GO issue is 13% of total
debt service, representing 3.25% in annual defaults over 4 years
for insured bonds of that credit type and rating. In determining
its ratings, the rating agencies may determine how the aggregate
amount of assumed defaults will be allocated between the cash
portion of the portfolio and the Integrated Structure portion of
the portfolio.
[0526] The sizing of the insuring bonds can take account of both
the assumed defaults and a targeted coverage thereof, which will
exceed the coverage required for a AAA rating 2122. The minimum
coverage of assumed defaults for a AAA rating is 1.25 times. If,
for example, the targeted coverage is 1.50 times, for all BBB city
GO issues, the insuring bonds would need to be at least 4.88% of
the issue (or 5.12% of the insured bonds). Given that sizing, if
4.88% of such bonds default, the non-defaulting insuring bonds
would still provide the targeted 1.50 times coverage for 3.25% of
defaults of insured bonds. Stated more generally, even if defaults
of bonds under the Integrated Structure were to exceed the assumed
defaults by the targeted coverage amount, the non-defaulting
insuring bonds will still be sufficient to provide the targeted
coverage of the assumed defaults.
[0527] There is little to no difference in the legal obligation of
the issuer to pay insured bonds 1209 and insuring bonds 1210. In
this embodiment, the insuring bonds 1210 are not subordinate to the
insured bonds. So the assumed defaults are identical for both
insured bonds 1209 and insuring bonds 1210.
[0528] The following scenarios help to further illuminate the
benefits and potential issues relating to using municipal insuring
bonds within the asset portfolio of a monoline insurer using the
Integrated Structure.
[0529] Scenario I:
[0530] Suppose we compare the default tolerance of two alternative
capital structures for a mature monoline insurer: [0531] In the
first alternative, the capital structure consists entirely of cash
equity invested in treasuries ("cash" approach). [0532] In the
second alternative, the capital set aside for each issue of insured
bonds consists of insuring bonds together with the (small) amount
of cash equity discussed above (Integrated Structure approach).
[0533] Assume that under each alternative, the capital is funded at
a level sufficient to cover 1.50 times the level of assumed 4-year
portfolio defaults.
[0534] (A) First, assume that the actual defaults over a 4 year
period equal 1.50 times the assumed level.
[0535] Under the cash approach, at the end of the 4-year period,
all of the insured defaults have been funded, but none of the
original capital is left. Under the insuring bond approach, (1) all
of the insured defaults have also been funded; (2) the insuring
bonds on the issues that never defaulted continue to provide
capital to meet future needs; and (3) the previously defaulted
insuring bonds are once again being paid. The available capital
continues to be sufficient to cover future defaults in an amount
equal to 1.50 times the assumed level. Under the above set of
assumptions, the insuring bond approach provides a superior
result.
[0536] (B) Second, assume that defaults equal 1.0 times the assumed
level.
[0537] Under the cash approach, at the end of the 4-year period,
all of the insured defaults have been funded, but the remaining
capital equals 0.5 times the original assumed defaults--below the
coverage level that is extrapolated for a BB monoline insurer.
Capital can be increased to 1.25 times the assumed defaults to meet
the AAA rating requirements. Under the insuring bond approach the
result would be the same as in scenario 1(A) except the fewer
defaults would have needed be covered.
[0538] Note that payments on insuring bonds that are not needed to
cover insured defaults go to the insuring bondholder (i.e., do not
remain as a part of the Integrated Structure capital). Accordingly,
the fact that insuring bond debt service is used to fund defaults
has little to no impact on the future ability of the Integrated
Structure to withstand defaults.
[0539] Scenario 2:
[0540] Suppose the assumptions are the same as in Scenario 1
(including target coverage of 1.50 times), but we examine the
impact of the defaults if a monoline insurer's Insured Bond
portfolio is secured by a capital structure consisting in part of
cash equity and in part of insuring bonds. Given the use of loss
position and loss category subclasses, regardless of which portion
of the portfolio a default occurs in, the capital used to pay the
insured bonds could be derived either from cash capital or from
insuring bonds. However, for simplicity this discussion will assume
that if a default occurs in either the cash or insuring bond
portion of the portfolio of insured credits, the capital associated
with that portion of the portfolio is expended prior to using
capital associated with the other portion.
[0541] (A) Assume that the actual defaults are allocated pro-rata
between the portion of the Insured Bond portfolio for which the
capital is cash capital and the portion that uses insuring bonds.
As in scenario 1, the insuring bond approach will produce a
superior result. In fact, assume that cash and insuring bond
portions are equal and capital equals 1.50 times the assumed
defaults. If actual defaults over 4 years equal the assumed level,
at the end of that period, the remaining cash capital would cover
0.5 times the assumed defaults for that portion and the insuring
bond capital would cover 1.50 times the assumed defaults for its
portion of the portfolio. The combined capital would still meet the
AA monoline rating requirement at 1.0 times the original assumed
defaults and would have to be increased by only 0.25 times assumed
defaults to meet the AAA requirement.
[0542] (B) Suppose that the insured bonds are divided equally
between cash equity and insuring bond capital. What would the
impact be if the defaults equal the assumed level for the entire
portfolio, but they are disproportionately allocated either to the
cash or insuring bond portion? For simplicity and clarity, assume
that the combined cash and structure portfolio is comprised of bond
issues for which the assumed annual defaults/capital charge equal
3.25%, such as city GO bonds.
[0543] I. If all of the assumed defaults are in the cash portfolio,
the defaults allocated to it equal 2.0 times the level assumed for
it, whereas, the cash equity will accommodate defaults equal to 1.5
times the assumed level. At the end of 4 years, all of the insured
obligations would have been funded, but all of the cash capital
would have been expended. The insuring bonds would be sufficient to
fund 1.50 times the level assumed for the insuring bond portion,
assuming all of such defaults occur within such portion. To the
extent that such defaults are spread across the entire portfolio, a
larger amount of defaults could be funded because fewer insuring
bonds would be in default.
[0544] II. If all of the assumed defaults are in the Integrated
Structure portfolio, the defaults allocated to it equal 2.0 times
the level assumed for it under the rating criteria. Accordingly,
6.50% of the bond issues in the Integrated Structure portion of the
portfolio would be in default. The insured bonds in Structure
portion of the monoline's portfolio represent 95.1% of the total of
insured and insuring bonds under the Integrated Structure. The
amount of defaulted insured bonds under the Integrated Structure
equals 6.18% of the total insured and insuring bonds, 95.12% times
6.50%. The non-defaulting insuring bonds would equal 4.56% of the
total of insured and insuring bonds, 4.88% times (1 minus 6.50%).
The non-defaulting insuring bonds are sufficient to cover 1.40
times the 3.25% defaults assumed under the rating criteria for the
Integrated Structure portion of the portfolio. In addition, the
cash equity under the Integrated Structure would be sufficient to
cover 0.09 times such assumed defaults. The remaining defaults,
0.51 times the level assumed, would be covered by the capital
allocable to the cash portion of the portfolio. The cash capital
would equal 1.50 times the assumed defaults (the assume defaults
are the same for each half of the portfolio). So, at the end of the
4 year period, the remaining cash capital would be sufficient at
least to cover 0.99 times the assumed defaults for each half of the
portfolio and the insuring bonds would be sufficient to cover 1.50
times such defaults. In aggregate, the monoline insurer's capital
would be sufficient to cover 124.5 times the defaults assumed for
the total portfolio, the average of 0.99 and 1.50 times. To meet
the AAA requirement, additional cash capital would be needed to
fund the 0.5 times coverage shortfall and to replace the cash
capital under the Integrated Structure. The result produced by the
capital structure combining cash and insuring bonds is superior to
the result achieved with a cash only approach.
[0545] In practice, the targeted coverage level under the
Integrated Structure may be higher. A targeted coverage of 1.75
times, for example, might used to size the insuring bonds. In the
example above, the non-defaulting insuring bonds would cover 1.63
times the originally assumed defaults. Only 0.37 times the assumed
defaults would be funded from cash capital.
[0546] III. Suppose the facts are the same as in scenario II except
that (a) the Integrated Structure portion of the combined cash and
Structure portfolio exactly equals the amount of the assumed
defaults under the rating criteria for the combined portfolio and
(b) all of the defaults occur in the Integrated Structure
portfolio. In that case, the assumed defaults equal 3.25% of the
combined portfolio, and the insured bonds under the Integrated
Structure equal 3.25% of the combined portfolio. The cash portion
of the insured portfolio equals 96.75% of the combined portfolio.
The cash capital for that portion is sufficient at least to fund a
3.25% annual 4 year default on 96.75% of the portfolio with
coverage of 1.50 times, i.e., sufficient to fund a 4.73% annual
default of the entire portfolio. Since all of the insuring bonds
are in default, the cash capital would be used to fund the
defaults. (In this case, the cash capital under the Integrated
Structure would not be material, less that 1% of the capital under
the cash portfolio.) At the end of the 4 year period, cash capital
remaining would be sufficient to fund a 4 year default equal to
1.47% of the combined insured bond portfolio, which represents 0.45
times coverage of the original assumed defaults. Also, the insuring
bonds would no longer be in default and would be sufficient to fund
defaults equal to 0.16% (1.50 times 3.25% on 3.25%) of the total
portfolio. Together, the cash capital and insuring bonds would
cover a default of 1.63% of the combined portfolio, representing
0.50 times coverage of the original assumed defaults. This is the
same result as if the capital structure for the insured portfolio
consisted entirely of cash. Also, if the coverage of assumed
defaults in the cash portfolio is at least 1.3 times, the cash
capital will meet the 1.25 times AAA rating requirements for the
entire portfolio, even if the allocation of assumed defaults is
such that all of the bonds in the Integrated Structure portfolio
are assumed to be in default.
[0547] The best case is that the rating agencies view that the
assumed defaults as allocable pro rata between the cash and
Structure portions of combined portfolio from the outset. The worst
case should be that the portion of the assumed defaults that are
allocable to the Integrated Structure is determined based on the
standards for municipal pools applied to State Revolving Funds
("SRFs"), with the remaining amount of assumed defaults allocated
to the cash portion of the portfolio. Under the SRF standards, all
of the insuring bonds might be assumed to default until the number
of bonds issued under the Integrated Structure equals at least 10.
However, this is less onerous than the facts assumed in Scenario
2(B)(III) because the Integrated Structure portion of the portfolio
will initially be substantially less than the total amount of
assumed defaults. So, the amount by which the targeted coverage for
the cash portfolio would need to exceed 1.25 times would be less
than the 0.05 times indicated in that scenario to meet the AAA
requirement in spite of the allocation of assumed defaults. The
portion of the assumed default allocated to the Integrated
Structure portfolio can be reduced over time as the number of
credits in the Integrated Structure portfolio increases. In fact,
as the number of credits insured within the Integrated Structure
portfolio increases, the allocation of assumed defaults between the
cash and Structure portfolios should approach pro rata.
[0548] In any event, the assumed defaults that allocated to the
Integrated Structure portfolio may not exceed the assumed defaults
on the entire portfolio for the particular credit type and rating
category. If the assumed defaults on the Integrated Structure
portfolio equal 20% of the total assumed defaults for BBB city GO
bonds, then at most 5 times the normal assumed defaults may be
allocated to the Integrated Structure.
[0549] Given insuring bonds structured to cover at least equal 1.50
times the normal assumed defaults, even if the assumed defaults
allocated to the Integrated Structure portion are several times the
overall level of assumed defaults, the non-default insuring bonds
will still be sufficient to cover more than the minimum 1.25 times
of the overall level of assumed defaults necessary to support the
AAA rating without requiring additional cash capital. For example,
in our example above, even if the defaults allocated to the
Integrated Structure portion equal 5 times the overall level of
assumed defaults, the insuring bonds would still be sufficient to
meet the 1.25 minimum coverage requirement for the level of
defaults assumed on the entire portfolio. Given a 1.75 times target
coverage, the allocated defaults could be more than 8.5 times the
overall assumed level and the non-defaulting insuring bonds would
still provide 1.25 times coverage of the overall assumed defaults.
In each case, capital allocated to the cash portfolio would be
needed to fund a portion of the defaults disproportionately
allocated to the Integrated Structure portfolio. But,
non-defaulting insuring bonds would meet capital requirement
necessary to support the AAA rating.
[0550] Based on the SRF criteria, the assumed defaults allocated to
the Integrated Structure portfolio for a BBB city GO might
initially be 40%, 12 times the amount of the assumed defaults under
the monoline criteria applicable to the combined portfolio. One
solution would be to rely on the excess cash capital in the
monoline portfolio until the size of the insuring bond portfolio is
large enough to get more moderate allocation of the defaults
assumed for the combined portfolio. Another alternative is to
increase the size of the insuring bonds such that even taking
account of a 40% default in the Integrated Structure portfolio, the
non-defaulting insuring bonds would be sufficient to provide the
minimum 1.25 times coverage. In our BBB city GO example above, if
the insuring bonds were structure to provide 2.25 times coverage of
the assumed defaults, the non-defaulting insuring bonds would meet
the 1.25 times coverage requirement, even given a 40% default. The
insuring bonds would be 7.32%, rather than 4.88% of the issue.
However, if the Integrated Structure cash equity is also used,
insuring bonds sized to provide 2 times coverage of assumed
defaults would be sufficient that the non-defaulting insuring bonds
and cash would provide the required 1.25 times coverage. Note that
the cash equity does not have to be grossed up in order to address
a disproportional allocation of defaults to the Integrated
Structure portfolio.
[0551] Under the SRF criteria, for a pool of 9 or fewer credits,
the assumed defaults would be 100%. For a pool of 10 to 19 credits,
the assumed defaults for BBB credits (ignoring concentration
issues) would be 40%. For a pool of 20 to 49 credits, the assumed
defaults (ignoring concentration issues) for BBB credits would be
25%. For a pool of more than 50 credits, the assumed defaults
(ignoring concentration issues) for BBB credits would be 18%.
[0552] In our BBB city GO example above, if the Integrated
Structure portfolio is between 20 and 50 credits, the annual
defaults allocated to the Integrated Structure portfolio (absent
concentration issues) would be 18%, as compared to 3.25% assumed
defaults for the portfolio as a whole. Insuring Bonds structured to
provide 1.70 times coverage of assumed defaults would be sufficient
that, even given 25% defaults allocated to Structure portfolio,
non-defaulting insuring bonds would provide 1.25 times coverage of
the overall level of assumed defaults. If the Integrated Structure
cash equity were also considered, Insuring Bonds structured to
provide 1.60 times coverage would be sufficient.
[0553] It can be expected that concentration issues will be
evaluated separately based solely on the Integrated Structure
portfolio. However, the total amount of assumed defaults should
still be limited based on the aggregate cash and Integrated
Structure portfolios.
[0554] FIG. 22A shows a process for managing capital structures for
the insurer of debt (e.g., bonds). In one embodiment, a computer
system can be programmed to manage the BECM such that the BECM's
differentiating capital structure consists of (i) cash capital and
(ii) pledged bonds. BECM can meet all traditional requirements for
AAA monoline insurers including $200 million of hard, startup
capital. However, because of BECM's innovative approach, $200
million of startup capital can be the equivalent of a conventional
monoline insurer having more than $1 billion of startup
capital.
[0555] The committed capital can fall into two categories: [0556]
Regulatory Capital which are funds recorded in computer readable
media at least equal to the amount necessary to meet state
regulatory requirements and rating agency requirements--including
amounts necessary to meeting startup requirements for a new AAA
monoline insurer (e.g., $200 million of hard capital); and [0557]
Infrastructure Capital which are funds recorded in computer
readable media sufficient to pay initial expenses prior to
commencement of operations and during the first 24 months of
operations (e.g., estimated to be $20 million). BECM will also
incorporate additional sources of liquidity ("Additional Liquidity
Instruments").
[0558] Such Additional Liquidity Instruments may include letters of
credit, lines of credit and reinsurance contracts secured by the
Insuring Certificate Payments, all of which are recorded in
computer media. Amounts drawn on Additional Liquidity Instruments
will be reimbursed from Insuring Certificate Payments over the at
least one electronic exchange.
[0559] At step 2202, regulatory capital can be allocated.
Allocating can include allocating the regulatory capital in the
computer memory to an amount equal to at least a coverage factor
multiplied by an average annual depression scenario default
percentage for the investment. Several alternatives for determining
regulatory capital allocation are can be used, recorded, and
modeled in a computer system with respect to the entity holding the
regulatory capital. In one embodiment, the regulatory capital can
be deployed for an insurer performing the methodology of the BECM.
In one embodiment, a computer system can be programmed to manage
the BECM such that the BECM can deploy at least the same level of
upfront regulatory capital as a traditional AAA monoline insurer
(i.e., $200 million), while reducing, in one embodiment, a monoline
insurer's leverage ratio from 100 to 1 to less than 30 to 1 by
introducing "pledged bonds" into the capital structure. This
results in a more robust and resilient credit structure. Of equal
importance, BECM can increase the leverage of cash capital. As
tangible result and transformation, accounts of an insurer using
BECM software based methods, system, or apparatus may have
available additional funds that are not available to a monoline
based method, system, or apparatus.
[0560] For example, using a traditional monoline capital structure,
$200 million of regulatory capital supports approximately $21
billion of municipal bonds. Using BECM's technology, the same $200
million supports $125 billion of municipal bonds. Thus, the
invention enables the regulatory capital to support more than 5 to
approximately 6 times as much of the bonds. The invention can be
tailored to enable the regulatory capital to support from 2 to 3 to
as much as 10 times the amount of bonds supported by the
traditional monoline capital structure.
[0561] In one embodiment, the regulatory capital can be held by a
Special Purpose Company. Earnings on such capital are applied by
the Special Purpose Company to the ROE (return on equity) on
regulatory capital. Regulatory capital is allocated in a computer
system to each Insured Bond issue in an amount sufficient, together
with the Insuring Certificate Payments and Additional Liquidity
Instruments, to make timely payment of insured defaults under a
depression scenario. Both allocated and unallocated regulatory
capital are available in the computer system to fund insured
defaults. Regulatory capital can also be applied to reimburse over
the at least one electronic exchange any provider of liquidity to
the extent that reimbursement is not promptly made from Insuring
Certificate Payments. Initially, regulatory capital will be
allocated in a computer media to each Insured Bond issue in an
amount equal to the average annual depression scenario default for
the bond issue and credit category. The appropriate amount of
regulatory capital and other liquidity is reviewed on an ongoing
basis using user interface, algorithm determining sufficiency of
coverage for depression scenarios, or the like. To the extent that
regulatory capital is used directly or indirectly to fund an
insured default, such capital will be replenished from Insuring
Certificate Payments using a computer intercept components, such as
triggers in a database, stored procedure, electronic determination
of a need for replenishment, or the like.
[0562] Liquidity contributes to BECM's ability to guaranty the
timely payment of Insured Bonds' principal and interest payments.
For this purpose, liquid funds include moneys than can be
immediately accessed using a computer system and over the at least
one electronic exchange without the possibility of any material
loss.
[0563] The first source of liquidity configured in computer memory
to be used for the guaranty can be the regulatory
capital--initially $200 million. As bonds are insured, an amount of
regulatory capital equal to 1 times that average annual depression
scenario assumed default will move from unallocated and will become
allocated in a computer memory (e.g., a field in a database can tag
the funds as "allocated"). (By contrast, to provide 1.5 times
coverage of a four year depression scenario default, a
conventionally structured monoline would allocate 6 times the
average annual assumed default.) Once the initial regulatory
capital is fully allocated, additional regulatory capital will be
raised over the at least one electronic exchange to grow the
insured portfolio.
[0564] In yet another embodiment, at step 2202, the capital
structure of the BECM Structure can be configured differently from
the capital structure of municipal bond insurers. The bond
insurer's capital is primarily in the form of cash funded from
equity, with a portion provided through reinsurance. Presumptively,
the reinsurers have a similar need to fund their obligations with
cash. The capital provided by both the municipal bond insurer and
the reinsurer is risk capital funded from equity.
[0565] On the other hand, the risk capital in the BECM Structure is
provided by the Insuring Obligations. Unlike the capital provided
by bond insurers, which may be sufficient to cover the rating
agencies assumed (i.e., 4-year) default scenario, the capital
provided by the Insuring Bonds may be sufficient to fund a default
that continues for the life of an issue. (Of course, such a default
may be allocated to nonrelated Insuring Obligation).
[0566] A need for cash capital under the BECM Structure is to
provide liquidity (in the event that debt cannot be used) since it
can take up to a year to intercept sufficient payments due on
Insuring Obligations to make the payments due on Insuring
Obligations. To provide liquidity, 25% of the capital normally
provided by bond insurers (i.e., enough to cover the first year of
a 4 year default scenario) should be sufficient. In the SRF
context, S&P now assumes a 7 year default in which the amount
of defaulted bonds ramps up over time. Under that approach, cash
capital equal to 1/16th or 6.25% of the normal bond insurer
requirement should be sufficient.
[0567] If the payment dates of the underlying bonds are distributed
throughout the year, the need for liquidity can be significantly
reduced if the assumed defaults are assumed to be distributed
across the year. Even if the defaults are presumed to occur
simultaneously, the period during which any loan from cash capital
or other sources may remain outstanding can be reduced.
[0568] Accordingly, cash capital under the BECM Structure is more
akin to debt or preferred stock than to common equity. Accordingly,
the return required on any such capital can be lower. Also, there
is a strong argument for allowing a portion of such capital to
funded from letters or lines of credit or for relying, at least in
part, on the ability of the BECM Structure to borrow.
[0569] The exception is upon program termination. Cash capital used
as a result of any default occurring in the last year might be
wholly unreimbursed. However, S&P's capital charges (i.e., the
risk of default) decline as bonds near maturity. The calculated
capital charge for the last year is about 25% of the initial
capital charge. Two years before maturity, the capital charge is
40% and three years before maturity, the charge is 45% of the
initial capital charge. Given the 1.5 times coverage of assumed
defaults, cash capital used to fund a default in the third year
prior to final maturity may be fully recovered. The only cash
capital at risk is the larger of (i) 50% of the second to last
year's cash capital requirement and (ii) 100% of the last year's
capital requirement. Actually, coverage of assumed defaults will
grow dramatically over time if we do not reduce the amount of
Insuring Obligations as the capital charge declines. So the amount
of clause (i) should be reduced. Calculations indicate that
coverage will be well in excess of 2 times so that only a default
in the last year puts cash capital at risk. Thus, the real risk
capital should be viewed as 25% of the initial capital charge.
[0570] To provide a DSRF surety policy for a full year's reserve, a
bond insurer should have to increase its capital requirement by 25%
(i.e., be able to withstand a 5-year default rather than a 4-year
default). However, the BECM Structure can already withstand a
5-year default by diverting revenues from the Insuring Obligors for
an additional year. Accordingly, no additional cash capital should
be required to provide a DSRF surety under the BECM Structure. It
should only be necessary to confirm that under any realistic
scenario, any loss can still be imposed on the related Insuring
Obligations.
[0571] At step 2204, the investment criteria for the capital of the
insurer can be selected. Selecting can include selecting by the
computer system an investment criteria to invest the regulatory
capital to create an investment return. Regulatory Capital, whether
allocated as bonds are insured or whether not yet allocated, can be
selected to be invested over the at least one electronic exchange
in very short term investments, including investments providing
daily liquidity either in general or in the event of an insured
default. The selection can be algorithmic, based on a decision
tree, determined by human assistance, or the like. Using a computer
based trading systems such as those determining appropriate
securities matching appropriate criteria, the investment return
that are being targeted over time on Regulatory Capital is the
inflation rate, which can be achieved with investments providing
daily liquidity. In the event of an insured default, using the
automatic computer based triggers, regulatory capital will be
applied (in the absence of other immediate sources of liquidity) to
cure the default. Note that given the percentage of Insuring Bonds
that BECM incorporates (e.g., 3 times that annual assumed
defaults), even in the unlikely event that at any particular time
all Regulatory Capital were allocated (i.e., no unallocated
Regulatory Capital), Regulatory Capital is configured to be
expended using the computer system to fund Insured Bond defaults
and reimbursed from intercepted Insuring Certificate debt service
up to three times (3) within a single year. Without departing from
the scope of the invention, the factor can be increased to 4-5
times with appropriately sized initial regulatory capital.
[0572] At step 2206, additional liquidity sources can be
determined. Additional liquidity equal to 1 times the aggregate
average annual assumed default for the Insured Bond portfolio is
available over the at least one electronic exchange. This liquidity
level, together with the allocated Regulatory Capital, provides
access to immediate liquid funds at all times equal to half of the
defaults assumed to occur over a four year depression scenario.
Also, unallocated equity is an additional source of liquidity.
[0573] Additional liquidity may come from a variety of sources,
including: [0574] Lines of credit and letters of credit, [0575]
Reinsurance, [0576] Debt financings, including short term,
intermediate term, and long term financings, and [0577] Maintaining
a minimum balance of unallocated regulatory capital.
[0578] At step 2208, the capital structures of the pledged Insuring
Bonds can be determined. The process of determining can include
determining by the computer system a portion of the capital
structure for a pledged insuring investment that produces at least
a portion of the cash stream and securing a draw on sources of the
regulatory capital based on the portion of the cash stream. The
capital structure of the pledged Insuring Bonds, including sizing
of the pledged Insuring Bonds, obligations to pay funds from the
Insuring Bonds, or the like can be recorded in computer memory and
can cause a computer system to configure and use the Insuring Bonds
as described herein. In one embodiment, even if all cash funds
(regulatory capital and such additional liquidity) were expended to
cure insured defaults, the pledged Insuring Bonds are required to
be sized such that the cash funds would be covered 1.5 times by the
Insuring Certificate (which provides the pledged Insuring Bonds
debt service) that can be intercepted over the at least one
electronic exchange within each year to fund insured defaults. In
one embodiment, draws on sources of additional liquidity are
secured based on the Insuring Trust's intercepted debt service. In
each case, any draws on such sources of additional liquidity can be
secured based on computer recorded obligations by the ability of
the Insuring Trust to intercept Insuring Certificate debt service
in order to reimburse such amounts and interest thereon. In other
words, these draws are secured by AAA quality cash flows, which
will affect both the certainty that such sources of funds will be
available (even in times of economic and financial stress) and the
cost thereof. This also provides the Company with the flexibility
to respond quickly and easily to changing perceptions regarding the
appropriate amount of liquidity. The economics of BECM's approach
are such that the Company can increase the amount of liquidity
without any material financial impact. In the case of a debt
financing, the debt may also be secured (in the absence of a
default) by: (i) the invested proceeds of the debt financing and
(ii) by revenues of the Company.
[0579] At step 2210, the determined capital structures can be
applied to a primary market of debt. The primary market can include
newly issued debt, including newly issued bonds from an issuer. The
issuer can be municipalities, and the issued debt can be a series
of Insured Bonds and Insuring Bonds. The capital structures can be
recoded in computer memory and associated with various primary
market debt, characteristics, or the like. The stored data,
assumptions, and associations can be used by the steps 2010-2022 of
FIG. 20 to manage supported debt.
[0580] At step 2212, the determined capital structures can be
applied to a secondary market. The secondary market can include
already issued debt, securities, equity, or any other type of
financial instruments. The capital structures can be recoded in
computer memory and associated with various secondary market
instruments, characteristics, or the like. The stored data,
assumptions, and associations can be used by the steps 2010-2022 of
FIG. 20 to manage support of the supported debt, investments, etc.
The operations of step 2212 are described in more detail in
conjunction with FIG. 22B. Processing then returns to other
processing.
[0581] FIG. 22B shows an application of the BECM system to
guarantee opportunities in the secondary market for municipal
securities (est. $2.7 trillion). Approximately $1 trillion of the
outstanding municipal bonds meet BECM's credit and selection
criteria as described herein (e.g., BBB or above). The mechanics of
secondary municipal bond guarantees is a well established and
accepted practice. While much of the description herein is directed
to insuring newly issued bonds, the process, system, media, and
apparatuses described herein can be modified such that instead of
issuing Insuring Bonds for newly issued Insured Bonds, an existing
bond pool can be split into a insured and insuring pool. Processing
can use the split insured and insuring debt/bonds as described
herein to enhance the credit of the insured bonds and/or the
components of the BECM.
[0582] In one embodiment, writing guarantees on bonds owned by
investors entails the steps shown in FIG. 22B. At step 1, secondary
market bonds are identified. For example, the information shown is
an identity received, selected and/or determined electronically for
a market bond. The information includes issuer, CUSIP/State, par,
maturity, current dollar price, coupon/yield, commissions
AAA/Trust, issuer underlying ratings, issue insured ratings. At
step 2, an AAA guarantee is added. Information electronically
selected, determined, and received for adding the guarantee is
shown, including AAA dollar price, AAA yield, Acquisition bonds,
Trust bonds percentage (e.g., corresponding to the insuring debt
described herein), AAA bond par, Trust bond par, AAA Bond proceeds,
Trust bond proceeds, and total proceeds. At step 3, the bonds are
reoffered with an AAA guarantee. Information electronically
selected, determined, and received for reoffering the bond is
shown, including the total proceeds, less acquisition costs, less
supplemental coupon, less commissions, less legal and admin costs,
and less capital markets percentage. Also shown are any nets,
profits, and/or revenues produced form the guarantee that is
provided to the company as a tangible result and transformation of
the components of the BECM.
[0583] In one embodiment, the Company may not position bonds but
may partner with capital markets desks to underwrite secondary
market guarantees. In addition to the guarantee premium, the
components of the BECM (e.g., the Company) may retain a portion of
the profit resulting from the increased value of the security. The
Company's capital markets partners may be required through computer
based trigger and rules to retain for their own account and/or
underwrite the Trust Bonds associated with the BECM secondary
guarantee. Capital Market partners may receive a percentage of the
net transaction revenues after all costs, including: Trust Bond
supplemental coupon, legal, and sales commissions.
[0584] Hurdles to implementation of the BECM structure are similar
to those faced by new bond insurers (I) achieving market acceptance
that allows the new entry's credit enhancement to produce the same
pricing benefits versus unenhanced bonds as other enhancers, and
(II) achieving critical mass--a diversified portfolio of insured
credits.
[0585] For bond insurers, market acceptance is gained through
general marketing efforts and by insuring credits for which
established insurers are capacity constrained or at reduced returns
until the new entry's trading spreads become competitive.
[0586] For bond insurers, the critical mass issue is addressed by
pre-funding the cash capital required (including, to the extent
permitted by the rating agencies, secondary sources of cash
capital) to insure a diversified portfolio of credits. The actual
portfolio is acquired over time as the insurer's trading spread
diminishes and it wins bids to provide insurance.
[0587] With respect to FIG. 22B, marketing and portfolio
diversification issues, as well as program termination and tax
issues can be avoided or simplified by (1) having the Insured
Obligations be further insured by municipal bond insurance and (2)
configuring the credit enhancement provided by the structure as
reinsurance to the municipal bond insurers. Under the second
approach, either (I) the bond insurers can provide the cash capital
necessary to provide the liquidity necessary for a AAA rating or
(II) the BECM Structure can provide the capital, in which event the
bond insurer's capital requirement may be based on an already AAA
Insured Obligation.
[0588] Given alternative (II), the bond insurers may benefit from
the AAA credit quality of the enhancement and should be able to
significantly reduce or eliminate any capital charge relating to
the insured bonds that benefit from the structure.
[0589] If the rating of the Insured Obligations insured by a bond
insurer were initially below AAA, it may be possible to have all or
a portion of the obligations of the bond insurer terminate at some
point, e.g., once the bonds within a particular subcategory
independently achieve AAA ratings.
[0590] This approach may avoid any initial marketing penalty, and
any bonds that also benefited directly from the credit enhancement
provided by the structure should actually achieve better pricing
than ordinary insured bonds.
[0591] Tax issues relating to use of payments due to the Insuring
Obligations to pay defaulted amounts on Insuring Obligations may be
avoided since such amounts may technically go to reimburse the bond
insurer who may initially advance the funds to make the Insured
Owners whole.
[0592] Certain risks, such as validity risk may likely remain with
the bond insurer or simply not be covered risks. There are many
variations for integrating bond insurance into the structure.
[0593] For example, rather than having 4 Loss Position Subclasses,
the bonds allocable to the third loss and fourth-loss positions can
be sold as Non Obligations and the bond insurer can cover the risks
that may otherwise have been allocated to those bonds. Also, the
third and fourth loss position subclasses can be insured by the
bond insurers.
[0594] Alternatively, the structure can be created without cash
capital and the contribution of the insurer can be to provide the
necessary cash capital. As noted below, it may be possible for a
bond insurer to use a portion of its existing capital to meet the
liquidity requirement associated with the Structure. To that
extent, every additional dollar of income may increase the return
on the bond insurer's capital.
[0595] Another alternative for implementation of FIG. 22B may be
initially to establish the BECM Structure in the secondary market
by enhancing credits for which bond insurance is not available. In
the primary market, it might be easiest to establish the BECM
Structure in connection with competitive sales. In that context, it
may be clearly demonstrable that the issuer is achieving savings by
using the BECM Structure instead of traditional bond insurance.
That should minimize the pressure to provide extraordinary
discounts to issuers to get them to use the Structure. Also, in
this context, there may be no tax issue relating to offering the
Insuring Obligations to the public prior to subjecting the
underlying bonds to the obligations imposed by the structure which
are the basis for the additional interest payable on such
bonds.
[0596] The quality of the credit provided by the structure is
superior to that provided by municipal bond insurance since the
ability to divert payments from the insuring bonds continues beyond
the period necessary to fund the rating agencies assumed 4 year
default. In fact, given cash capital sufficient to fund the first
years default, the structure can withstand a default that lasts to
maturity of the defaulting bonds. Since the credit support provided
by the 1st loss subclass goes on indefinitely, the risk of an
ultimate loss to the 2nd loss and higher subclasses is negligible.
So, the risk associated with applying municipal bond insurance to
loss subclasses other than the 1st loss subclass associated with a
particular bond issue may be non-existent.
[0597] FIG. 23 shows a process for determining credit ratings for
various components of the BECM. At step 2302, the capital
pre-funding of the insurer is established by including a capital
pre-funding in the capital structure. In one embodiment, the
capital pre-funding in the capital structure is established by a
computer system in an amount that is a multiple of an average
annual depression scenario default percentage that is based on the
credit rating of the investment.
[0598] In another embodiment, the computer system determines an
amount of the capital pre-funding by the insurer that is sufficient
to cover a default and that is calculated by (a) at least a
pre-funding coverage factor multiplied by (b) a downgrade function
that is applied to an average annual depression scenario default
percentage for the investment based on the credit rating of the
investment. In one embodiment, the downgrade function comprises a
weighted sum of a percentage of a given insured investment issued
by a given issuer that is at a current credit rating falling to a
lower credit rating multiplied by another default percentage that
is associated with the given issuer's industry and the lower credit
rating. The establishing can be performed using, for example, the
interfaces of FIGS. 27A to 33F.
[0599] In one embodiment, the basis for the capital charges can be
the rating agencies' assessment of the risk of municipal default
for each credit type and each rating category during a four year
depression scenario. The capital charges represent the anticipated
percentage defaults within the insurer's portfolio for each such
credit type and rating category
[0600] Under BECM's method, for the capital structure that is
implemented in a computer system, sufficient capital is pre-funded
in computer based accounts to withstand rating agency depression
scenario defaults and still retain sufficient capital to meet the
Aaa criteria. The amount of capital pre-funding and a numeric ratio
representing whether the capital is sufficient to withstand the
depression scenario can be provided as electronic parameters.
[0601] In contrast the BECM system and method, to achieve AAA
monoline rating, the monoline insurer's capital must cover the
aggregate capital charges (i.e., its assumed four year depression
scenario defaults) by at least 1.25 times. In practice the monoline
insurers have been capitalized at slightly higher level, e.g., 1.5
times to 1.6 times. Based on these parameters, monoline insurers
habitually accumulated risk exposure at insured risk to capital
ratios in excess of 100:1.
[0602] If insured defaults occur at the assumed depression scenario
levels, the monoline insurer's remaining capital is short of the
minimum AAA capital requirement by 0.65 times to 1 times. The
monoline insurer is then expected to raise additional capital to
maintain its AAA level and to pay claims, if needed. Similarly, if
the credit quality of the portfolio deteriorated so as to increase
the monoline insurer's capital charges beyond its available capital
or to decrease the coverage margin below 1.25 times, the insurer is
also expected to raise additional capital. In financial crises,
raising capital at a time when the credit markets are under stress
is very difficult and at times impractical.
[0603] At step 2306, the capital adequacy of the BECM insurer is
examined based on the period during the depression scenario. During
the depression period, if the assumed level of defaults were to
occur, BECM can continue to meet the Aaa monoline criteria as long
as the Insuring Bonds are computed to be sized to equal at least
2.3 times the assumed depression scenario defaults for the BECM
portfolio. The BECM computer based insuring system can sustain that
assumed level of defaults for the life of the portfolio (e.g., 20
years) without falling below the Aaa capital requirements. A result
of this examination can be provided as a electronic parameter. In
general, for steps 2304-2306, the computer system can examine the
capital adequacy of the insurer's capital structure to cover a
default based on a default scenario that occurs during or at an end
of the depression scenario period.
[0604] At step 2308, the credit rating of the BECM components are
determined based on the examinations of capital pre-funding and
capital adequacy. The BECM components that can have their credit
ratings determined include loss classes, the insurer, and/or the
Trust. In one embodiment, determining can include determining the
credit rating for the insurer based on the determined capital
pre-funding and the examined capital adequacy. In one embodiment,
the computer system generates determination of whether the
established capital structure is sufficient to cover a depression
scenario period to obtain a minimal target credit rating for the
insurer. The steps of examining the capital adequacy and generating
the determination can be performed using, for example, the
interfaces of FIGS. 27A to 33F.
[0605] The electronic parameters can be received from the steps
described above. Based on the received parameters, a rating
function or algorithm may be used to determine the credit rating of
the insurer, the Company, the trust, or other components of the
BECM. The rating function can be a determination of whether the
parameters meet certain thresholds, a determination of whether an
average, weighted average or the like of the parameters meets
certain thresholds, or the like. The thresholds can correspond to
the credit ratings, AAA, AA, A, etc. In one embodiment, the
thresholds can correspond to adequacies of capital to withstanding
defaults in depression scenarios as described above. Multiples
above the adequate capital can correspond to different thresholds
such as AAA, AA, A, or the like. As described above, the multiples
can be well above 1.5 to 2 times. In such cases, the ratings can be
determined to be AAA or even higher, such as a "True AAA".
[0606] Given the quality of the credit enhancement provided by the
structure, it may be possible for the structure to borrow (using
EMCP or letters or lines of credit, for example) in order to make
payments due on a timely basis and in order to avoid a need to
divert funds payable on nonrelated Insuring Obligations. Such debt
may be highly secure since it (and any debt issued to take it out)
can be secured by all of the payments due to Insuring Obligations
of all Loss Subclasses.
[0607] Given the rating agency assumptions with respect to the
period of time that a municipal borrower may remain in default
(generally 4 years if a AAA rating is sought) and the ability to
borrow on a temporary basis using the credit of the structure, the
risk that losses will be allocated to nonrelated Insuring
Obligations can be minimized by using debt to make the Insured
Owners whole. Assuming the defaulting borrower resumes payment as
assumed, the cost of the default (interest on any debt incurred and
any unpaid principal) can be allocated the related Insuring
Obligations. Note that the assumptions regarding the duration of
any default are conservative in light of actual experience with the
few municipal defaults that have occurred.
[0608] Processing then continues to other steps.
[0609] FIG. 24 shows a process for sizing an Insuring Bond. At step
2402, an Insuring Bond's debt service coverage is determined and is
configured to achieve the target credit rating such as the credit
rating determined from step 2004. For example, in one embodiment,
during the depression period, if the assumed level of defaults were
to occur, BECM can continue to meet the Aaa monoline criteria as
long as the Insuring Bonds' debt service is computed to be sized to
equal at least 2.3 times the assumed depression scenario defaults
for the BECM portfolio.
[0610] In one embodiment, the S&P capital requirement (and
presumptively, the others as well) decreases (in each by 25% of the
original requirement) for maturities less than 5, 3, and 1
years--e.g., the capital requirement for a 1 year maturity is 25%
of the requirement for a maturity beyond 5 years. As a result, the
amount of Insuring Bonds can be decreased at each of those points
with either the released bonds becoming Non Obligations or a
portion thereof becoming Insured Obligations and the balance
remaining as Insuring Obligations. In either case, the Insuring
Owners will realize an increase in the market value of their
holdings. However, even though probability of default is lower, it
may be best to leave the Insuring Obligation percent unchanged.
First, doing so might reduce the likelihood that a default can be
imposed solely on the related Insuring Obligations. Second, leaving
the % unchanged results in increased coverage of the capital charge
(i.e., assumed defaults) over time. So, the time it may take to
reimburse expended capital declines, increasing the likelihood that
a bond insurer's existing capital can be used to provide liquidity
for the Structure. Also, since coverage exceeds 2 times for a
period prior to final maturity, only the last year's capital
requirement needs to be viewed as risk capital. The remainder of
the Structure's capital is for liquidity and can be borrowed.
Substantial coverage also increases the likelihood that debt can be
issued to fund a default.
[0611] At step 2404, the ratio of Insuring Bonds to the Insured
Bonds can be determined. In one embodiment, appropriately sized
Insuring Bonds can cover a default equal to the same percentage of
the Insured Bonds as the Insuring Bonds represent of the entire
portfolio of Insured and Insuring Bonds. For example, assume that
the Insuring Bonds equal 3% of the total bonds issued and Insured
Bonds equal 97%. If 3% of the portfolio defaults, the
non-defaulting Insuring Bonds equal 97% of 3% of the portfolio and
the defaulting Insured Bonds equal 3% of 97% of the portfolio.
Accordingly, the debt service on the non-defaulting Insuring Bonds
is sufficient and can be used to cure over the at least one
electronic exchange the 3% default of Insured Bonds. This ratio
(e.g., 3% to 97%) can be used for various functions, including the
function of maintaining constant any payment or redemption of the
insured or Insuring Bonds.
[0612] At step 2406, the criteria for determining whether the
insured or Insuring Bond would default (the "default
criteria/criterion") is calculated. In one embodiment, determining
can include determining the default criteria/criterion based on the
depression scenario, wherein the default criteria/criterion
comprises a plurality of default percentages for a plurality of
issuers based on the depression scenario, and wherein an insurance
coverage based on a factor of one of the plurality of default
percentages is sufficient to achieve the target credit rating.
BECM's default criteria/criterion recorded in computer media and
used by the computer system can be based on the Standard &
Poor's criteria/criterion for monoline insurer capital charges
(FIG. 26), but any other similar criteria/criterion can be used
without departing from the scope of the invention. The
criteria/criterion assumptions can be recorded in a database
structure, file, spreadsheet, or the like. The criteria/criterion
shown in FIG. 26 outline for each identified bond type, the capital
charge which indicates the percentage of the bonds of that credit
type that would be assumed to default ("default percentage") over a
four year depression scenario. For example, the capital charge for
an A rated or BBB rated city or county general obligation bond is
7% and 13% respectively. This criteria/criterion may be changed on
an periodic basis or even in real-time, and may be transmitted to
the BECM's computer system over a network, or even accessed
remotely (e.g., from S&P's website as a web service) by the
BECM's computer system.
[0613] At step 2408, a downgrade function is determined for the
Insured Bond based on at least a portion of a plurality of Insured
Bonds insured by the insurer being downgraded to a lower credit
rating. In one embodiment, the portfolio downgrade function for
each Insuring Bond managed by a BECM Trust is computed, including
Insuring Bond associated with the recorded default
criteria/criterion. The Insuring Bonds are structured (e.g., sized
in a computer readable media and required to be issued at the size)
using the average annual assumed default over a four year
depression scenario, e.g., 1.75% or 3.25% for an A rated or BBB
rated city or county GO bond, respectively. BECM in turn computes
and records the assumption of a downgrade of a portion of the bonds
of each rating category. This computation is shown in FIGS. 29A and
29B. Specifically the downgrade function can be a step wise
function such as one that computes the downgrades as 25% of A rated
bonds are downgraded to BBB and that 20% of BBB bonds are
downgraded to BB, or the like. Other steps of percentages
downgrades can also be used. Accordingly, for an A rated credit the
baseline assumed default represents 75% times the A rated assumed
default percentage (1.75%) plus 25% times the BBB rated assumed
default percentage (3.25%). In turn, BECM's assumed default for an
A rated city or county general obligation would be 2.125%.
Accordingly, the Insuring Bonds' sizing is structured based on the
computed downgrade assumed defaults.
[0614] At step 2410, the debt service coverage provided by the
Insuring Bond for the Insured Bond can be determined based on the
determined ratio of coverage, default criteria/criterion and the
downgrade function. In one embodiment, BECM's Insuring Bonds are
structured to provide coverage of the assumed defaults in excess of
what has traditionally been provided by monoline insurers. The
downgrade function can be applied to the appropriate default
percentage from the default criteria/criterion that is associated
to the Insuring Bond. The result of the function is the Insuring
Bond coverage. The Insuring Bond coverage takes into account the
state of flux regarding rating agency criteria/criterion and the
uncertain direction of municipal ratings. The Company's computer
system can structure coverage at 2.3 times the assumed defaults,
but other coverage percentages can be used without departing from
the scope of the invention. For example, for an A rated city or
county general obligation bond, this calculation results in
structuring Insuring Bonds to raise 4.89% of the issuer's bond
proceeds. The computing system can round up the Insuring Bonds to
5.25%, representing: 2.47 times the Company's assumed 2.125%
default, and 3 times the assumed defaults for an A rated city and
county general obligation bond under the Standard and Poor's
default criteria/criterion as computed in step 2406. Computing then
returns to other processing.
[0615] FIG. 25 shows a process for determining loss category
subclasses. At step 2502, the loss category subclasses is
established. In one embodiment, establishing comprises establishing
a loss category subclass for the trust certificate. The loss
category subclasses can be recorded and managed in a computer
system to group the Insuring Bonds so that, in the event of a
default that cannot be funded by intercepting debt service payable
on the related insuring certificates (i.e., the certificates
associated with the Insuring Bonds of the defaulting issuer), the
cash flows from non related insuring certificates that are
intercepted to cure the default, are determined to be from insuring
certificates related in computer readable media to bonds with
similar characteristics to the defaulting bond issue. The loss
category subclass can be recorded as a type field in a database for
an insuring certificate. For example, the individual bond types
described in "Standard and Poor's Single Risk Categories" can
represent loss category subclasses, e.g.: [0616] General Obligation
Bonds of City and Counties (category A) [0617] Tax Supported
Debt--Sales, gas, excise, gas and vehicle registration--Statewide
(category B) [0618] Public power agencies and utilities with no
special project risk and little nuclear dependence (category C)
[0619] Water, sewer, electric, and gas utilities (revenue secured)
(category D) [0620] Investor Owned Utilities--Electric distribution
system (category E)
[0621] In addition, each of the single risk categories themselves
(i.e., credit types rated 1, 2, and 3, respectively) can be
represent in the computer fields as a loss category subclass.
[0622] Alternatively, a loss category subclass might be comprised
of more than bond type or single risk category, e.g.: [0623]
Multiple bond types [0624] General obligation City and County bonds
plus water, sewer, electric, and gas utilities (revenue secured)
(category F) [0625] Personal income tax with a population of less
than 1 million plus local sales, gas, excise, gas and vehicle
registration taxes (category G) [0626] Multiple risk categories
[0627] Single risk category 1 (category H) [0628] Single risk
category 2 plus single risk category 3 (category I) [0629] Insured
Bonds issued within a particular state, e.g., California (category
J)
[0630] At step 2504, the type of the loss category subclasses can
be determined. In one embodiment, there can be at least two
variations on the use of loss categories subclasses in structuring
the Insuring Bonds.
[0631] 1. Loss category subclasses can be used "horizontally"
within each loss position subclass. Under this approach, in the
case of a default under category B, the loss would be allocated by
intercepting debt service payable to Insuring Certificates in the
following order determined by a database trigger, stored procedure,
or any other computer implemented algorithm: [0632] Related
Insuring Bonds [0633] 1st loss subclass [0634] Category B
bonds--not rated [0635] All other categories of bonds [0636] 2nd
loss subclass--Ba rated [0637] Category B bonds [0638] All other
categories of bonds [0639] 3rd loss subclass--Baa rated [0640]
Category B bonds [0641] All other categories of bonds [0642] 4th
loss subclass--A rated [0643] Category B bonds [0644] All other
categories of bonds [0645] 5th loss subclass--AA rated [0646]
Category B bonds [0647] All other categories of bonds
[0648] The use of horizontal loss category subclasses does not
require any additional credit analysis as compared to structuring
the Insuring Bonds without loss category subclasses.
[0649] 2. Loss category subclasses can also be used "vertically" so
that there are loss position subclasses within each such vertical
loss category subclass. Under this approach, in the case of a
default under category H, the loss would be allocated in computer
readable media by intercepting debt service payable to Insuring
Certificates in the following order: [0650] Related Insuring Bonds
[0651] Category H--Single risk category 1 [0652] i. 1st loss
subclass (and horizontally with respect to loss category subclasses
within the 1.sup.st loss subclass) [0653] ii. 2nd loss subclass
(and horizontally with respect to loss category subclasses within
the 2nd loss subclass) [0654] iii. 3rd loss subclass (and
horizontally with respect to loss category subclasses within the
3rd loss subclass) [0655] iv. 4th loss subclass (and horizontally
with respect to loss category subclasses within the 4th loss
subclass) [0656] v. 5th loss subclass (and horizontally with
respect to loss category subclasses within the 5th loss subclass)
[0657] Category I--Single risk categories 2 and 3 [0658] i. 1st
loss subclass (and horizontally with respect to loss category
subclasses within the 1.sup.st loss subclass) [0659] ii. 2nd loss
subclass (and horizontally with respect to loss category subclasses
within the 2nd loss subclass) [0660] iii. 3rd loss subclass (and
horizontally with respect to loss category subclasses within the
3rd loss subclass) [0661] iv. 4th loss subclass (and horizontally
with respect to loss category subclasses within the 4th loss
subclass) [0662] v. 5th loss subclass (and horizontally with
respect to loss category subclasses within the 5th loss
subclass)
[0663] The use of vertical loss category subclasses may include an
additional credit analysis as compared to structuring the Insuring
Bonds without loss category subclasses because each vertical loss
category subclass can have sufficient size to support the target
ratings of the various loss position subclasses within each such
vertical subclass.
[0664] At step 2506, an obligation to intercept payments to
insuring bonds to cover defaults of related insured bonds is
established. In one embodiment, Insuring Bonds are deposited at
issuance the Insuring Bonds into a trust (the "Insuring Trust"),
using for example, computer based recording software, bank account
routing, and other mechanism for modifying a computer readable
media. The Insuring Trust holds the Insuring Bonds for the benefit
of BECM's Insured Bondholders. That is the legal obligation to the
Insured Bondholders can be recorded in memory and can constrain the
operations that can be applied to funds from the Insuring Bonds
that relate to the Insured Bondholders, e.g., the funds cannot be
transferred out of an account if the funds are needed to make the
Insured Bondholders whole due to a default and/or the funds deemed
for the Insuring Bondholders are automatically sent to the Insured
Bondholder's account based on a computer determination of default
by the issuer of the Insured Bonds. These Insured Bonds can be
configured in a computer readable media to be secured by both the:
(i) Insuring Trust and (ii) BECM's cash capital. That is, cash
capital in another account can be transferred to the Insured
Bondholders to make the bondholders whole based on an electronic
determination of the default by the issuer.
[0665] At step 2508, trust certificates are issued for the Insuring
Bonds. In one embodiment, the Insuring Trust purchases the Insuring
Bonds from the issuer through at least one electronic exchange and
sells a mirror image trust certificate (e.g., the Insuring
Certificate) for each Insuring Bond deposited into the trust
through the at least one electronic exchange. For new issues, the
(i) deposit of Insuring Bonds into the Insuring Trust and (ii) sale
by the Insuring Trust of the Insuring Certificates occurs
simultaneously with the issuance of the bonds, using for example,
electronic triggers in database records to cause such simultaneous
issuance. The proceeds raised by the sale of the Insuring
Certificates can be identical to the proceeds paid to the issuer by
the Insuring Trust. Insuring Bonds bear yields over at least one
electronic exchange based on the underlying ratings of the issuers'
bonds. In the absence of an insured default determined
electronically by a computer system, payment of principal and
interest on each Insuring Bond is passed through to the owner of
the related Insuring Certificate over the at least one electronic
exchange.
[0666] In one embodiment, Insuring Certificate holders may be
provided certain rights and/or obligations and those rights and/or
obligations may be recorded in computer media and programmed to
cause the computer systems described herein to perform actions,
such as receiving consent from Insuring Certificate holders (e.g.,
over a user interface, a network, or the like). The rights and/or
obligations can include receiving the coupons and/or principal from
the Insuring Bond for the Insuring Certificates, and can include
additional yields for the added risk of holding the Insuring
Certificates rated at a particular credit rating. Yields of each
loss position or category can be incrementally higher as the
position or category class decreases (e.g., yields increase in
inverse to position or category). The sum of the additional yields
can be at least the amount of up front fees paid to the Trust over
time for the issuers in aggregate. In one embodiment, the sum can
even be greater by adding an amount received from issuer's fees
paid over time. Other provisions recorded in computer media
requiring consent of affected can include: [0667] Any change in the
right of a certificate holder to be paid the Insuring Certificate
Payments specified with respect to such certificate, excluding any
provision relating to intercepting Insuring Certificate Payments
[0668] Any change in the order in which or purposes for which
Insuring Certificate Payments are intercepted except as noted
below: [0669] At the direction of the Company, subclasses of
Insuring Bonds may be created and/or modified in order to group
related credits and risks together so that the Insuring Bond
Payments of Insuring Bonds that are similar to a defaulted Insured
Bond Issue are intercepted before the Insuring Bond Payments of
dissimilar or less similar credits as reasonably determined by the
Company. However, no such change can be made which results in a
reduction of the rating of any Insuring Bond by any Rating Agency
then rating such bond [0670] Any amendment to these provisions.
[0671] In one embodiment, the Company may exercise the voting
rights of all Insured and Insuring Bonds Except as noted above,
amendments to the provisions of the Insuring Trust can be made. In
one embodiment, the computer may be programmed to require that
amendments to rights and obligations do not result in any reduction
of the rating of any Insured Bond or Insuring Bond. Computing then
returns to other processing.
[0672] FIG. 25 may be modified with alternate steps, embodiments,
and implementations as explained below. In one embodiment, at step
2502, credit losses is imposed on those Insuring Owners who
specifically purchased bonds of (or specifically accepted the
credit risk relating to) the defaulting borrower. This is different
from simply having a distinct Underlying Rating which reflects the
likelihood of payment of the Insuring Obligor by the underlying
borrower, but does not subordinate the Insuring Obligor (both to
the related Insured Obligation and to the non-related Insuring
Obligations) in the event of a default by such borrower. Benefits
of this approach include reducing the effect on nonrelated Insuring
Obligors of the inclusion of weaker credits within the pool. It
discourages adverse selection by making each Insuring Owner
responsible for the credit that it enables to be enhanced.
[0673] At step 2504, with respect to any payment shortfall on an
Included Issue (a "Defaulting Issue"), the default may be allocated
as follows:
[0674] First, to the related Insuring Obligations. So, in the event
of a partial or temporary payment default, it may be possible that
the entire default may be absorbed by the related Insuring
Obligations. There may be subclasses of the related Insuring
Obligations that are required to absorb the dollar amount of losses
in a specified order (See "Loss Position Subclasses", below). So,
for example, the first-loss subclass might be required to assume
all losses up to the full amount of the payments owed to it. Any
additional losses may then be allocated to the second-loss subclass
up to the full amount of the payments owed to it. It may be natural
for the loss position subclasses for Insuring Obligations related
to a particular bond to correspond to the BECM Structure Rating
subclasses.
[0675] Second, to nonrelated Insuring Obligations. Their may be
subclasses of nonrelated Insuring Obligations that are required to
absorb the dollar amount of losses in a specified order (See "Loss
Position Subclasses", above).
[0676] By allocating losses first to the related Insuring
Obligations, any actual losses are configured to be allocated to
the related Insuring Obligations. The nonrelated Insuring
Obligations provide marketing enhancement in the same way as bond
insurance--bond insurers view themselves as not actually taking any
credit risk, but only providing marketing enhancement. The
resultant rating of an Insuring Obligation may be the lower of its
Structure Rating and its Underlying Rating.
[0677] The bonds underlying the Insuring Obligations might be held
within a trust or otherwise pledged or subject to a lien such that
even in the event of a bankruptcy of a borrower, the proceeds of
the bankruptcy delivered to the holders of related Insuring
Obligations may be used to reimburse any amounts used to pay the
Insured Obligations, including amounts diverted from nonrelated
Insuring Obligations. This approach may achieve a real
subordination of the Insuring Obligations, as compared to
subordination at the borrower level that may not survive
bankruptcy. Any recoveries from a defaulting borrower may be
applied first to reimburse non-related Insuring Obligations and
second to reimburse related Insuring Obligations. Also, any loss
position subclasses may be reimbursed in inverse order of their
loss position. So, within each category of Insuring Obligations,
the second-loss subclass may be reimbursed prior to the first-loss
subclass.
[0678] At step 2508, ratings subclasses can be used to ensure that
Insuring Obligations not exposed to a default by a nonrelated
borrower that is lower rated than such Insuring Obligation unless
the credit enhancement provided by a subclass of Insuring
Obligations that is not lower rated is insufficient to cure such
default. This might be accomplished, first, by allocating the cost
of any loss to be allocated to nonrelated Insuring Obligations only
to Insuring Obligations with the same or a lower rating as the
defaulting issue. Second, the credit enhancement provided the
Insuring Obligations in each Rating Subclass may have at least to
equal the next highest rating category.
[0679] For example, the BBB Rating Subclass of Insuring Obligations
should achieve at least an A rating when viewed only with respect
to the subclass of BBB-rated Insured Obligations. Similarly, the
BBB and A Rating Subclasses of Insuring Obligations should
collectively achieve at least a AA rating when viewed solely with
respect to the subclass of BBB and A-rated Insured Obligations. Or,
alternatively, the A Rating Subclass can be structured separately
to achieve a AA rating when viewed solely with respect to the
subclass of A-rated Insured Obligations.
[0680] In some cases, additional cash capital may be necessary for
a particular Rating Subclass to achieve its target rating--i.e.,
the immediately higher rating category.
[0681] So, even on a weak link basis, the Insuring Obligations
within a particular Rating Subclass may achieve the same rating
category as the related underlying bonds. This ignores the
potential credit impact of the greater severity of a loss on the
Insuring Obligations, since the full impact of the loss may be
imposed on the Insuring Obligations related to a Defaulting Issue.
Hence, a partial loss on the Defaulting Issue can be a complete
loss on the related Insuring Bonds. However, this may not be
qualitatively different from the impact of normal subordination as
long as losses are imposed solely on related Insuring
Obligations.
[0682] In order to address the fact that ratings of underlying
bonds will change from time to time, the Rating Subclass of a
particular Insuring Obligation can change with the rating of the
underlying bond. If for example the City of New York general
obligation bond rating is changed from A to AA, the Insuring
Obligations related to all New York general obligation bond issues
within the structure may move from the A-rated Rating Subclass to
the AA-rated Rating Subclass. In one embodiment, this rating
volatility can be avoided by a Structure Enhanced Ratings.
[0683] The Structured Enhanced Ratings can be implemented using
computer-implemented mechanisms for determined and storing the
ratings. A mechanism for split rating is implemented. In order to
achieve the objective of not adversely affecting the ratings of the
Insuring Obligations with in a rating subclass, it may probably be
necessary to use the lowest rating to determine the rating
subclass. Fewer ratings (i.e., Moody's and S&P) may seem to be
better to minimize the possibility of split ratings. The impact of
split ratings might be minimized if the higher rating were to
determine the Rating Subclass of the Insuring Obligations for
purposes of allocating non-related losses to the split-rated
Insuring Obligations (the BECM Structure Rating may be the higher
of the split ratings) and the lower Rating Subclass were to
determine the Rating Subclass of the Insured Obligations to
determine the allocation of a loss if the split-rated borrower
should default. In one embodiment, non-related losses are allocated
first to the lower rating subclasses (rather than to all subclasses
at the same or lower rating level than the defaulting credit).
[0684] As described above the processes of FIGS. 12A to 12E and 14A
to 25 are directed to insuring newly issued debt or bonds, or even
to insuring and/or to re-insure already existing bonds or debts. In
general, in one embodiment, without departing form the scope of the
invention, the BECM can use in the place of the Insuring Bond or
debt in the above processes any stream of income and need not be
income from a bond or debt. Such streams can be tied to or
otherwise associated with the Insured Bond (e.g., be paid by the
issuer of the Insured Bond). The streams can include debt,
dividends, accounts receivables, or the like.
[0685] In one embodiment, the debt managed by the processes
described herein can be a variable rate bond. A structure for
variable rate bonds include being able to issue the Insuring
Obligations for variable rate bonds that are Insured Obligations as
unenhanced, with an interest rate equal to the rate on the Insured
Obligations plus the insured/uninsured spread plus the spread over
uninsured bonds allocated to Insuring Obligations. Such high yield
variable rate bonds may be candidates for tender option programs
and may not expose the principal in the program to interest rate
risk. Assuming a single class of Insuring Obligations, the spreads
to uninsured might range from 85 basis points to more than 150
basis points. Alternatively, another structure for variable rate
bonds include issuers simply selling the Insuring Obligations as
fixed rate bonds, thus preserving variable rate debt capacity for
the Insured Obligation portion of future issues. Another structure
for variable rate bonds include a mechanism where variable rate
bonds might tend to be used by larger, more creditworthy borrowers
so the real risk of default may be extraordinarily low.
[0686] FIG. 26 shows an example of a data model for determining a
percentage of possible defaults ("default criteria/criterion") over
a 4 year depression scenario for a type of debt with a particular
credit rating or for a single-risk category. For example, States
that are rated CCC are modeled to have a 30% chance of defaulting
within a 4 year period. An average annualized percentage of
possible default can be determined by dividing the 4 year period
percentage by 4. For example, States with CCC rating has an average
annualized percentage of default of 30%/4=7.5%.
[0687] FIGS. 27A to 33F shows user interfaces and algorithmic
models for managing insurance of debt that is implemented in
computer readable and executable instructions for managing BECM
based components. In one embodiment, the user interfaces can be a
web interface, graphical user interface, database program, Excel
files and associated formulas executed by a computer to provide an
Excel user interface. In one embodiment, the interfaces and
algorithmic models can be used by the systems, processes, media,
and apparatuses of FIGS. 1 to 26.
[0688] In one embodiment, the user interface component which can
include any of the screens, data-model and algorithms of FIGS. 27A
to 33F can be configured for receiving input relating to the
insured bond and the insuring bond to generate a model of applying
the insuring bonds to enhance the insured bond's credit rating;
providing a break-even comparison of applying established capital
structure to a monoline insurance of the insured bond; generating
an indication of the determination of whether the established
capital structure is sufficient to cover the depression scenario
period to obtain the minimal target credit rating for the insurer;
and sending a message to another computer system (e.g., the company
computer system) to establish an appropriate capital structure that
was modeled using the user interface and based on the
indication.
[0689] As shown, the Company, issuers (e.g., municipalities), and
rating agencies are provided the analytical computer based tool and
user interfaces shown to do a model, analyze, and confirm the
numerical performance of insuring debt based on the BECM and to
compare the BECM against other models. For example, a breakeven
analysis can be provided, thus showing municipalities the savings
benefit of using the BECM versus the Monoline. For example, the
municipalities can be shown that savings can come from a higher
rating of AAA on their Insured Bonds, thus lowering the cost of
borrowing. Users can enter underlying assumptions and parameters in
the user interfaces.
[0690] As described and shown in the FIGS. 27A to 33F provides
modeling, analysis and interfaces for managing loss position
classes, among other things. The term "lower loss position" or
"LLP" and "higher loss position" or "HLP" used in the description
herein for these FIGS and in the terms FIGS corresponds to the loss
position subclasses described above but uses different terminology.
The junior lower loss position and senior loss position correspond
to the 1.sup.st and 2.sup.nd loss subclasses, respectively
described above with respect to FIGS. 12A to 25. The higher loss
position classes 2.sup.nd, 3.sup.rd, and 4.sup.th corresponds to
the 3.sup.th, 4.sup.th, and 5.sup.th loss subclasses, respectively
described above with respect to FIGS. 12A to 25.
[0691] As a summary of the computations performed from the various
interfaces, parameters are entered into the interfaces of FIGS. 27A
to 28D. Based on the parameters, and the loss position information
and downgrade functions of FIGS. 29A and 29B, a percentage of the
insuring bonds to the insuring bonds is determined. An additional
yield for the portion of the insuring bonds is used to adjust the
coupons of the insuring bonds based on maintaining level debt
service and pricing, as shown in FIGS. 30A to 31I. The portion of
the coupons of the insuring bonds (including the adjustment to the
coupon) is used to pay fees, etc. The remaining portion is used to
pay the coupons to the holder of the loss positions, including the
adjusted coupons associated with each loss position. The debt
service is maintained level for the loss positions while varying
the coupons and/or additional yields that are different to each
loss positions, as shown in FIGS. 32A to 32F. Based on the pledge
of the debt service for each loss position (that is computed and
maintained level) to enhance the insured bonds and/or a higher loss
position insuring bonds, a credit rating for each loss position and
an enhanced credit rating of the insured bonds are computed in
FIGS. 33A to 33F.
[0692] Referring to FIG. 27A, information about the BECM system can
be entered and modeled, including entering and modeling the
underlying Insured Bond's rating, and other options such as whether
the model should also enhance the loss classes, the bond's
characteristics, current spread assumptions, premium parameters,
and the like. FIG. 27A shows entry of the assumed target insured
bond (e.g., BBB-rated hospital system), whether the insured bonds
are only enhanced or whether the loss classes are also enhanced,
bond term, target bond proceeds, insuring bond par, and call
provisions. Given the entered assumed information, the percent of
Insuring Bonds needed to give the Insured Bond a AAA rating is
returned and displayed, the coverage of Insured Bond debt service,
and the target and actual 4-year default tolerance are displayed.
Based on these parameters entered or shown, various data interfaces
can be provided that shows possible results of using a BECM model
versus a monoline model, as shown in FIG. 27A itself and FIGS. 27B
to 27H. In one embodiment, entering data into the interfaces of
FIG. 27A, causes an automatic change in the interfaces of FIGS. 27A
to 27H. Of note, the % of Market Spreads as a of particular date to
MMD used in the analysis is shown, thus showing the benefit to the
purchasers of insuring bonds and associated trust certificates
above other types of similar debt instruments.
[0693] FIGS. 27B to 27C show user interfaces displaying and
modeling computations and parameters for BECM components assuming
yields to maturity for the insured and Insuring Bonds. The
statistics show comparisons between uninsured bonds, monoline
Insured Bonds, total structures of bonds, insured and Insuring
Bonds using the BECM methodology, the total structures of the BECM
components, and investment grade insuring subclasses. As shown,
yields information, including yields with and without an additional
coupon or annual charges, yields with certain portions, etc. are
determined for different bond scenarios (e.g., with and without
BECM). Yields benefits are also shown. The costs of the different
bond scenarios are also shown. As shown, the yields and other
parameters are at least comparable and superior to those provided
by monoline insured bonds and/or uninsured bonds.
[0694] FIGS. 27D to 27E show user interfaces displaying and
modeling computations and parameters for BECM components assuming
yields to call for the insured and Insuring Bonds. The types of
information is substantially similar to the user interfaces of
FIGS. 27B to 27C, except that the insurer realizes a significant
savings in terms of cost of insurance by redeeming the bonds early
using the BECM model.
[0695] FIG. 27F show user interfaces displaying and modeling
computations for a summary of yields provided by using the BECM
system given the parameters computed and entered from FIGS. 27A to
27E. As shown, various yields of monoline versus the BECM are
shown. The yields show yields from premiums, for various
subclasses, yields retained by the Company/Trust (e.g., the
Program), annual yields, net yields, return on equity, or the
like.
[0696] FIG. 27G shows a user interface displaying and modeling
computations for a summary of premiums and costs of applying the
BECM system. As shown, the net upfront structured premium, premiums
on structured insuring and insured bonds, total upfront premiums,
total cost of structuring, annual cost of structure, percent of and
annual cost of insuring bonds, upfront cost of the structuring,
upfront cost of insuring bonds, cost of insuring bonds as a percent
of structured cost, any additional yields on equity and profits,
percent of total costs of structure available, upfront monetary
equivalent to the percent available, max upfront cost net of
program costs and annual dollar equivalents to the percent
available.
[0697] FIG. 27H shows a user interface displaying and modeling
computations for a summary of different loss classes/positions,
including each class/position's as a percent of the bond issue and
as a cumulative percent of the insuring bond.
[0698] FIGS. 28A to 28I show other user interfaces displaying and
modeling computations for a summary of using the BECM system. FIG.
28A shows the insuring bond sizing and associated subclass sizing,
using the computations and downgrade functions of the processes
described herein, including the processes of FIGS. 20, 24, and 25.
FIG. 28A shows entry of the assumed target insured bond (e.g.,
BBB-rated hospital system). FIG. 28A provides different assumed
annual default percentages, coverage to enhance a security to AAA,
suggested insuring bond sizes, actual insuring bond size, and other
assumptions and calculations. Also provided are different sizing of
different loss subclasses, including a minimum percentage insuring
bonds, estimated, proposed, and actual subclass sizing, and the
like.
[0699] FIG. 28B shows another user interface displaying and
modeling computations for breakeven analysis with respect to the
BECM and the monoline systems. The managed and displayed monoline
information includes: benefits of the monoline insurance, breakeven
calculations of the monoline versus uninsured bonds, premiums
information, and the like. As a comparison, cost and benefit
information for using the BECM system is provided, including total
cost of the structure, annual costs, annual expenses, upfront
costs, amounts available (e.g., profits), etc. Also shown are input
assumptions such as target of additional return on structured
equity, base investment return on cash equity, other investment
returns, discount rates to determine present values, percent of
premiums allocated to expenses, or the like. Also shown are margins
over required coverage of assumed defaults by insuring subclasses,
and other insuring bond sizing information.
[0700] FIG. 28C shows another user interface displaying and
modeling computations for structured spreads to unenhanced yields,
and structured spreads to monolines insured for various ratings. As
shown, various assumptions can be entered and modeled, including
the percent of current market spreads (based on for example,
municipal market data) that is being used in the calculations
described herein, cash equity as a percent of insuring bond debt
service, various loss position yields, and the like. Also provided
are different basis points for spreads for various rated structures
of insuring bonds (loss positions/classes) over a simple uninsured
target bond (e.g., BBB-rated hospital systems). Moreover, also
provided are structured spreads for various insured and insuring
bonds compared to monoline spreads for various target ratings.
[0701] FIG. 28D shows another user interface displaying and
modeling computations for yields for various loss positions
insuring bonds including on senior and junior lower loss positions
insuring bonds. For each loss position subclass, the yields, spread
to an unenhanced comparable security, an increment between each
loss position of the spreads, various tax information, and other
information are provided. Also provided are revenues percentages
that are available to cure an insured default from various sources
including net program revenues after all outflows, additional
equity return, and other reserved amounts. Moreover, also provided
are downgrade analysis of the target insured bond, and the various
insuring bonds for different loss classes/positions. Information
provided for each bonds include the gross required coverage of
assumed defaults, required coverage for the initial rating, percent
of minimum capital for the rating category, percent of original
capital supporting the structured rating, original excess capital,
requirements for downgrade analysis, minimum capital required
assuming downgrade, increase in minimum capital required for
downgrade, percent of subclass that can be downgraded without
causing a downgrade of the target insured bond, percent of
respective bond that can default without causing a default on
payments of the insured bond debt, or causing a downgrade of the
insured debt, or the like.
[0702] FIGS. 28E to 28I show other user interfaces for providing
various inputs and calculating and providing parameters for the
BECM system. FIG. 28E shows an input and analysis for general
inputs for the target insured bond, including various attributes of
the bonds such as total amount of the issued bonds, whether there
is principal amortization, various associated dates, including
maturity dates, call dates, amortization periods, cost of issuance
and additional underwriter's discount for insuring bonds, and the
like.
[0703] FIG. 28F shows specific inputs and analysis for the
structured bonds including the credit type and underlying bond
ratings for the target insured bonds, and various spreads comparing
enhancement of the credit of the insured bonds under various
methodologies to uninsured bonds, insured bond percentages and
insuring bond percentages under the BECM (which may be calculated
based on the processes of FIGS. 21 to 22A). Various information
about the loss position subclasses are also managed including the
number of insuring subclasses, the maximum additional yields on the
lower loss position bonds, the lower loss position senior and
junior bonds percentage and coupon limit for the senior and junior
lower loss position bonds, the percentage of the insuring bond loss
positions breakdown for loss positions of various credit ratings.
Also shown are premiums, coverage and tolerance information under
the BECM methodology, including the minimum required coverage of
the assumed defaults for insuring and insured bonds of various
ratings, various tolerances, including an average annual weighted
default tolerance, average worst case assumed annual defaults,
structured upfront premiums and annualized premiums. Parameters for
comparison against monoline and uninsured are also included such as
the target for additional structure benefit to issuer versus
benefit of monoline insurance, actual benefit to issuer versus
monoline, and total structure benefit versus uninsured. Also shown
is the amount of money retained for the annual program revenues,
liquidity fees, return on equity, etc., for applying the BECM, and
the lower loss position tranches of insuring bonds in
percentages.
[0704] FIG. 28G shows specific inputs and analysis for the
marketing penalties for using the BECM, including for issuing trust
certificates and bond insurance inputs. Shown are the higher loss
positions insuring bond penalty for the structure, any taxes, and
additional penalties. Shown also are the bond insurance inputs,
including information for the underlying bonds. The information
includes whether the bond is callable, and whether the issuer has
access to a monoline insurer. Also shown is a breakeven analysis
compared to monolines including information about monoline bond
insurance premiums as percent of total debt service and as a
percent of the breakeven premium, monoline costs, benefits, and
breakeven versus uninsured, etc. The algorithm for the analysis
does the following: calculate breakeven monoline premium by doing a
sizing with an estimated premium greater than zero. Even if
insurance is not available for underlying bonds, since insurance is
used to calculate the premium for the HLP Bonds, show insurance as
available with a premium equal to the breakeven premium.
[0705] FIG. 28H shows specific inputs and analysis for the
structured insured bonds, and the insuring bonds. To reflect the
availability of monoline insurance for Structure Insured, the
algorithm for the analysis does the following: First, do a bond
sizing with no insurance available. Second, paste the value of the
insurance benefit and equivalent upfront premium into the cells to
the right. Third, do another bond sizing with insurance available.
The breakeven comparison information includes whether the AAA
monoline is available for this type of bond, net pricing benefit of
the monoline bond insurance on the structured insured bonds,
estimate of upfront premium equivalent to net benefit, percentage
of monoline insurance benefit paid to bond insurer, annualized
upfront premium for structured insured bonds net basis points
available for insuring bonds and program, and upfront monoline
insurance premiums.
[0706] Also shown are similar breakeven analysis for the insuring
bonds. The breakeven comparison information includes whether the
AAA monoline is available for this type of bond, benefit of bond
insurance on the higher loss position bonds comparisons, monoline
insurance premium comparisons, percentage of monoline insurance
benefit paid to bond insurer, annualized monoline premiums for
higher loss position bonds, upfront monoline insurance premiums,
benefits of bond insurance on the higher loss positions bond net
bond insurance premiums and credit spreads.
[0707] FIG. 28I shows specific inputs and analysis for rounding
inputs and conventions for performing calculations shown in the
various interfaces. Liquidity and equity inputs are also provided,
including liquidity as a percent of insuring bond debt service and
as a percent of total insured and insuring bond debt service,
liquidity in dollars plus fees, equity as a percent of insuring
bond debt service and as a percent of 4 year assumed default
covered by structure cash equity, equity in dollars plus return on
equity above investment return, and investment return on cash
equity and upfront premiums. Also provided is a comparison of the
BECM structure to the monoline insurance and conventional CDOs,
including information about a portion of the monoline premium
allocated to hard program expenses, monoline cash equity capital
amount plus unrated insuring bonds earnings on equity-like return,
and the marketing penalty on insured CDOs plus tax on reallocated
interests in basis points on all bonds.
[0708] FIGS. 29A and 29B show an example of a method, data model,
and interface for computing a downgrade function, and sizing the
Insuring Bond and loss class and/or category subclasses. The
method, data model, and interface takes into account of assumed
defaults, assumed portfolio deterioration downgrades, and coverage.
In this example, the analysis assumes that startup cash equity is
$200 million for both the BECM and a conventionally structured
monoline insurer and that both capital allocated to an insured
issue and capital not yet allocated are available to cure a
defaults. For each bond with an underlying particular credit
rating, a downgrade function or relation is provided to determine
the percentage of the bond that will deteriorate to a lower credit
rating. For example, for the A rated bond, 75% will remain A, while
25% will fall to BBB. The function may be over the lifetime of the
bond or over a 4 year period. Also shown is the assumed default for
each bond type over the 4 year or 1 year period. The percentage
that degrades can be multiplied to the average annualized
depression scenario coverage percentage (from FIG. 26) for the
associated debt/bond type (e.g., GO). This weighted sum can be used
as the coverage percentage for a particular debt/bond. As shown,
the BECM has significantly greater capital (i.e., capacity to
withstand defaults) at every point in time from the issuance of the
first Insured Bond until the monoline insurer's startup capital is
fully allocated. The bond portfolio can comprise A and Baa rated
City GOs. The monoline insurer's capital is fully allocated when
$19.6 billion of bonds have been insured whereas the cash equity
available under the BECM can support the enhancement of $136
billion. The BECM's default tolerance significantly exceeds that of
the conventional monoline at every point in time both over a
four-year depression scenario and over the term of the bonds (e.g.,
20 years).
[0709] FIGS. 30A to 30C show examples of a method, data model, and
interfaces for providing calculations of sizing of structured
insured and insuring bonds. FIG. 30A shows that the structured
insured bonds is determined to be 75.5% of the issued bonds for the
particular type of target bond (e.g., BBB-rated hospital system).
The various information about the debt service, including the level
of debt service, proceeds information, bond par, surplus versus
target, the yields of the insured bonds (base and all-in), and the
like. Shown for each payment date (on a semi-annual basis) for the
insured bonds, are the various structured insured bond sizing and
the present value of the debt service for the base yield and the
all-in yield (column CC-CD). Base yield includes the yield at which
the gross proceeds of an issue are borrowed. All-in yield includes
the base yield plus the annualized cost of any upfront monoline
insurance premium or upfront structure premium. For each payment
date, the sizing information includes preliminary bond proceeds
(BT), bond par (BU) and maturity interest (BV), and final bond
proceeds (BW), bond par (BX), maturity interest (BY), semi-annual
debt service (BZ). Also shown are annual debt service (CA), and any
bond takedowns (CB).
[0710] FIG. 30B show examples of a method, data model, and
interfaces for providing various data parameters for the insured
bond, including structured insured costs versus monoline insured,
structured insured benefits versus uninsured bonds, and an analysis
of the economics based on the base yields of the structured insured
versus an uninsured bond. The analysis includes a base yield
benefit of the structured insured versus insured in basis points,
less annualized bond insurance premium, less annualized upfront
structure premium, less benefit of monoline bond insurance retained
by issuer, less additional benefit to the issuer provided by the
structure, plus gross benefits of certain insuring bonds versus
uninsured, less a premium for monoline insurance of on the certain
insuring bonds, less interest on those certain insuring bonds. The
net of the foregoing numbers provides the net benefit for the
structured insuring bonds that are available for insuring the
insured bonds. This number can also be provided in basis points on
the insuring bonds as the net benefit available for the insuring
bond.
[0711] FIG. 30C shows an example of a method, data model, and
interfaces for providing the pricing structure of the insuring
bonds before additional interest. As shown, the insuring bonds is
computed to be 24.4% of the issued bonds. For each payment date,
information shown for the insuring bonds (column CG-CQ) is
substantially the same as for the insured bond, except that
aggregate base yield information is also provided. The present
value of the debt service for the aggregate base yield (CR) is also
provided over the period of years for the payment dates (on a
semi-annual basis) of the insuring bonds. The computations and
interfaces of FIGS. 30A-30C are configured to be used by the issuer
to determine the proceeds, par, maturity, etc. that the issuer is
obligated to pay for the insured and insuring bonds.
[0712] FIGS. 31A to 31F show examples of a method, data model, and
interfaces for providing calculations of coupons, proceeds, and
yields paid by an issuer for insuring bonds. FIG. 31A shows an a
model and interface for computing the adjusted structured insuring
bonds to maintain a level pricing to the issuer. The computation
provides an adjusted coupon that takes into account the incremental
yield provided to the insuring bond to keep the proceeds or price
of the bond level, thereby to provide a level debt service. The
higher yield is paid to compensate the holders of the insuring
bonds for the extra risk of coupons form the insuring bonds will be
intercepted. The extra coupon is structured as a debt service
obligation and not a fee to make the payment more secure for the
holder of the insuring bonds and the trust certificates. As shown,
for each payment date (on a semi-annual basis) for the insuring
bonds, the interface provides the priced to call or maturity
selection (column CS), the original yields to maturity (CT), the
original yields to call (CU), the insuring bond price (CV), the
adjusted yields to worst (CW), estimated adjusted price to worst
(CX), initial versus adjusted price to worst (CY), the estimated
adjusted maturity coupon (CZ), incremental maturity coupon (DA),
adjusted yields to best (DB), adjusted price to worst (DC), and the
adjusted bond proceeds (DD). As can be seen, the bond pricing
remains level on a semi-annual basis. Taking into account the
adjusted yields, an incremental coupon is computed using various
methodologies including search, estimation, iterative computation,
or the like. In one embodiment, the coupon is computed using the
Excel function GOALSEEK. The adjusted bond proceeds can be computed
based on the adjusted coupon. The information provided by FIG. 31A
can be displayed in FIG. 30C, including providing the level debt
service for the insuring bond. Additionally, the adjusted bond
proceeds of FIG. 31A can be provided to the interface of FIG. 30C
for example in the Final bond proceeds column.
[0713] FIG. 31B shows an example of a method, data model, and
interfaces for providing another computation of adjusted structured
debt service reflecting issuer level pricing. The information of
FIG. 31B include parameters such as total structured bond par, bond
proceeds, up front and insured premiums, underwriter's discount,
cost of issuance, net proceeds, bond yields ad proceeds for base
yields and all-in yields, and various other information. Shown for
each payment date for the adjusted insuring debt service, are
insuring bond par (column DE), interest coupons (DF), maturity
interest (DG), adjust semi-annual debt service (DH), annual
insuring debt service (DI), present values of debt service for
different types of yields (DJ-DK, DN-DO), total semi-annual
structured debt service (DL), and an annual structured debt service
(DM--the sum of most recent two semi-annual structure debt
service). Similar to FIG. 31A, for the adjusted insuring debt
service, the interest coupons is computed based on an iterative
computation that is based on keeping the pricing for the bond
level, while increasing the yield.
[0714] FIG. 31C shows an example of a method, data model, and
interfaces for providing another computation of adjusted structured
debt service for higher level loss positions reflecting issuer
level pricing. Similar to the computations above, the coupon is
adjusted to take into account a higher yield while keeping the
price level. Shown for each payment date, are original yields to
maturity (column DQ), original yields to call (DR), original
insuring bond price (DS), adjusted yields to worst (DT), estimated
adjusted prices to worst (DU--which is maintained level), initial
versus estimated adjusted price to worst (DV), estimated adjusted
maturity coupon (DW--which is computed based on the level pricing
and extra yield), additional maturity coupon (DX), adjusted yield
to best (DY), adjusted prices to worst (DZ), and adjusted bond
proceeds (EA).
[0715] FIG. 31D shows an example of a method, data model, and
interfaces for providing an analysis of the economics of insuring
bond subclasses taking into account level debt service. An
increment to the uninsured yield available to the insuring bond is
provided. The higher loss position subclass economics is also
provided, including marketing penalty due to the structure of the
higher loss position bonds (e.g., trust certificate marketing),
certain portions, credit spreads, total yields, adjustments to
yields, and increment to coupon (as described in FIG. 31C). The
lower loss position subclass economics can be determined from the
above information and other information, including the incremental
yield (above uninsured yield and the portion of the marketing
penalty on the higher loss position insuring tranches), bond
proceeds retained for annual program revenues, liquidity fees, and
return on equity. The sum of the incremental yield and bond proceed
retained, etc., is equal to the yields available for lowest
position bonds, above the uninsured bond yield and the portion of
the marketing penalty and net program revenues, fees, etc. This
number in basis points can be converted to the yields in basis
points on the lower loss position bonds.
[0716] FIG. 31E shows an example of a method, data model, and
interfaces for computing yields, coupons, and level debt service
for a plurality of loss positions. The interface provides for each
payment date, the adjusted coupons on the insuring coupon (column
ED--as computed by the interfaces of the FIGS. 31A to 31B. above),
the coupons adjusted only for the highest loss position's marketing
penalty (EE), fees (EF), net additional coupons on the insuring
bonds (EG), the equivalent additional coupons on the lower loss
positions (EH--as computed in FIG. 31C), additional lower loss
position supplemental coupon after any coupon limit (EI), the total
coupon on the lowest subclass (EJ), the yield to maturity of the
lowest subclass (EK), the additional lower loss position subclass
yield to maturity (EL), yield to call on the lowest subclass (EM),
additional lower loss position subclass yield to call (EN), and the
additional lower loss position subclass yield to worst (EO). As
shown, the predicted average and weighted averages of various
columns are also shown.
[0717] FIG. 31F shows an example of a method, data model, and
interfaces for computing a verification, data, and computation
check of the calculations of FIGS. 31A to 31E. As shown, for each
payment date, the interface provides the par of the highest loss
position insuring bonds (column EP), interest to maturity on the
highest loss position insuring bonds (EQ), debt service on higher
loss position insuring bonds (ER), par of lower loss position
insuring bonds (ES), interest to maturity on the lower loss
position insuring bonds (ET), debt service on the lower loss
position insuring bonds (EU), total par of the insuring bonds (EV),
the total debt service on the various insuring bonds subclasses
(EW--sum of the previous mentioned debt services), surplus interest
due to coupon limit on lower loss position bonds or no loss
position bonds (EX), bond proceeds for annual program revenue,
fees, and return on equity (EY), total debt service on the insuring
bonds before subdivision into various subclasses (EZ), and the
surplus debt service on insuring bonds from truncating the highest
loss position subclass yields (FA). The verification check should
show that the sum of column EW (total DS of various insuring
subclasses) and EX (various surpluses) and EY (bond proceeds for
fees) should be near or equal to EZ (total debt service of insuring
bonds) plus FA (a miscellaneous surplus DS of insuring bonds due to
truncating of various values).
[0718] FIGS. 31G to 31H show an example of a method, data model,
and interfaces for computing a summary of the bond yields and the
yield related calculations as computed from the above FIGS. Shown
are, for a base yield and an all-in yield, bond yields on insuring
bonds, various parameters and calculations for bond yields paid by
the issuer, various parameters and calculations for bond yields on
insuring bonds as further adjusted within the structure, with
various parameters and calculations for comparisons to the monoline
alternatives. The comparison of the insured and insuring bonds to
the monoline insured system includes data for costs, yield
comparisons to uninsured bonds, upfront premiums, or the like. A
comparison between the monoline and the aggregate structure of the
insured and insuring bonds are also provided, including aggregate
benefits versus uninsured, incremental costs, and the like.
[0719] FIG. 31I shows an example of a method, data model, and
interfaces for computing a summary of the components of adjusted
insuring debt service. The summary information includes the total
program revenues (e.g., to the Trust of Company). Shown for each
payment date are additional debt service on insuring bonds (column
FX), marketing penalty on the highest loss insuring maturities
(FY-FZ), additional yields on the lower loss position maturities
(FZ), additional yield on lower loss position bonds (GA-GB),
liquidity and equity expenses (GC), annual program revenues (GD),
surplus interest from coupon limits or truncating (GE) and the
total amount paid to the insuring bond holders and the program
(GF). Also, certain surplus interest due to coupon limits are also
shown.
[0720] FIGS. 32A to 32F show examples of a method, data model, and
interfaces for providing calculations of coupons, proceeds, and
yields payable to holders of loss position subclasses. FIGS. 32A to
32B show examples of a method, data model, and interfaces for
managing the detailed structure level cash flows for the 4.sup.th
loss position. Referring to FIG. 32A, to maintain the adjusted
insuring bond price level while providing an extra yield for the
4.sup.th loss position, the coupon to be paid to the holder of a
certificate for the 4.sup.th loss position is computed, using for
example, GOALSEEK. That is an additional coupon is added
representing the risk that the holder takes that the coupons will
be intercepted. Shown for each payment date, are subclass principal
(column D), adjusted coupon on insuring coupon (E), base insuring
bond coupon (F), based insuring bond yield (G), yields for AA
insuring subclass structured enhance (H), AA insuring subclass
spread to base yield, which is the additional yield for this class
for taking the extra risk (I), credit spread which can be empty
(J), credit spread which can be the same as from column I, a
marketing penalty (L), marketing penalty (M), net penalty (N),
total yield (O), and amounts net yield that are available (P).
[0721] FIG. 32B continues the calculations and interface. Shown for
each payment date are total net yield from bond (Q=G+O), original
insuring bond price (R), adjusted insuring bond price (S), interest
coupon surplus or shortfall % (T) estimated adjusted versus target
price to worst (U), the estimated adjusted maturity coupon which is
computed, for example, using GOALSEEK based on the proceeds/pricing
being level and the adjusted yield (V), final insuring bond coupon
(W which can be the same as V), original bond proceeds (X),
adjusted bond proceeds (Y which is kept level with X), and any
interest coupon surplus or shortfall (Z). FIG. 32A to 32B are
examples for the 4.sup.th loss class, but other loss classes'
information, e.g., for the higher loss classes, can be computed and
displayed in a similar manner.
[0722] Because these loss positions' credit rating are not
associated standard market yield information, to maintain the debt
service constant, and to provide a coupon that is at a
pre-determined increment above the previous loss position levels,
the incremental yield is computed, using any financial projection
algorithm, including the YIELD function of Excel, as shown in FIG.
32C to 32E. FIGS. 32C to 32E show examples of a method, data model,
and interfaces for calculating of reallocated interest available
for lower loss position classes. A summary is provided which
includes interest reallocated from the higher loss position bonds
to the lower loss position bonds, the impact of the higher loss
position bonds credit and marketing penalty, interest reallocated
to the higher loss position bonds, and total higher loss position
debt service. Shown for each payment date are par of higher loss
position insuring bonds (CV), original higher loss position
maturity interest (CW), original higher loss position debt service
(CX), higher loss position interest rate including reallocated
interest from structured insured bonds (CY), higher loss position
maturity interest reallocated from the structured insured bonds
(CZ), higher loss position debt service including reallocated
interest (DA), reallocated interest on higher loss position bonds
from structured insured bonds (DB), reallocated interest on higher
loss position bonds from structured insured bonds as a percent of
par (DC).
[0723] The calculations continue on interface of FIG. 32D. For
various subclasses, a summary is provided including adjusted
proceeds, any bond insurance premiums, COIs, base takedowns, and
net bond proceeds. Shown for each payment date, are the fourth loss
subclass interest rate calculated from FIG. 32B (column DD), the
fourth loss subclass maturity interest (DE), the fourth loss
subclass debt service which is maintained level fro FIG. 32B (DF),
third loss subclass interest rate (DG), third loss subclass
maturity interest (DH), third loss subclass debt service (DI),
second loss subclass interest rate (DJ), second loss subclass
maturity interest (DK), second loss subclass debt service (DL),
higher loss insuring bonds debt service adjusted for credit spread
and marketing penalty (DM), net impact of credit spread and
marketing penalty on higher loss position bonds (DN), and
reallocated interest from higher loss position bonds available for
the lower loss position bonds and program expenses (DO). Thus, the
amount of DO can be used to pay the coupons for the lower loss
positions holders.
[0724] The calculations continue on interface of FIG. 32E. A
summary is provided for the original and adjusted higher loss
position proceeds (which should be the same or substantially the
same). Shown for each payment period, are the lower loss position
insuring bonds par (column DP), the reallocated interest on the
lower loss position insuring bonds from the structured insured
bonds in percents (DQ), the reallocated interest on the lower loss
position insuring bonds from the structured insured bonds in
dollars (DR), the semi-annual interest reallocated to the lower
loss position bonds from the structured insured bonds in dollars
(DS), the program revenues as a percentage (DT), program revenues
as dollar amounts (DU and DV), total interest reallocated to the
lower loss position insuring bonds in dollars (DW), lower loss
position reallocated interest on the lower loss position insuring
bonds in basis points on the lower loss position par (DX),
reallocated interest on the lower loss position insuring bonds to
maturity in dollars (DY), additional coupons on the lower loss
position bonds to maturity in percent (DZ), interest coupon on
lower loss position insuring bond to maturity (EA), and the bond
yield on the lower loss position insuring bonds to maturity which
is calculated based on EA and maintaining the pricing level using,
for example the YIELD function (EB).
[0725] The calculations continue on interface of FIG. 32F. FIG. 32F
shows an of a method, data model, and interfaces for summarizing
the allocation of the lower loss position reallocated interest to
the senior and junior lower loss positions. A summary of calculated
information is shown, including senior lower loss position bond
proceeds, junior lower loss position bond proceeds, total lower
loss position bond proceeds. Each proceeds information may include
additional takedowns, base takedowns, cost of issue, and net
proceeds. Shown for each payment date, are senior lower loss
position insuring bond par (column EC), reallocation interest on
senior lower loss position to maturity in dollars (ED), additional
coupon on senior lower loss position insuring bond to maturity
which is a portion of the reallocated interest from the higher loss
position calculated above (EE), interest coupon on senior lower
loss position insuring bonds to maturity (EF which includes EE),
bond yield on senior lower loss position insuring bond to maturity
which is computed using the YIELD function based on the adjusted
coupon and the level pricing of the senior lower loss position
(EG), interest reallocated to senior lower loss position bonds in
dollars and basis points (EH and EI). Corresponding information for
the junior lower loss position bonds are also calculated and
provided. Shown for each payment date, are junior lower loss
position insuring bond par (column EJ), reallocation interest on
junior lower loss position to maturity in dollars (EK), additional
coupon on junior lower loss position insuring bond to maturity
which is a portion of the reallocated interest from the higher loss
position calculated above (EL), interest coupon on junior lower
loss position insuring bonds to maturity (EM which includes EL),
bond yield on junior lower loss position insuring bond to maturity
which is computed using the YIELD function based on the adjusted
coupon and the level pricing of the junior lower loss position
(EN), interest reallocated to junior lower loss position bonds in
dollars and basis points (EO and EP). Also provided is the surplus
interest from the coupon limit (EQ).
[0726] FIGS. 33A to 33E shows an example of a method, data model,
and interfaces for providing calculations of debt service coverage
based on debt insurance. As shown, a bottom up computations is
provided of coverage for a semi-annual basis, but other time-based
analysis can be provided without departing form the scope of the
invention. The amount of debt that is repaid alternates
semi-annually because of the need to pay principal back in part of
the year.
[0727] FIG. 33A shows credit enhancement provided to the Insured
Bonds by the junior lower loss position bonds to provide at credit
enhancement to the Insured Bond and the Insuring Bonds at the next
higher loss position level to be a BB credit rating. A summary of
the calculation shows the average annual worst case assumed
defaults for the type of Insured Bond (e.g., A rated City and
County GO), an average annual weighted default tolerance based on
the debt service coverage shown, the coverage of the target default
tolerance (weighted average divided by worst case assumed
defaults), the minimum for BB coverage as a percent of the total
bond amount, and the margin of the actual debt service coverage
provided by the BECM method over the a required coverage (coverage
of target default tolerance minus minimum BB coverage). The margin
shows that the debt service covers over an assumed default at a
higher rate. Also shown are effects due to downgrade of the Insured
Bonds' credit rating one or two levels below the current level. The
margin decreases with the downgrade of the credit rating.
[0728] As shown in FIG. 33A, column IQ provides the semi-annual
amount of the Senior Insuring Bond debt service. IR shows the
Junior Insuring Bond debt service (e.g., that can be intercepted).
IS shows other available moneys that can be used to pay the Insured
Bond debt service. IT shows the covered debt service that is
provided for the Insured Bond. IU shows the total amount of
available insured debt service (e.g., IR+IS+IT). IV shows the
coverage of insured debt service (e.g., IU/IT). Column IW shows the
semi-annual default tolerance (e.g., (IV-1)/IV). IX shows the two
semi-annual default tolerance averaged together for the year. IY
shows the 4-year default tolerance which is the running count from
IX of the last 4 years. IZ shows the required default tolerance for
a AAA rating. JA shows the excess of coverage from IX or IY over
that required to enhance a bond to be BB. JB shows the percentage
of Insuring Bonds that are used as the intercepted debt service
shown in IQ and/or IR.
[0729] FIG. 33B shows one level of enhancement above those shown in
FIG. 33A. The debt service of FIG. 33A can be intercepted and used
to enhance Insured Bonds and the Insuring Bonds at the next level
to a BBB credit rating. The summary is substantially the same as
FIG. 33A, except the average values are computed for the scenario
shown, and the minimum BBB coverage requirement is to compute the
margin of actual over required coverage of assumed defaults.
[0730] As shown in FIG. 33B, column IF includes the subclass debt
service provided by the debt service of FIG. 33A (e.g., from column
IQ+IR of FIG. 33A). This subclass debt service can be intercepted
as described herein. All other values of IG-IO are similar to the
calculation shown in FIG. 33A. As shown, the 4-year default
tolerance provided is much higher than that required by the minimum
BBB coverage requirement.
[0731] FIG. 33C shows one level of enhancement above those shown in
FIG. 33B including intercepting the debt service from FIG. 33B, and
enhancing the next highest level and the Insured Bond to be an A
credit rating. The calculations are substantially similar to those
described above.
[0732] FIG. 33D shows one level of enhancement above those shown in
FIG. 33C including intercepting the debt service from FIG. 33C, and
enhancing the next highest level and the Insured Bond to be an AA
credit rating. The calculations are substantially similar to those
described above.
[0733] FIG. 33E shows one level of enhancement above those shown in
FIG. 33D including intercepting the debt service from FIG. 33D, and
enhancing the Insured Bond to be an AAA credit rating. The
calculations are substantially similar to those described
above.
[0734] FIG. 33F shows an example of a method, data model, and
interface for providing a summary of a debt service coverage based
on debt insurance. As shown, a top down computations is provided of
coverage for a semi-annual basis, but other time-based analysis can
be provided without departing form the scope of the invention. In
this example, the debt service coverage results in a credit
enhancement of an A-rated City and County GO bond to an AAA rated.
A summary of the calculation shows the average annual worst case
assumed defaults for this type of bond, an average annual weighted
default tolerance based on the debt service coverage, the coverage
of the target default tolerance (weighted average divided by worst
case assumed defaults), the minimum for AAA coverage as a percent
of the total bond amount, and the margin of the actual debt service
coverage provided by the BECM method over the a required coverage
(coverage of target default tolerance minus minimum AAA coverage).
The margin shows that the debt service covers several orders of
magnitude above what is needed to enhance the credit of the bond to
AAA. For example, this margin can enhance this bond to a "True
AAA."
[0735] Column GI shows the amount available for the Adjusted Debt
Service plus other available less certain fees. The amount for
column GI shows the cash streams from the underlying Insuring Bonds
and other capital (e.g., regulatory capital). Column GJ shows the
amount of structured insure debt service that is needed to be paid
to the Insured Bond holders. Column GK shows the coverage the
amounts from Column GI divided by the amount from Column GJ. Column
GL shows the semi-annual default tolerance (e.g., (GK-1)/GK). The
average for the year of any two numbers in the year is shown in GM.
The 4 year default tolerance of GN is a running average of the GM
in the last 4 years. Column GO shows the worst case assumed annual
defaults. As shown, the amount from GM is much higher than the
worst case scenario of GO, thus increasing the credit rating of the
covered bond.
[0736] Further aspects and embodiments of the invention described
herein relates to a computer-implemented system for minimizing risk
as to a default on payments associated with an investment. The
system can include a company computer implemented component. The
component can be configured for establishing by an insurer a
capital structure within a computer memory of a computer system,
the capital structure designed to minimize risk and structured with
regulatory capital and a cash stream that is pledged to fund the
default; determining whether the established capital structure is
sufficient to obtain a minimal target credit rating for the
insurer; and electronically receiving the target rating based on a
determination that the capital structure is adequate to cover a
depression scenario period.
[0737] In one embodiment, the target credit rating is AAA, wherein
the investment comprises an Insured Bond issued by an issuer, and
the cash stream is produced from an Insuring Bond issued by the
issuer.
[0738] In yet another embodiment, the investment can include a
previously issued bond issued by an issuer, and the cash stream is
produced by an investment unrelated to the issuer and is used as
re-insurance or the previously issued bond.
[0739] Establishing the capital structure can include allocating
the regulatory capital in the computer memory to an amount equal to
a coverage factor multiplied by an average annual depression
scenario default percentage for the investment; selecting by the
computer system an investment criteria to invest the regulatory
capital to create an investment return; determining by the computer
system a portion of the capital structure for a pledged insuring
investment that produces at least a portion of the cash stream; and
securing a draw on sources of the regulatory capital based on the
portion of the cash stream.
[0740] In one embodiment, determining the credit rating can include
including a capital pre-funding in the capital structure;
determining by the computer system an amount of capital pre-funding
by the insurer that is sufficient to cover a default and that is
calculated by (a) at least a pre-funding coverage factor multiplied
by (b) a downgrade function that is applied to an average annual
depression scenario default percentage for the investment based on
the credit rating of the investment; examining by the computer
system, a capital adequacy of the insurer's capital structure to
cover a default based on a default scenario that occurs during or
at an end of a depression scenario period; and determining the
credit rating for the insurer based on the determined capital
pre-funding and the examined capital adequacy.
[0741] The invention also relates to a processor readable medium
for minimizing risk as to a default on payments associated with an
investment, comprising processor readable instructions that when
executed by a processor causes the processor to perform actions.
The actions can include establishing by an insurer a capital
structure within a computer memory of a computer system, the
capital structure designed to minimize risk and structured with
regulatory capital and a cash stream that is pledged to fund the
default; determining whether the established capital structure is
sufficient to obtain a minimal target credit rating for the
insurer; and electronically receiving the target rating based on a
determination that the capital structure is adequate to cover a
depression scenario period.
[0742] The invention also relates to a computer-implemented method,
system, apparatus, and media for insuring a default of debts
specified in financial instruments. The method may include the
steps of establishing, by a computer processor, an insuring debt
related to an insured debt of a debtor based on an insured debt
amount representing at least a proportion of the insured debt;
allocating, in a computer memory associated with an insuring trust,
a first loss class and a second loss class; and routing, over a
computer network, a payment payable from the insuring debt to a
first class holder in the first class, wherein the first class
holder is entitled to the payment based on a debt to the first
class holder of an insuring fund of the insuring trust, and wherein
the insuring fund is for insuring an obligation to make payments
for the insured debt.
[0743] The method may further include intercepting at least a
portion of the payment, when the debtor defaults on the obligation
to make payments for the insured debt; allocating at least a
portion of the payment to the first class holder less an unrelated
payment to cure an unrelated default of an unrelated insured debt
associated with the second class, when the first class is junior to
the second class in a rating scale; and intercepting an unrelated
payment from an unrelated insuring debt associated with the second
class, when the second class is junior to the first class in the
rating scale, and when the debtor defaults on the obligation to
make payments for the insured debt.
[0744] The method may further include intercepting providing an
insuring payment from the insuring trust to a holder of the insured
debt, when the debtor defaults on the obligation to make payments
for the insured debt, wherein the insuring payment is deducted from
a related fund in the insuring trust related to the insured debt
before the insuring payment is deducted from an unrelated fund in
the insuring trust that is unrelated to the insured debt.
[0745] In one embodiment, allocating includes providing a credit
rating for trust issued debts associated with the first class or
second class based on a subordination of the first class to the
second class; and issuing electronic certificates to the first and
second classes based on the credit rating of the classes, wherein
holders of the electronic certificates are entitled to satisfaction
from the insuring trust for trust held debt.
[0746] In one embodiment, the insured debt and the insured debt are
bonds issued by a municipality, wherein the payments are credit
enhancement coupons. This establishing can include determining that
a credit rating for the insured debt is BBB or better; determining
an insuring debt amount of the insuring debt based on an annual
depression-scenario assumed defaults percentage for the debtor
times a multiple of at least 2; and maintained constant, for any
payment from the insured or insuring debts, a proportion of the
insured debt amount to the insuring debt amount; pre-funding the
insuring fund with cash equity in an amount of the annual
depression-scenario assumed defaults percentage for the debtor
times another multiple of at least 1. The multiples can be selected
as desired for optimum safety in the investment.
[0747] The method may further include sending a credit information
record of the insured debt based on an insurance payment
configuration for the insured debt that is structured in the
computer memory; and receiving an increase in a credit rating for
the insured debt based on the sent credit information record.
[0748] Another embodiment of the invention is a device for debt
management. The device can include a computer memory configured to
manage financial data; and a computer processor configured to
perform actions. The actions can include establishing an insuring
debt for a debtor related to an insured debt of a debtor based on
proportion of an insured debt amount of the insured debt to the
insuring debt amount of the insuring debt, wherein the proportion
is maintained constant for any redemption from the insured or
insuring debts; allocating an insuring trust, a first loss class
and a second loss class; and routing a first payment payable from
the insuring debt to a holder in the first class, wherein the
holder is entitled to the first payment based on a debt to the
holder of an insuring fund of the insuring trust, and wherein the
insuring fund is for insuring an obligation to make payments for
the insured debt.
[0749] The actions of the processor can further include
intercepting a first payment of the payments when the debtor
defaults on the obligation to make payments for the insured debt;
allocating a second payment of the payments to cure an unrelated
default of an unrelated debt associated with the second class, when
the first class is junior to the second class in a rating scale;
allocating an unrelated payment from an unrelated insuring debt
associated with the second class, when the second class is junior
to the first class in the rating scale, and when the debtor
defaults on the obligation to make payments for the insured debt;
debiting a remaining payment from a cash capital when other
payments are insufficient to cover the defaults on the obligation
to make payments for the insured debt; and providing an insuring
payment from the insuring trust to holders of the insured debt,
when the debtor defaults on the obligation to make payments for the
insured debt, wherein the insuring payment comprises at least one
or a combination of the first payment, the unrelated payment, or
the remaining payment.
[0750] The actions of the processor can further include receiving,
before the issuance of the insured debt, loss class payments in
exchange for ownership in the loss classes, wherein the loss class
payments is for pre-funding a portion of the insuring fund; sending
a credit information record of the insured debt based on an
insurance payment configuration for the insured debt that is stored
in the computer memory; receiving the increase in the credit rating
for the insured debt based on the sent credit information record;
routing the increase to the debtor, thereby enabling the debtor to
decrease an interest payment payable by the debtor for the insured
debt; and receiving a portion of savings from a decreased interest
payment from the debtor.
[0751] In one embodiment, the insured debt and the insuring debts
are bonds, wherein the payments payable from the insuring debt are
credit enhancement coupons. The actions can further include
structuring, in a field in the computer memory associated with the
insuring fund related to the Insured Bond, an upfront payment
amount from the debtor, wherein the upfront payment is a portion of
a full amount due for insuring the Insured Bond; structuring, in
the field, a remaining portion of the full amount less the upfront
payment, wherein the remaining portion is funded by the debt of the
insuring fund; structuring, in a field of the computer memory
associated with a payment fund, at each of a plurality of time
intervals, a plurality of credit enhancement coupons payable from
the Insuring Bond, wherein the fund is for paying the debt of the
insuring fund, and wherein a sum of the credit enhancement coupons
over the time intervals covers the remaining portion; and providing
an insuring payment to holders of the Insured Bonds, when the
computer memory indicates required payments to cure the default,
wherein the insuring payment is deducted from the insuring fund
that is related to the Insured Bond before the insuring payment is
deducted from an unrelated fund that is unrelated to the Insured
Bond.
[0752] In one embodiment, the upfront payment is insufficient to
cure the default, the insuring payment is deducted from a portion
of the insuring fund associated with at least one of the credit
enhancement coupons, and wherein an outgoing payment from the
payment fund is prohibited when a default to pay at least a portion
of the insured debt amount occurs.
[0753] Another embodiment of the invention is a system for managing
debt insurance over a computer network. The system can include a
computer-implemented issuer component for establishing an insuring
debt related to an insured debt of a debtor based on an insured
debt amount representing at least a proportion of the insured debt,
wherein the proportion is maintained constant for any redemption
from the insured or insuring debts.
[0754] The system can include a computer-implemented insuring trust
component for allocating, in an insuring trust, a first loss class
having a first loss class holder and a second loss class having a
second loss class holder; routing, over the computer network, a
payment payable from the insuring debt to a first class holder in
the first class, wherein the first class holder is entitled to the
payment based on a debt to the first class holder of an insuring
fund of the insuring trust, and wherein the insuring fund is for
insuring an obligation to make payments for the insured debt.
[0755] In one embodiment, routing to the first loss class holder
the related payment further includes allocating the related
payment. In one embodiment, (a) a portion of a defaulted insured
debt service for a default of an obligation on the insured debt is
deducted from the related payment; and (b) a portion of the
defaulted insured debt service for the default of the obligation is
deducted from the related payment, if another debtor defaults on an
unrelated obligation and the first loss class is junior to the
second loss class; and (c) a portion of the related payment is
added to an unrelated payment, if a portion of a prior unrelated
payment from an unrelated insuring debt was used to fund the
defaulted insured debt service for the insured debt.
[0756] In one embodiment, the computer-implemented insuring trust
component is further configured for routing to the second loss
class holder the unrelated payment for an unrelated insuring debt,
by allocating the unrelated payment. In one embodiment, (a) a
portion of the defaulted insured debt service for a default of the
unrelated obligation is deducted from the unrelated payment; (b) a
portion of the defaulted insured debt service for the default of
the unrelated obligation is deducted from the related payment, if
the debtor defaults on the obligation and the second loss class is
junior to the first loss class; and (c) a portion of the unrelated
payment is added to the related payment, if a portion of a prior
related payment from the insuring debt was used to fund the
defaulted insured debt service for the unrelated insured debt.
[0757] In one embodiment, the computer-implemented trust component
is configured to provide the first loss class holder with an first
electronic certificate in the insuring trust related to the insured
debt, and to provide the second loss class holder with a second
electronic certificate in the insuring trust unrelated to the
insured debt, and wherein the insured and insuring debts are
bonds.
[0758] The system may also include a computer-implemented trustee
component configured for receiving, over the network, non-default
principal and interest payments for the insured debt and the
insuring debt from the issuer component; and routing pro-rata
amounts of the non-default payments between holders of the insured
debt and the insuring trust that holds the insuring debt.
[0759] The system may also include a computer-implemented guarantor
component configured for receiving, over the network, an insuring
trust payment in an amount of the defaulted insured debt service;
routing to the trustee component, based on the received insuring
trust payment, a default amount sufficient to satisfy the
obligation on the insured debt; receiving an upfront payment from
the issuer component for guarantying the insured debt; pre-funding
at least a portion of the insuring trust with funds from the first
loss class holder that are received in exchange for a first
electronic certificate for the first loss class; receiving a
contractual record indicating a right to receive a portion of the
principal and interest in the insuring debt's cash flow, if the
default occurs; sending, to the insuring trust component, a portion
of the upfront payment, wherein the portion of the upfront payment
is configured to be paid by the insuring trust component into the
defaulted insured debt service if the default occurs; and receiving
a portion of interests in at least one of a plurality of debts
managed by the insuring trust component.
[0760] In one embodiment, the system can include a
computer-implemented credit agency component configured for
receiving, over the network, a credit information record of the
insured debt based on insurance payment structuring for the insured
debt; and providing an increase in a credit rating for the insured
debt based on the received credit information record.
[0761] Another embodiment of the invention is processor readable
medium comprising instructions that are executable by a computer
processor to cause the processor to perform actions. The actions
can include establishing an insuring debt related to an insured
debt of a debtor based on an insured debt amount representing at
least a proportion of the insured debt; allocating, in a computer
memory associated with an insuring trust, a first loss class and a
second loss class; and routing, over a computer network, a payment
payable from the insuring debt to a first class holder in the first
class, wherein the first class holder is entitled to the payment
based on a debt to the first class holder of an insuring fund of
the insuring trust, and wherein the insuring fund is for insuring
an obligation to make payments for the insured debt.
[0762] In one embodiment, the actions further includes increasing a
credit rating for the insured debt based on a credit formula with
inputs that are independent of a profitability of the insuring
trust, wherein the inputs comprises an amount of insurance
available for insuring the obligation that includes an amount in
the insuring funds for insuring the obligation.
[0763] It is to be understood that the invention is not to be
limited to the exact configuration as illustrated and described
herein. Accordingly, all expedient modifications readily attainable
by one of ordinary skill in the art from the disclosure set forth
herein, or by routine experimentation there from, are deemed to be
within the spirit and scope of the invention as defined by the
appended claims.
[0764] For the sake of brevity, it should be understood that
certain structures and functionality, or aspects thereof, of
embodiments of the present invention that are evident from the
illustrations of the Figures have not been necessarily restated
herein.
[0765] A computer or processor readable medium such as a floppy
disk, CD-ROM, DVD, etc. may be use to store the processes,
techniques, software, and information illustratively described
herein. The media may store instructions, which when executed by a
computer processor causes the processor to perform the processes
described herein. The media can also be stored on devices, such as
a server device, within a database, within main memory, within
secondary storage, or the like.
[0766] Further still, the memory of the system may comprise a
magnetic hard drive, a magnetic floppy disk, a compact disk, a ROM,
a RAM, and/or any other appropriate memory. Further still, the
computer of the system may comprise a stand-alone PC-type
micro-computer as depicted or the computer may comprise one of a
mainframe computer or a mini-computer, for example. Further still,
another computer can access the software program being processed by
the CPU by utilizing a local area network, a wide area network, or
the Internet, for example.
Attachment A
[0767] ATTACHMENT A shows one example of a definition for
implementing the BECM system. ATTACHMENT A is disclosed as a
non-limiting example of the definitions, rules, algorithms, and
parameters for implementing the BECM system. The components of the
BECM system can be programmed by one skilled in the art to perform
the operations as defined below. Other embodiments or variations of
ATTACHMENT A can be implemented without departing from the scope of
the invention.
Key Provisions of Trust Agreement
Article I: Definitions
[0768] "Administrator" means, with respect to the Regulated
Guarantor, The BondModel Company LLC, a Delaware limited liability
company (and its successors and assigns) or a successor firm
selected by the Regulated Guarantor.
[0769] "Aggregate Loss Subclass Percentage" means, for each Loss
Position Subclass and with respect to each Supported Bond Issue or
Supported Transaction, the Average Annual Assumed Default
multiplied by the Loss Subclass Minimum Coverage multiplied by the
Loss Subclass Discount Percentage multiplied by the Loss Subclass
Coverage Factor. This represents the sum of the Loss Subclass
Percentage Requirements for each Loss Position Subclass and all of
the lower Loss Position Subclasses. For example, initially, for an
A rated city or county general obligation bond issue, the Aggregate
Loss Subclass Percentage for the 4th Loss Position Subclass equals
1.75% multiplied by 1.00 multiplied by 100% multiplied by 1.6, or
2.80%. Correspondingly, the Aggregate Loss Subclass Percentage for
the 3.sup.rd Loss Position Subclass equals 1.75% multiplied by 0.80
multiplied by 25% multiplied by 1.6, or 0.56%. A more detailed
illustration of the calculation of Aggregate Loss Subclass
Percentage is included in Exhibit I. For each Supported Bond Issue
or Supported Transaction, the Aggregate Loss Subclass Percentage
shall be deemed to be met for any Loss Position Subclass for which
either: [0770] A. The par amount or proceeds for each maturity of
such subclass and the lower subclasses at least equals the
calculated percentage of the par amount or proceeds, as the case
may be, of the Supported Bonds and Trust Bonds of such maturity or
[0771] B. The Average Annual Debt Service on the Trust Bonds of
such subclass and the lower subclasses at least equals the
calculated percentage of Average Annual Debt Service for such
periods on the total Supported Bonds and Trust Bonds of such
Supported Bond Issue or Supported Transaction.
[0772] For a particular Supported Bond Issue or Supported
Transaction, it is not required that the Trust Bonds in each Loss
Position Subclass meet the Aggregate Loss Subclass Percentage so
long as the requirements of Section 201 D relating to Minimum Trust
Debt Service are met for each Loss Position Subclass.
[0773] "Aggregate Trust Bond Requirement" means the Aggregate Loss
Subclass Percentage for the highest Loss Position Subclass.
[0774] "Agreement" means this Trust Agreement between the
[Regulated Guarantor] and the Trustee dated as of the date
hereof.
[0775] "Allocated Capital Multiple" means 1.0.times. or such higher
multiple as may be established by the Regulated Guarantor, provided
that, for any Supported Bond Issues or Supported Transactions for
which the Cash Alternative Capital Requirement is applied, it shall
mean 9.2.times. (i.e., 4 times 2.3). The higher multiple applicable
for purposes of the Cash Alternative Capital Requirement shall be
applicable solely to the calculation of the Capital Requirement and
not for purposes of other calculations hereunder, such as
calculation of the Liquidity Requirement. The Allocated Capital
Multiple may be reduced by the Regulated Guarantor upon
confirmation by each Rating Agency that such modification will not
cause a reduction of the Rating of any outstanding Supported
Obligations or Trust Certificates.
[0776] "Allocated Capital Requirement" means the Annual Weighted
Average Capital Charge for the entire Supported Bond portfolio
multiplied by the Allocated Capital Multiple multiplied by the
Average Annual Debt Service for such Supported Bond portfolio
(including Other Supported Obligations). In the event that the Cash
Alternative Capital Requirement is used for any portion of the
Supported Bond Portfolio, for purposes of determining the Capital
Requirement, the Allocated Capital Requirement shall consist of two
parts that are calculated separately based on the two distinct
multiples. For the purpose of calculating the Capital Requirement
relating to portion of the portfolio for which the Alternative Cash
Capital Requirement is used, the Capital Requirement shall be
calculated separately for each Supported Bond Issue or Supported
Transaction using the Average Annual Debt Service of such bond
issue or transaction.
[0777] "Annual Weighted Average Capital Charge" means 25% of the
Weighted Average Capital Charge. Such percentage may be modified by
the Regulated Guarantor upon confirmation by each Rating Agency
that such modification will not cause a reduction in the Rating of
any outstanding Supported Obligations or Trust Certificates.
[0778] "Appropriation Bond" means a bond the payment on which is
subject to appropriation by the issuer thereof. A determination by
the Chief Credit Officer that a particular bond issue or issuer
credit does or does not represent an Appropriation Bond credit
shall be dispositive for purposes of this Agreement unless and
until revised by the Chief Credit Officer.
[0779] "Authorized Officer" means, with respect to the Regulated
Guarantor or its Administrator, the Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer, or Chief Credit Officer
or another officer designated by the Chief Executive Officer
thereof. Where a particular officer is specified herein as
authorized to perform certain actions, another officer may also be
designated by the Chief Executive Officer.
[0780] "Average Annual Assumed Default" means the average annual
assumed default over an assumed depression scenario for purposes of
structuring the Support Trust. Until modified as described below,
the Average Annual Assumed Default for any Supported Bond Issue
shall be 25% of the Capital Charge for such bond issue. In using
the Average Annual Assumed Default to size the Trust Bonds and
Trust Certificates related to any Supported Bonds, such Capital
Charge shall apply to the total amount of Supported Bonds and
related Trust Bonds, rather than solely to the Supported Bonds. For
example, for an A rated city or county general obligation bond
issue (and assuming that both Supported Bonds and related Trust
Bonds are part of the Supported Bond Issue), the Average Annual
Assumed Default is 25% of 7% or 1.75%. As a result, and before
application of other factors (such as Loss Subclass Minimum
Coverage, Loss Subclass Discount Percentage, and Loss Subclass
Coverage Factor), the Trust Bonds would represent 1.75% of the
total par amount, proceeds, or debt service of Supported Bonds and
Trust Bonds of each maturity. The Average Annual Assumed Default
may be modified by the Regulated Guarantor upon confirmation by
each Rating Agency that such modification will not result in a
reduction of the Rating of any outstanding Supported Obligations or
Trust Certificates.
[0781] "Average Annual Debt Service" means: [0782] I. For purposes
of determining the Weighted Average Capital Charge, with respect to
the Supported Obligations of each Supported Bond Issue or Supported
Transaction and any related Other Supported Obligations, (A) the
total debt service on such Supported Obligations for the period
from the date of issuance to the maturity of such bonds and
obligations divided by (B) the period from such date of issuance to
the final maturity of such Supported Bond Issue; and [0783] II. For
all other purposes with respect to particular Obligations,
including with respect to the entire portfolio of Supported
Obligations, (a) the total debt service on such Obligations for the
period from the date of the calculation to the latest final
maturity of such Obligations divided by (b) such period.
[0784] The Average Annual Debt Service may be modified by the
Regulated Guarantor upon confirmation by each Rating Agency that
such modification will not result in a reduction of the Rating of
any outstanding Supported Obligations or Trust Certificates.
[0785] "Bond Issue Rating" means for each Rating Agency and with
respect to each Obligation, the rating of such Obligation without
regard to any Support Requirement hereunder and without regard to
any guarantee provided by another monoline insurer. For all
purposes hereunder, Bond Issue Rating shall mean the rating
category of an Obligation, without regard to pluses or minuses or
numeric designations. For example, the Rating of an Obligation with
an assigned rating of A3 or A1 by Moody's or of A- or A+ by
Standard & Poor's or Fitch, shall be "A". For purposes of any
provision of this Agreement that requires a single Bond Issue
Rating (such as Capital Charge and Loss Subclass Discount
Percentage), the Bond Issue Rating of a Supported Bond Issue shall
mean the lowest Bond Issue Rating of such issue from any Rating
Agency unless (a) the Chief Credit Officer shall specify that the
Rating from another Rating Agency shall be used or (b) the
Regulated Guarantor shall adopt distinct methodologies for the
different Rating Agencies, which may occur only upon confirmation
from each Rating Agency that the adoption of such distinct
methodologies will not result in a reduction in the Rating on any
outstanding Supported Obligations or Trust Certificates. Wherever
Bond Issue Rating appears in this Agreement, the Regulated
Guarantor, by action of its Chief Credit Officer, may substitute
Underlying Rating, provided that each Rating Agency shall have
determined that such change shall not result in a reduction of the
rating of any outstanding Supported Obligations or Trust
Certificates.
[0786] "Bond Year" means the period selected by the Regulated
Guarantor for the calculation of annual aggregate debt service for
the Supported Bonds. Unless otherwise determined by the Regulated
Guarantor, the same period shall be used for the calculation of
annual aggregate debt service on other Obligations. For the
purposes of calculating annual aggregate debt service on Trust
Certificates and Trust Bonds, the Regulated Guarantor may select a
distinct period. The Regulated Guarantor may modify the period
selected as the Bond Year for any Obligations upon confirmation by
each Rating Agency that such modification will not result in a
reduction of the Rating on any outstanding Supported Obligations or
Trust Certificates.
[0787] "Borrowed Funds" means money obtained by the issuance of
debt by the Regulated Guarantor or the Support Trust, which debt is
secured in whole or in part by: [0788] 1. Investment earnings on
such Borrowed Funds; [0789] 2. The obligation to apply such
Borrowed Funds to repay the principal of such debt at the maturity
thereof; and [0790] 3. The obligation of the Trustee pursuant to
Section 301 hereof, in the event that any such Borrowed Funds and
earnings are applied to fund a default with respect to Supported
Obligations, to reimburse the amounts so applied with interest
thereon.
[0791] "Capital" means funds being used to meet the Capital
Requirement.
[0792] "Capital Charge" means for a Supported Bond Issue, the
capital charge for such issue determined in accordance with
S&P's 2009 Monoline Criteria. For example, the Capital Charge
for an A-rated city or county general obligation bond issue is 7%.
The Capital Charges for various credit types are set forth in
Exhibit II. Such Capital Charges may be modified by the Regulated
Guarantor upon confirmation by each Rating Agency that such
modification will not cause the reduction of the Rating on any
outstanding Supported Obligations or Trust Certificates.
[0793] "Capital Fund" means the fund established under this
Agreement by the Trustee to hold the Capital and investments
thereof.
[0794] "Capital Requirement" means the greater of the Rating
Minimum Capital Requirement and the Allocated Capital
Requirement.
[0795] "Cash Alternative Capital Requirement" means an alternative
method permitted hereunder for funding required capital for
specific Supported Bond Issues or Supported Transactions using cash
only rather than Trust Bonds. This requirement represents the
amount of cash capital required to withstand a full
depression-scenario default and to still retain AAA ratings.
[0796] "Chief Credit Officer" means ______.
[0797] "Chief Legal Officer" means ______.
[0798] "Counsel" means Winston and Strawn LLP or such other firm
selected by the Regulated Guarantor.
[0799] "Debt Service" or "debt service" means, for any period and
with respect to any Obligation, the principal and interest (and, if
applicable, any other payments that are the subject of a Support
Requirement) coming due during such period. In determining debt
service payable on Supported Bonds and any Other Supported
Obligations, debt service shall mean the higher of (a) the ongoing
debt service payable on such Supported Bonds and Other Supported
Obligations and (b) the debt service that would be payable on such
Supported Bonds and Other Supported Obligations upon the occurrence
of any event which would have the effect of accelerating the
issuer's amortization of such Obligations. The Regulated Guarantor
or Financial Advisor may make such adjustments or refinements to
the calculation of debt service or amounts payable with respect to
Obligations (for example, refinements to deal with variable rate
debt or capitalized interest and including annual fees or other
ongoing payments as debt service) as it deems appropriate, provided
that each Rating Agency has confirmed that such adjustments and
refinements will not result in a reduction in the Rating on any
outstanding Supported Obligations or Trust Certificates.
[0800] "Default Tolerance Requirements" means, with respect to each
Rating Agency, all of the tests and requirements contained in the
methodology established under Section 203 for such Rating
Agency.
[0801] "Designation" means a designation by the Regulated Guarantor
that certain Qualifying Bonds and Other Related Obligations, in
accordance with the terms hereof, shall be beneficiaries of a
Support Requirement hereunder. A Designation shall become
effective, subject to issuance of an insurance policy by the
Regulated Guarantor, at the time that the Regulated Guarantor:
[0802] 1. Enters into a contractual agreement based on such
Designation, regardless of whether such agreement is subject to
conditions; [0803] 2. Submits a bid or proposal to enter into such
a contractual agreement; or [0804] 3. Delivers a certificate
modifying the amount of Supported Bonds or Trust Bonds of a
Supported Bond Issue in accordance with Section 201.
[0805] Upon such a Designation and the issuance of the related
insurance policy, the Qualifying Bonds shall become Supported Bonds
and the Other Related Obligations shall become Other Supported
Obligations. With respect to a Supported Bond or Other Supported
Obligation, "designated" means that such Obligation is the subject
of a Designation.
[0806] "Financial Advisor" means ButcherMark Financial Advisors LLC
or such other qualified firm selected by the Regulated
Guarantor.
[0807] "Fitch" means Fitch Ratings, Ltd.
[0808] "Insurance Law" means the New York Insurance Law, as the
same may be modified from time to time.
[0809] "Liquidity" means: [0810] 1. Funds held under this
Agreement, including Borrowed Funds, being used to meet the
Liquidity Requirement; and [0811] 2. Amounts available under a
Liquidity Facility pursuant to which the Trustee or the Regulated
Guarantor has the right to draw funds needed to provide liquidity,
provided that each Rating Agency confirms that the use thereof will
not cause a reduction in the Rating of any outstanding Supported
Obligations or Trust Certificates. [0812] 3. The portion of Capital
required due to the use of the higher Allocated Capital Multiple
applicable for purposes of the Cash Alternative Capital
Requirement. [0813] 4. Regulatory capital held by the Regulated
Guarantor and premiums held by the Regulated Guarantor, provided in
each case that investments of such amounts would be permitted
investments of Liquidity under this Agreement.
[0814] The initial term of any debt issued to provide such Borrowed
Funds shall not be less than years and remaining term of such debt
shall not be less than months unless each Rating Agency for the
Supported Obligations has confirmed that the shorter term will not
cause a reduction in the Rating of any outstanding Supported
Obligations or Trust Certificates. Such limitation as to term shall
not apply to the repayment obligation with respect to a Liquidity
Facility.
[0815] "Liquidity Facility" means a letter of credit, line of
credit or other similar agreement upon which the Trustee may draw
to fund a defaulted payment on Supported Obligations.
[0816] "Liquidity Fund" means the fund established under this
Agreement by the Trustee to hold the Liquidity and investments
thereof
[0817] "Liquidity Multiple" means 2.0.times.. The Liquidity
Multiple may be modified by the Regulated Guarantor upon 30 days
notice to each Rating Agency, provided that it shall not be less
than the Rating Liquidity Multiple.
[0818] "Liquidity Requirement" means the Liquidity Multiple
multiplied by the Allocated Capital Requirement (calculated without
regard to the Cash Alternative Capital Requirement). The Liquidity
Requirement is a measure of liquid resources required to be
available either within the Trust, or directly to the Regulated
Guarantor, solely for the purpose of making payments required to
cure a payment default on a Supported Obligation.
[0819] "Loss Category Subclasses" means subclasses of bonds
established by the Regulated Guarantor within a Loss Position
Subclass for the purpose of allocating losses within the subclass
first to those Trust Certificates whose related bonds have
characteristics (such as credit type) that, in the judgment of the
Chief Credit Officer, are similar to the other bonds within such
subclass, thereby reducing the possibility that such losses will be
allocated to Trust Certificates whose related bonds have
characteristics that are dissimilar to any defaulted Supported
Bonds. Loss Category Subclasses may also be established by the
Regulated Guarantor where such subclass includes multiple Loss
Position Subclasses (i.e. losses within the Loss Category Subclass
would be allocated by Loss Position Subclass). In either case,
prior to any Loss Category Subclasses being established, each
Rating Agency must confirm that the use thereof will not result in
a reduction in the Rating on any outstanding Supported Obligations
or Trust Certificates.
[0820] "Loss Position Subclasses" means various subclasses of Trust
Certificates (and the Trust Bonds related to such Trust
Certificates) that indicate the order in which the amounts payable
with respect to the Trust Certificates are intercepted in order to
cure a default with respect to a Supported Bond Issue. The inverse
of such order represents the order in which the subclasses are to
be reimbursed for funds intercepted to fund a defaulted payment or
reimbursement therefore. Until modified as described below, the
loss subclasses shall be: [0821] 1.sup.st Loss Position Subclass
[0822] 2.sup.nd Loss Position Subclass [0823] 3.sup.rd Loss
Position Subclass [0824] 4.sup.th Loss Position Subclass [0825]
5.sup.th Loss Position Subclass
[0826] A lower number associated with a Loss Position Subclass
means that such subclass is more exposed to having its cash flows
intercepted than a subclass with a higher number. Trust
Certificates may also be issued which are comprised of multiple
Loss Position Subclasses. The Loss Position Subclasses may be
modified by the Regulated Guarantor at any time (and for purposes
of determining Minimum Trust Debt Service) upon confirmation by
each Rating Agency that such modification will not result in a
reduction of the Rating of any outstanding Supported Obligations or
Trust Certificates.
[0827] "Loss Subclass Capital and Liquidity Requirement" means,
with respect to a particular Loss Position Subclass, a portion of
the Capital and Liquidity equal to an amount specified by the
Regulated Guarantor for such subclass, which portion of the Capital
and Liquidity, to the extent available and provided that it is
sufficient to cure any defaults on Supported Obligations: [0828] A.
Shall be applied to cure such defaults prior to the interception of
Trust Certificate Payments of such subclass (or any higher
subclass) for such purpose; and [0829] B. Shall not be reimbursed
from the Trust Certificate Payments of such subclass (or any higher
subclass) for the period specified for such subclass; provided that
the limitation on reimbursement from such payments shall not apply
if in the judgment of the Chief Credit Officer of the Regulated
Guarantor, the failure to reimburse Capital and Liquidity (a) might
result in a reduction of the Rating of a higher Loss Position
Subclass or of the Supported Bonds or (b) might impair the ability
of the Support Trust to reimburse such Capital and Liquidity.
[0830] Initially, the Loss Subclass Capital and Liquidity
Requirements and associated periods are as follows:
TABLE-US-00006 Loss Position Subclass Requirement (cumulative
including Specified Subclass lower subclass requirements) Period
5.sup.th Subclass 4.sup.th Subclass 3.sup.rd Subclass 2.sup.nd
Subclass 1.sup.st Subclass NA NA
[0831] The specified requirements and periods may be modified by
the Regulated Guarantor (including during the pendency of a
default) provided that each Rating Agency shall confirm that such
modification will not cause a reduction in the Rating of any
outstanding Supported Obligations or Trust Certificates.
[0832] "Loss Subclass Coverage Factor" means the Trust Coverage
Requirement divided by the Loss Subclass Minimum Coverage for the
highest Loss Position Subclass. For example, initially, the Loss
Subclass Coverage Factor is 2.0 divided by 1.25 which equals
1.6.
[0833] "Loss Subclass Discount Percentage" means the percentage of
the Loss Subclass Minimum Coverage that applies to each Loss
Position Subclass for a particular Supported Bond Issue. Unless
modified as described below, the Loss Subclass Discount Percentage
for each Loss Position Subclass shall be based on the relationship
between the Structure Rating category for the next higher subclass
(and, in the case of the highest loss position subclass, for the
Supported Bonds) and the Bond Issue Rating for the Supported Bond
Issue as follows: [0834] Bond Issue Rating lower than Structure
Rating category for next higher subclass: 100% [0835] Bond Issue
Rating equal to Structure Rating category for next higher subclass:
25% [0836] Bond Issue Rating one category higher than Structure
Rating category for next higher subclass: 20% [0837] Bond Issue
Rating two categories higher than Structure Rating category for
next higher subclass: 15% [0838] Bond Issue Rating three or more
categories higher than Structure Rating category for next higher
subclass: 10%
[0839] The Loss Subclass Discount Percentage may be modified by the
Regulated Guarantor upon confirmation by each Rating Agency that
such modification will not result a reduction of the Rating of any
outstanding Supported Obligations or Trust Certificates.
[0840] "Loss Subclass Minimum Coverage" means for each respective
Loss Position Subclass, the following coverage of Average Annual
Assumed Defaults: [0841] 5.sup.th Loss Subclass: 1.25 [0842]
4.sup.th Loss Subclass: 1.00 [0843] 3.sup.rd Loss Subclass: 0.80
[0844] 2.sup.nd Loss Subclass: 0.64 [0845] 1.sup.st Loss Subclass:
0.56
[0846] The Loss Subclass Minimum Coverage may be modified by the
Regulated Guarantor upon confirmation by each Rating Agency that
such modification will not result in a reduction of the Rating on
any outstanding Supported Obligations or Trust Certificates.
[0847] "Loss Subclass Percentage Requirement" means for each Loss
Position Subclass and with respect to each maturity of each
Supported Bond Issue or Supported Transaction, the Aggregate Loss
Subclass Percentage for such Loss Position Subclass minus the
Aggregate Loss Subclass Percentage for the next lower Loss Position
Subclass. For example, in the illustration used in the definition
of Aggregate Loss Subclass Percentage, for the 4th Loss Position
Subclass, the Loss Subclass Percentage Requirement equals 4.20%
minus 0.84%, which equals 3.36%. For a particular Supported Bond
Issue or Supported Transaction, it is not required that the Trust
Bonds in each Loss Position Subclass meet the Loss Subclass
Percentage Requirement.
[0848] "Minimum Trust Debt Service" means, for the period,
beginning on the date of calculation, over which Supported
Obligations and the related Trust Bonds are payable and for each
Loss Position Subclass (together with the lower Loss Position
Subclasses), the sum for all Supported Bond Issues and/or Supported
Transactions of the following product: (a) the Average Annual Debt
Service payable on the bonds of each such Supported Bond Issue or
Supported Transaction (and any Other Related Obligation), in each
case measured to the final maturity thereof, multiplied by (b) the
Aggregate Loss Subclass Percentage of such subclass for such
Supported Bond Issue or Supported Transaction. Minimum Trust Debt
Service may be modified by the Regulated Guarantor upon
confirmation by each Rating Agency that such modification will not
result in a reduction of the Rating of any outstanding Supported
Obligations or Trust Certificates. This definition is intended to
ensure that there is adequate Trust Bond debt service in every Loss
Position Subclass, together with the lower Loss Position
Subclasses, even though for particular Supported Bond Issues or
Supported Transactions, there may not be bonds in every Loss
Position Subclass. The calculation of Minimum Trust Debt Service
shall exclude any Supported Bond Issues or Supported Transactions
for which the capital is funded using the Cash Alternative Capital
Requirement, provided that such exclusion shall not be applicable
until the Allocated Capital Requirement exceeds the Rating Minimum
Capital Requirement.
[0849] "Moody's" means Moody's Investor Services, Inc.
[0850] "Net Trust Bond Payments" means, with respect to each
Supported Bond Issue, the net amounts payable with respect to such
issue taking account of (a) all amounts payable by the issuer to
the Support Trust with respect to such issue, including debt
service thereon, Supplemental Coupon payments, and any fees with
respect thereto and (b) the portion of such amounts required to be
applied to make the Trust Certificate Payments on related Trust
Certificates and (to the extent such amounts have been dedicated to
such purpose) unrelated Trust Certificates.
[0851] "Obligations" means Supported Bonds, Other Supported
Obligations, Trust Bonds, and Trust Certificates.
[0852] "Other Available Funds" means any funds received by the
Trustee other than Trust Certificate Payments, Net Trust Bond
Payments (except to the extent designated by the Regulated
Guarantor as Other Available Funds), Capital, Liquidity, Reserves
and proceeds from the sale of Trust Certificates.
[0853] "Other Supported Obligation" means an Other Related
Obligation that is designated by the Regulated Guarantor as the
beneficiary of a Support Requirement hereunder.
[0854] "Other Related Obligation" means: [0855] I. The following
payments related to Supported Bonds, provided in each case that
either (A) such payments are on a parity with such Supported Bonds
or (B) the Bond Issue Rating for the Supported Bond Issue by each
Rating Agency is deemed to be the same as such agency's Bond Issue
Rating for such payments: [0856] a. Payments due with respect to a
line of credit or letter of credit, insurance or reinsurance
policy, or similar instrument that secures payment of such
designated bonds; and [0857] b. Payments due on any interest rate
swap or similar interest rate exchange agreement determined by the
Regulated Guarantor to be related to such designated bonds, and
[0858] II. Other payments related to such bonds, provided that the
Regulated Guarantor has approved including such payments as Other
Related Obligations and that each Rating Agency has determined that
including such payments as Other Related Obligations will not
result in a reduction of the Rating on any outstanding Supported
Obligations or Trust Certificates.
[0859] "Qualifying Bond" means a bond for which, at the time such
bond is designated as a Supported Bond: [0860] I. The Bond Issue
Rating by each Rating Agency is in one of the four highest rating
categories and [0861] II. The credit type of such bond is listed in
Standard & Poor's, in the 1.sup.st or 2.sup.nd Single-Risk
Category as shown in Exhibit II. The Regulated Guarantor may adopt
a separate list of qualifying credit types for each of Moody's
and/or Fitch. The credit type of each bond that is designated as a
Supported Bond must fit within the qualifying credit types for each
Rating Agency for whom such a list is specified.
[0862] The list of credit types or ratings relating to any Rating
Agency may be modified by the Regulated Guarantor upon confirmation
by such Rating Agency that such modification is not inconsistent
with their ratings and qualifying credit types previously in
effect. Qualifying Bond shall exclude Appropriation Bonds unless
the Specific Rating of such bonds is the same as the Specific
Rating on the issuer's related non-Appropriation bonds. A
determination by the Chief Credit Officer that a bond is a
Qualifying Bond shall be dispositive for purposes of this
Agreement.
[0863] "Rating" means a Supported Rating assigned to any Supported
Bonds or Other Supported Obligations or a Structure Rating assigned
to any Trust Certificates by a Rating Agency; provided, however,
that for purposes of this Agreement, the Rating assigned to any
such bonds by any Rating Agency shall not be deemed to be higher
than the Target Rating with respect to such bonds. For any Trust
Bond and for any Other Related Obligation (before taking account of
any Support Requirement), Rating means an Underlying Rating or Bond
Issue Rating assigned to such Obligation by a Rating Agency.
[0864] "Rating Agency" means, with respect to the Supported Rating
of any series or subclass of Supported Bonds (or any Other
Supported Obligation related thereto) or the Structure Rating of
any Trust Certificates, any nationally recognized rating agency
which has provided a rating for such series or subclass or such
Trust Certificates at the request of the Regulated Guarantor. With
respect to the Underlying Rating or Bond Issue Rating of any
Supported Bond, Other Related Obligation, or Trust Bond, Rating
Agency means any Rating Agency for the related Supported Bonds
which has provided an Underlying Rating or Bond Issue Rating, as
the case may be, for such Obligation.
[0865] "Rating Aggregate Loss Subclass Percentage" means, for each
Loss Position Subclass and with respect to each maturity of each
Supported Bond Issue or Supported Transaction, the Average Annual
Assumed Default multiplied by the Loss Subclass Minimum Coverage
multiplied by the Loss Subclass Discount Percentage multiplied by
the Rating Loss Subclass Coverage Factor.
[0866] This represents the sum of the Rating Loss Subclass
Percentage Requirements for each Loss Position Subclass and all of
the lower Loss Position Subclasses. For example, initially, for an
A rated city or county general obligation bond issue, the Rating
Aggregate Loss Subclass Percentage for the 4th Loss Position
Subclass equals 1.75% multiplied by 1.00 multiplied by 100%
multiplied by 1.6, which equals 2.80%. Correspondingly, the Rating
Aggregate Loss Subclass Percentage for the 3.sup.rd Loss Position
Subclass equals 1.75% multiplied by 0.80 multiplied by 25%
multiplied by 1.6, which equals 0.56%.
[0867] "Rating Liquidity Multiple" means 2.0.times. or such higher
multiple as may be established by the Regulated Guarantor. The
Rating Liquidity Multiple may be reduced by the Regulated Guarantor
upon confirmation by each Rating Agency that such reduction will
not cause a reduction of the Rating of any outstanding Supported
Obligations or Trust Certificates.
[0868] "Rating Loss Subclass Coverage Factor" means the Rating
Trust Coverage Requirement divided by the Loss Subclass Minimum
Coverage for the highest Loss Position Subclass. For example,
initially, the Rating Loss Subclass Coverage Factor is 2.0 divided
by 1.25 which equals 1.60.
[0869] "Rating Loss Subclass Percentage Requirement" means for each
Loss Position Subclass and with respect to each maturity of each
Supported Bond Issue or Supported Transaction, the Rating Aggregate
Loss Subclass Percentage for such Loss Position Subclass minus the
Rating Aggregate Loss Subclass Percentage for the next lower Loss
Position Subclass. For example, initially, for the 3.sup.rd Loss
Position Subclass, the Loss Subclass Percentage Requirement equals
2.80% minus 0.56%, which equals 2.24%. For a particular Supported
Bond Issue, it is not required that the Trust Certificates in each
Loss Position Subclass meet the Rating Loss Subclass Percentage
Requirement so long as the sum of the Trust Certificates in all of
the Loss Position Subclasses meets the Rating Aggregate Loss
Subclass Percentage for the highest Loss Position Subclass.
[0870] "Rating Minimum Capital Requirement" means $200 million.
Such requirement may be increased by the Regulated Guarantor at any
time. The Rating Minimum Capital Requirement may be otherwise
modified by the Regulated Guarantor upon confirmation by each
Rating Agency that such modification will not result in a reduction
of the Rating on any outstanding Supported Obligations or Trust
Certificates.
[0871] "Rating Trust Coverage Requirement" means 1.5.times. for the
purposes of calculating the Loss Subclass Percentage Requirements
and Aggregate Loss Subclass Percentages for a specific Supported
Bond Issue or Supported Transaction and means 2.00 for all other
purposes hereunder (e.g., for the purpose of calculating Minimum
Trust Debt Service). This represents the minimum Trust Certificate
coverage of Average Annual Assumed Defaults for rating purposes.
The Rating Trust Coverage Requirement may be modified by the
Regulated Guarantor upon confirmation by each Rating Agency that
such modification will not result in a reduction of the Rating of
any outstanding Supported Obligations or Trust Certificates.
[0872] "Regulated Guarantor" means ______, a monoline insurer
regulated under the Insurance Law. There should be an agreement
between the Support Trust and the Regulated Guarantor in which the
Regulated Guarantor agrees only to insure obligations that have a
Support Requirement by the Support Trust.
[0873] "Regulated Guarantor Action" means an action taken by an
Authorized Officer of the Regulated Guarantor or of its
Administrator on its behalf, by written notice to the Trustee,
which action is permitted under the terms of this Agreement. Unless
specifically stated herein, actions by the Regulated Guarantor
authorized hereunder shall be taken by Regulated Guarantor Action
and actions authorized hereunder to be taken by a particular
officer of the Regulated Guarantor may be taken by the
corresponding officer of the Administrator.
[0874] "Regulatory Capital Requirement" means $65 million or such
higher amount as shall be equal to the applicable minimum
regulatory capital requirement to provide monoline insurance under
the Insurance Law from time to time. This may not be used if the
Capital Requirement is all used in a manner that permits it to be
counted for regulatory purposes.
[0875] "Reserve Fund" means a fund established under this Agreement
by the Trustee to hold the Reserves and investments thereof.
[0876] "Reserve Requirement" means a requirement established by a
certificate of the Regulated Guarantor that one or more Reserves
are to be created and funded in the manner set forth in such
certificate. Such certificate (a) shall set forth the order in
which such Reserve shall be applied to cure a default with respect
to Supported Obligations (b) may provide for the reimbursement of
such reserve from Trust Resources. Once established, a Reserve
Requirement, including the order in which the reserve can be used
and the provisions for reimbursement thereof, may only be modified
in accordance with the provisions, if any, for modification thereof
that are set forth in the certificate establishing such
requirement.
[0877] "Reserves" means funds being used to meet a Reserve
Requirement.
[0878] "Specific Rating" means for each Rating Agency with respect
to a bond or obligation, the rating of such bond including any
pluses or minuses or numerical designations.
[0879] "S&P's 2009 Monoline Criteria" means the criteria
setting forth capital charges for monoline insurers in Standard
& Poor's Global Bond Insurance 20_ attached hereto as Exhibit
II.
[0880] "Standard & Poor's" means Standard & Poor's, a
Division of The McGraw-Hill Companies, Inc.
[0881] "Senior Credit Officer" means ______
[0882] "Structure Rating" means for each Rating Agency and with
respect to each subclass of Trust Certificates, the rating assigned
by such Rating Agency that reflects the risk that the amounts
payable with respect to such certificates will be intercepted
pursuant to Section 301 hereof.
[0883] "Supplemental Coupon" means, with respect to any Trust Bond
maturity, any portion of the interest rate on such maturity which
is in excess of the unenhanced interest rate otherwise payable by
the issuer as determined by the Regulated Guarantor or Financial
Advisor. Supplemental Coupon also shall also include, to the extent
specified by the Regulated Guarantor, (1) annual fees payable to
the Trust in connection with a Supported Bond Issue or Transaction,
(2) debt service on any additional series of bonds (or portion
thereof) delivered to the Trust in connection with a Supported Bond
Issue or Transaction, or (3) payments generated from the investment
of an amount deposited with the Trustee for such purpose in
connection with a Supported Bond Issue or Transaction. Supported
Coupon payments shall be allocable to particular maturities as
directed by the Regulated Guarantor or Financial Advisor.
[0884] "Support Requirement" means any and all obligations of the
Support Trust to provide Trust Resources (A) to the Regulated
Guarantor to provide funds in the amount required to cure any
default in the payment of debt service on designated Qualifying
Bonds or Other Related Obligations or (B) to other parties on
behalf of the Regulated Guarantor to provide funds in such amounts
or to reimburse funds used to provide such amounts, together with
interest thereon and/or related expenses, all as contemplated by
Section 301 of this Agreement.
[0885] "Supported Bond Issue" means an issue of bonds any portion
of which represents Supported Bonds. Unless the context otherwise
requires, the phrase Supported Bond Issue shall refer only (a) to
those maturities of such issue for which there are Supported Bonds
and (b) to that portion of such maturities which are Supported
Bonds or Trust Bonds (the "related" Supported Bonds and Trust
Bonds, respectively) and/or to related Other Supported Obligations.
Unless the context otherwise requires, with respect to a Supported
Bond Issue or Supported Transaction, With respect to a specific
Supported Bond Issue, any other Supported Bond Issue (and the
corresponding Trust Certificates) that has the same issuer credit,
as determined by the Regulated Guarantor (even if the legal
entities issuing such bonds are different), shall be deemed to be
related to such specific Supported Bond Issue. Any such
determination may be modified at the discretion of the Regulated
Guarantor based on then current facts and circumstances.
[0886] "Supported Bonds" means, with respect to a Supported Bond
Issue or Supported Transaction, that portion of such issue which is
the beneficiary of a Support Requirement.
[0887] "Supported Obligations" means Supported Bonds and Other
Supported Obligations. All Supported Obligations shall also be the
beneficiaries of a monoline insurance policy issued by the
Regulated Guarantor.
[0888] "Supported Rating" means, for each Rating Agency and with
respect to each Supported Bond and Other Supported Obligation, the
rating assigned thereto that reflects the benefit of any Support
Requirements.
[0889] "Supported Transaction" means all of the Qualifying Bonds
of, and Other Related Obligations relating to, a Supported Bond
Issue that either (i) become Supported Obligations as part of a
single Designation or, (ii) if elected by the Regulated Guarantor,
are insured by the Regulated Guarantor under a single insurance
policy (and, in each case, any related Other Supported Obligation).
Unless the context otherwise requires, the phrase Supported
Transaction shall refer only (a) to those maturities of the issue
for which there are Supported Bonds as part of the transaction and
(b) to that portion of such maturities which become Supported Bonds
or Trust Bonds as part of the transaction.
[0890] "Support Trust" means the trust estate established pursuant
to this Agreement.
[0891] "Target Rating" means, for each Rating Agency and with
respect to each subclass of Obligations, any target rating
specified by the Regulated Guarantor for such subclass of
Obligations. For Supported Bonds, the Target Rating shall mean a
targeted Supported Rating. For each subclass of Trust Certificates,
the Target Rating shall mean a targeted Structure Rating for such
subclass. Unless modified, the Target Ratings for the Supported
Bonds and for each Loss Position Subclass for Moody's, Standard
& Poor's and Fitch, respectively, shall be as follows: [0892]
Supported Bonds: Aaa/AAA/AAA [0893] 5.sup.th loss: Aa/AA/AA [0894]
4.sup.th loss: A/A/A [0895] 3.sup.rd loss: Baa/BBB/BBB [0896]
2.sup.nd loss: Ba/BB/BB [0897] 1.sup.st loss: Not rated
[0898] Each Supported Bond and Trust Certificate may be in more
than one subclass with varying rights and may therefore have more
than one Target Rating. Unless otherwise specified by the Regulated
Guarantor, for Trust Bonds, Target Rating means at any time the
Underlying Rating or Bond Issue Rating, as the case may be, of the
related Supported Bonds. The Target Rating for any subclass of
outstanding Obligations may not be reduced without the consent of
the affected subclass.
[0899] "Trust Bond" means a bond deposited into the Support Trust
at the direction of the Regulated Guarantor and related to a
specified Trust Certificate and the related Supported Bond Issue.
Such Trust Bond may be, but is not required to be, a part of such
Supported Bond Issue. However, for purposes hereof, such Trust
Bonds shall be deemed to be part of such Supported Bond Issue.
Prior to the use of Trust Bonds that are not in fact, but are
deemed to be, a part of the same bond issue as the related
Supported Bonds, each Rating Agency for the Supported Bonds must
confirm that the use of such Trust Bonds will not cause a reduction
in the rating of any outstanding Supported Obligations or Trust
Certificate.
[0900] "Trust Bond Payments" means, with respect to each Supported
Transaction, the gross amounts payable to the Trustee with respect
to the related Supported Bonds and Trust Bonds, including any
annual or periodic fees from the bond issuer that are related to
such transaction and payable to the Trustee.
[0901] "Trust Certificate" means a certificate issued by the
Support Trust at the direction of the Regulated Guarantor which
grants to the holder thereof the right to receive Trust Certificate
Payments, subject to the terms of this Agreement with respect to
the right and obligation of the Trustee to intercept such payments
to secure each Support Requirement made by the Support Trust. Each
Trust Certificate shall be payable primarily from payments received
by the Support Trust with respect to a specific Trust Bond (the
"related" Trust Bond). Trust Certificates and the related Trust
Bonds shall be related to a specific Supported Bond Issue as
specified by the Regulated Guarantor. Each Trust Certificate shall
have a principal amount equal to the principal amount of the
related Trust Bonds.
[0902] "Trust Certificate Payments" means, with respect to each
Trust Certificate: [0903] I. Payments of principal on the related
Trust Bond at maturity or upon earlier redemption (including
sinking fund payments), together with any redemption premium
payable with respect to such bond; [0904] II. A specified portion
of the payments of interest payable on such related Trust Bond;
[0905] III. A specified portion of the payments of taxable interest
payable on such related Trust Bond; [0906] IV. A specified portion
of any other payments of various types of interest or recurring
fees payable with respect to the Supported Bonds of the related
Supported Bond Issue or other Trust Bonds related to such bond
issue; and [0907] V. Other specified amounts from funds available
under this Agreement, including without limitation: [0908] a. Debt
service payments on related Trust Bonds or other Trust Bonds that
are received by the Support Trust and that are not payable with
respect to a specific Trust Certificate; [0909] b. Recurring fees
payable to the Support Trust with respect to any non-related
Supported Bonds or Trust Bonds that are not payable with respect to
a specific Trust Certificate; and [0910] c. Any other Trust Bond
Payments or Other Available Funds.
[0911] "Trust Coverage Requirement" means 2.00. This represents
Regulated Guarantor policy with respect to the minimum Trust
Certificate coverage of Average Annual Assumed Defaults. The Trust
Coverage Requirement may be modified by the Regulated Guarantor
upon notice to the Trustee and upon 30 days notice to each Rating
Agency provided, however, that it may not at any time be less than
the Rating Trust Coverage Requirement.
[0912] "Trust Resources" means the following amounts which, to the
extent available, may be used by the Trustee in accordance with
this Agreement to fund any defaulted payments that are the subject
of a Support Requirement: [0913] 1) Trust Certificate Payments on
certificates related to the defaulted Supported Bond Issue: [0914]
First, such payments on certificates maturing on the dates that any
such defaulted payments are due (or on the certificate payment
dates corresponding to such dates), [0915] Second, such payments
that are due on any such dates with respect to certificates
maturing after such dates, and [0916] Third, other such payments
due after such dates and within the shortest period needed to fully
fund the requirements payable from such Trust Resources; [0917] 2)
Trust Certificate Payments on certificates that are not related to
the defaulted Supported Bond Issue: [0918] To the extent consistent
with the terms of this Agreement and of the Trust Certificates,
including, without limitation terms concerning Loss Position
Subclasses, Loss Category Subclasses and Trust Subgroups, the
Regulated Guarantor shall exercise discretion as to: [0919] Whether
and when to apply such payments to fund the requirements payable
from Trust Resources, and [0920] Which, if any, subclasses of Trust
Certificates shall be used to fund any such requirements or portion
thereof [0921] With respect to Trust Certificates within the same
set of applicable subclasses, as determined by the Regulated
Guarantor, requirements payable from Trust Resources shall be
funded within the shortest period needed to fully fund such
requirements from the date determined by the Regulated Guarantor to
begin or resume funding such requirements from such set of
subclasses. [0922] 3) Capital; [0923] 4) Liquidity from Borrowed
Funds; [0924] 5) Liquidity from Liquidity Facilities; [0925] 6)
Reserves established at the direction of the Regulated Guarantor;
and [0926] 7) Other Available Funds dedicated for such purpose at
the direction of the Regulated Guarantor.
[0927] "Trustee" means ______
[0928] "Trust Subgroups" means subclasses established by the
Regulated Guarantor by allocating all of the Supported Obligations,
together with related Trust Bonds and Trust Certificates and
specified portions of the Capital, Liquidity, Reserves and Other
Available Funds, into distinct subgroups such that: [0929] I.
Within each such Trust Subgroup, any losses from a default of a
Supported Obligation within such subgroup would be funded first
from Trust Resources allocated to such Subgroup (the "related"
subgroup). Trust Resources allocated to other Trust Subgroups
("nonrelated" subgroups) may be applied only as deemed necessary by
the Regulated Guarantor to make timely payment of a Supported
Obligation or, to the extent that Trust Resources of the related
subgroup are deemed to be insufficient, to reimburse amounts drawn
from Liquidity or Capital allocated to the related subgroup. Any
amounts used from a nonrelated subgroup shall be promptly
reimbursed from Trust Resources of the related subgroup as funds
become available. [0930] II. At the time each such Trust Subgroup
is established, each Rating Agency shall confirm that the creation
of such subgroup will not result in the reduction of the Rating on
any outstanding Supported Obligations or Trust Certificates.
[0931] Trust Subgroups previously established may also be modified
by the Regulated Guarantor, provided that each Rating Agency shall
confirm that such modification will not result in a reduction in
the Rating on any outstanding Supported Obligations or Trust
Certificates.
[0932] "Underlying Rating" means for each Rating Agency and with
respect to each Obligation, the rating of such Obligation without
regard to any Support Requirement hereunder. The Underlying Rating
of a Trust Certificate shall be the Underlying Rating of the
related Trust Bond. For all purposes hereunder, Underlying Rating
shall mean the rating category of an Obligation, without regard to
pluses or minuses or numerical designations. For example, the
rating of an Obligation with an assigned rating of A3 or A1 by
Moody's or of A- or A+ by Standard & Poor's or Fitch, shall be
"A". For purposes of any provision of this Agreement that requires
a single Underlying Rating, the Underlying Rating of a Supported
Bond Issue shall mean the lowest Underlying Rating of such issue
from any Rating Agency unless (a) the Chief Credit Officer shall
specify that the Rating from another Rating Agency shall be used or
(b) the Regulated Guarantor shall adopt distinct methodologies for
the different Rating Agencies, which may occur only upon
confirmation from each Rating Agency that the adoption of such
distinct methodologies will not result in a reduction in the Rating
on any outstanding Supported Obligations or Trust Certificates.
[0933] "Weighted Average Capital Charge" means: [0934] I. For the
Supported Bonds of each Supported Bond Issue, (a) the Average
Annual Debt Service for such Supported Bonds multiplied by the
Capital Charge for such issue divided by (b) the sum of the Annual
Average Debt Service for the Supported Bonds of all Supported Bond
Issues; and [0935] II. With respect to the entire portfolio of
Supported Bonds, the sum of the Weighted Average Capital Charges
for all Supported Bond Issues.
[0936] The Weighted Average Capital Charge may be modified by the
Regulated Guarantor upon confirmation by each Rating Agency that
such modification will not result in a reduction of the Rating of
any outstanding Supported Obligations or Trust Certificates.
Article II
Section 201 Designation of Supported Bonds
[0937] At the time that any Supported Bonds and Other Related
Obligations are designated by the Regulated Guarantor in connection
with a Supported Transaction: [0938] A. Such Supported Bonds shall
be Qualifying Bonds. [0939] a. Satisfaction of this requirement may
be conclusively demonstrated by a certificate of a Senior Credit
Officer or of the Financial Advisor. [0940] B. The amount of each
Loss Position Subclass of Trust Bonds related to such Supported
Bonds shall be specified by a certificate of the Regulated
Guarantor or the Financial Advisor or, if permitted hereunder, such
certificate may specify that the Cash Alternative Capital
Requirement is being used. [0941] C. The Trust Bonds related to
such Supported Bonds shall meet the Aggregate Trust Bond
Requirement. [0942] a. Satisfaction of this requirement may be
conclusively demonstrated by a certificate of the Financial
Advisor. This requirement shall not apply with respect to any
Supported Bond Issue or Supported Transaction for which capital is
funded using the Cash Alternative Capital Requirement. [0943] D.
For each Loss Position Subclass, together with the lower Loss
Position Subclasses and taking account of estimated debt service on
the designated Supported Obligations and related Trust Bonds, the
sum for all Supported Bond Issues and/or Supported Transactions of
the Average Annual Debt Service calculated separately on each such
Supported Bond Issue or Transaction, in each case measured to the
final maturity thereof, shall not be less than the Minimum Trust
Debt Service for such subclass. [0944] a. Satisfaction of this
requirement may be conclusively demonstrated by a certificate of
the Financial Advisor. [0945] E. Upon such Designation and taking
account of estimated debt service on the designated Supported
Obligations and related Trust Bonds, the Default Tolerance
Requirements for each Rating Agency shall be met. [0946] a.
Satisfaction of this requirement may be conclusively demonstrated
by a certificate of the Financial Advisor. [0947] F. The monoline
insurance policy to be issued by the Regulated Guarantor shall be
in a form approved by each Rating Agency. [0948] a. Satisfaction of
this requirement may be conclusively demonstrated by a certificate
of Counsel or of the Chief Legal Officer. [0949] G. The amounts on
deposit in the Capital Fund, the Liquidity Fund (including any
Liquidity Facilities) and any Reserve Funds are not less than the
Capital Requirement, the Liquidity Requirement, and any applicable
Reserve Requirement, respectively, taking account of the designated
Supported Obligations and, in each case, less any amounts applied
to cure defaults pursuant to Section 301 that have not been
reimbursed. [0950] a. Satisfaction of this requirement may be
conclusively demonstrated by certificates of (a) the Trustee
stating the respective amounts available in such funds (e.g., as of
the last semi-annual valuation date), (b) the Regulated Guarantor
indicating the deposits to such Funds since the such last valuation
date, and (c) the Financial Advisor stating the respective
requirements and indicating that the following sums are at least
equal to the respective requirements: [0951] i. The amounts on
deposit in each such fund minus [0952] ii. Any amounts that have
been withdrawn pursuant to Section 301 and that have not been
reimbursed. [0953] H. The Trust Bond Payments and Other Available
Funds specified by the Regulated Guarantor to make the Trust
Certificate Payments on the Trust Certificates related to such
Supported Transaction are sufficient for such purpose. [0954] a.
Satisfaction of this requirement may be conclusively demonstrated
by a certificate of the Financial Advisor.
[0955] For the purpose of performing the analyses required in
connection with subparagraphs D, E and H of this section in
connection with a Designation of Supported Obligations, the
Financial Advisor may make such assumptions as it deems to be
reasonable, including, without limitation, with respect to: (1) the
specific terms of the Trust Certificates related to the Supported
Transaction such as certificate payment dates and interest rates,
(2) the amounts of variable interest rate payments, and (3) the
amounts of interest earnings and Other Available Funds. In the
event that Trust Subgroups have been established hereunder, the
requirements set forth in D, E, G, and H shall be separately both
to each Trust Subgroup and to this Agreement as a whole. The amount
of Trust Bonds and related Trust Certificates for a Supported Bond
Issue may be modified by certificate of the Regulated Guarantor
such that either (1) a larger amount of bonds are designated as
beneficiaries of a Support Requirement or (2) the amount of Trust
Bonds is reduced, provided that, at the time such certificate is
delivered, the requirements of Section 201 are met for designation
of the Supported Bonds.
Section 202 Trust Certificate and Trust Bond Requirements
[0956] The Regulated Guarantor shall provide reasonable notice to
the Trustee of the terms of the Trust Certificates relating to each
Supported Transaction, including the terms relating to the matters
described in paragraphs I through V of the definition of Trust
Certificate Payments. The Trustee shall issue and deliver such
Trust Certificates to the purchaser's thereof in connection with
the closing of the Supported Transaction and the delivery of a
monoline insurance policy by the Regulated Guarantor. The payment
dates of the Trust Certificates shall be identical to those of the
Supported Bonds unless otherwise specified by the Regulated
Guarantor. An example of a form of Trust Certificate is included in
Exhibit III.
Section 203 Default Tolerance
[0957] The Regulated Guarantor may establish, and may from time to
time modify, a methodology for each Rating Agency for determining
whether, at the time the Supported Bonds relating to each Supported
Transaction are designated, the Trust Resources available over the
term of the portfolio of all Supported Obligations are sufficient
to maintain the Supported Ratings of the Supported Obligations and
the Structure Ratings of the portfolio of Trust Certificates. Any
modification of such a methodology for a Rating Agency shall be
effective only upon confirmation from such Rating Agency that such
modification will not cause a reduction in its Rating of any
outstanding Supported Obligations or Trust Certificates.
Article III
Section 301 Obligation to Apply Trust Resources to Cure
Defaults
[0958] Each item listed in the definition of Trust Resources
represents the loss position of the respective category of Trust
Resources. The loss positions do not reflect the likelihood that a
particular category of resources will be drawn upon in order to
prevent a non-payment of Supported Obligations. However, the lower
the number associated with a particular category of Trust
Resources, the greater the ultimate exposure to non-payment risk
since the categories with the lower loss position will be utilized
to reimburse amounts that have been drawn from higher loss
categories in order to cure a default. In establishing Reserves or
Other Available Funds, the Regulated Guarantor may assign them a
lower loss position than indicated in the definition of Trust
Resources.
[0959] In the event that the Trustee receives notice from the
Regulated Guarantor, any party designated by the Regulated
Guarantor, or from a paying agent for a Supported Obligation that
insufficient funds are available to make timely payment of amounts
then due and owing with respect to such Obligation, the Trustee
shall: [0960] I. Apply Trust Resources as necessary to provide the
funds needed to make full and timely payment of the Supported
Obligations. To the extent that the Regulated Guarantor, or other
party on its behalf, shall directly fund any such defaulted
payments and shall become subrogated to the rights of the Supported
Obligations, the obligation of the Trustee hereunder to make timely
payment of such amount shall run to the subrogated party and the
obligation to such party shall be deemed to be the Supported
Obligation hereunder. There shall be no obligation hereunder to
reimburse funds applied to pay Supported Obligations pursuant to a
guarantee on such Obligations that existed at the time such
obligations were designated as Supported Obligations hereunder.
[0961] II. If Trust Resources are used to cure a default on a
Supported Obligation, the Trustee shall use available Trust
Resources from the lowest loss position categories of Trust
Resources to make timely reimbursement any amounts drawn from any
higher loss position category, with such reimbursement going first
to the highest loss position category that has not been fully
reimbursed. Amounts payable pursuant to this paragraph II shall be
subordinate to amounts then payable pursuant to paragraph I. [0962]
III. Intercept Trust Certificate Payments for the purpose of:
[0963] A. Making funds directly available to cure a default
relating to Supported Obligations; [0964] B. Reimbursing amounts
actually used to cure a default either from higher loss categories
of Trust Resources, from Trust Certificates that are not related to
the defaulted Supported Obligations or from higher Loss Position
Subclasses of Trust Certificates; and [0965] C. Paying interest or
reimbursing lost earnings on amounts used from higher Loss Category
Subclasses of Trust Resources and/or related expenses, but not
interest on amounts intercepted from non-related Trust Certificates
or from higher Loss Position Subclasses of Trust Certificates.
[0966] If the losses to be allocated within a set of subclasses to
a maturity or payment date are less than the Trust Certificate
Payments available to fund the losses, such losses may be allocated
in the discretion of the Regulated Guarantor either pro-rata or to
bonds selected at random.
[0967] If the Trustee receives timely directions from the Regulated
Guarantor consistent with the terms of this Agreement and if
adhering to such directions would (in the judgment of the Trustee)
result in timely payment of the Supported Obligations or timely
reimbursement of Trust Resources used to fund or reimburse such
payments, the Trustee shall apply Trust Resources in accordance
with such Regulated Guarantor directions. In the absence of
direction from the Regulated Guarantor, if such directions are not
consistent with this Agreement, or if adhering to such directions
would not (in the judgment of the Trustee) result in timely
payment, the Trustee shall apply Trust Resources in accordance with
its best judgment in order to make timely payment of such Supported
Obligations or such timely reimbursement. The Trustee may
conclusively rely on advice of Counsel with respect to whether the
Regulated Guarantor's directions or the Trustee's proposed actions
are consistent with this Agreement.
[0968] Any recovery of defaulted payments realized with respect to
any Trust Bonds shall be applied to reimburse the various
categories of Trust Resources, including Trust Certificates, in
accordance with this section.
Section 302 Trust Certificate Proceeds
[0969] The Support Trust shall use the proceeds from the sale of
Trust Certificates solely to pay the purchase price of the related
Trust Bonds to the issuers or underwriters thereof.
Section 303 Obligation to Make Trust Certificate Payments; No Sale
of Trust Bonds
[0970] Each such Trust Bond shall be held by the Support Trust and,
subject only to the right and obligation of the Trustee to
intercept Trust Certificate Payments pursuant to Section 301 of
this Agreement, the Trust Certificate Payments with respect to the
Trust Certificates related to such Bond shall be paid to the
certificate holder on the payment dates of the certificate and
shall be of first priority under this Agreement. The Trustee shall
not sell, nor permit the sale or transfer of, any Trust Bond
without the consent of the certificate holder of the related Trust
Certificate.
Section 304 Net Payments from Supported Bond Issues
[0971] The Net Trust Bond Payments with respect to each Supported
Bond Issue shall be promptly paid to the Regulated Guarantor unless
otherwise specified by the Regulated Guarantor.
Section 305 Other Available Funds
[0972] Any Other Available Funds (including earnings on all of the
funds and accounts hereunder and including amounts held in the
Capital, Liquidity or Reserve Fund that are in excess of the
respective requirements) received or held by the Trustee shall be
promptly paid as specified by the Regulated Guarantor and, in the
absence of other direction, shall be promptly paid to the Regulated
Guarantor. Any direction of the Regulated Guarantor with respect to
the disposition of Other Available Funds may be modified by the
Regulated Guarantor except to the extent expressly limited in the
document establishing such direction.
Section 306 Allocation of Potential Losses on Defaulted or
Deteriorating Credits
[0973] The Regulated Guarantor may at its discretion designate
which Trust Certificates will be subject to having their Trust
Certificate Payments intercepted to cure a future payment defaults
with respect to existing defaulted credits or with respect to other
specific credits, including the order in which such payments will
be intercepted. The Regulated Guarantor may also specify that in
the event that any Trust Certificates selected for such purpose are
redeemed prior to the scheduled payment date thereof, the
redemption proceeds may be retained by the Trustee to secure such
potential future payment defaults until such scheduled payment date
shall have passed.
[0974] The Regulated Guarantor may subordinate Trust Certificates
outstanding prior to a specific date (relative to Trust
Certificates issued thereafter) with respect to the risk of default
of a designated Supported Bond Issues or Supported
Transactions.
Article IV
Section 401 Revenue Fund
[0975] Pending disbursement hereunder, Other Available Funds shall
be held on deposit in the Revenue Fund.
Section 402 Capital Fund
[0976] Unless being used pursuant to Section 301 to cure a default,
Capital shall be held on deposit in the Capital Fund. Such Capital
shall be used solely for the purpose of curing defaults of
Supported Obligations in accordance with Section 301.
[0977] A portion of the Capital on deposit in the Capital Fund at
least equal to the greater of the Regulatory Capital Requirement or
the minimum surplus to policy holders required under the Insurance
Law shall be invested in accordance with Section 1402 of Insurance
Law.
Section 403 Liquidity Fund
[0978] Unless being used pursuant to Section 301 to cure a default
or unless held by the Regulated Guarantor, Liquidity shall be held
on deposit in the Liquidity Fund.
Section 404 Reserve Fund
[0979] Unless being used pursuant to Section 301 to cure a default,
Reserves shall be held on deposit in a Reserve Fund.
Section 405 Trust Certificate Fund
Section 406 Other Funds and Accounts
[0980] At the direction of the Regulated Guarantor, the Trustee
shall establish other funds and accounts provided that such
directions are not inconsistent with the terms of this Agreement.
Such funds and accounts shall be funded, applied, and modified as
provided in such direction, provided that each Rating Agency shall
have confirmed that such actions will not cause a reduction in the
Rating of any outstanding Supported Obligations or Trust
Certificates. In addition, the Trustee may create such accounts
within the funds established hereunder as it shall deem necessary
or desirable in order to carry out its responsibilities under this
Agreement.
Section 407 Valuation of Investments
[0981] Unless otherwise directed by the Regulated Guarantor,
investments hereunder shall be valued at amortized cost. Prior to
any modification of an existing valuation approach for any
investments held under this Agreement, each Rating Agency shall
confirm that such modification will not result in a reduction of
the Rating on any outstanding Supported Obligations or Trust
Certificates.
Article V
Section 501 Miscellaneous
[0982] Provisions requiring consent of affected Trust Certificate
holders include: [0983] Any change in the right of a certificate
holder to be paid the Trust Certificate Payments specified with
respect to such certificate, other than those provisions relating
to intercepting Trust Certificate Payments. [0984] Any change in
the order in which or purposes for which outstanding Trust
Certificate Payments are intercepted, except that: [0985] At the
direction of the Regulated Guarantor, Loss Category Subclasses may
be created and/or modified in order to group related credits and
risks together so that the payments of Trust Bonds that are similar
to a defaulted Supported Bond Issue are intercepted before the
payments of dissimilar or less similar credits as reasonably
determined by the Regulated Guarantor. However, no such change
shall be made which results in a reduction of the rating of any
Trust Certificate by any Rating Agency. [0986] At the direction of
the Regulated Guarantor, Trust Subgroups may be created and/or
modified, provided that prior to the creation or modification of
any Trust Subgroup, each Rating Agency shall confirm that such
action will not result in a reduction of the rating of any
outstanding Supported Obligations or Trust Certificates.
[0987] The Regulated Guarantor shall exercise the voting rights of
all Supported Bonds and Trust Bonds. The Trust Agreement may be
amended as directed by the Regulated Guarantor and without consent
to adopt distinct methodologies for the different Rating Agencies
for designating Supported Bonds, provided that any such amendment
shall take effect only upon confirmation from each Rating Agency
that the adoption of such distinct methodologies will not result in
a reduction in the Rating on any outstanding Supported Obligations
or Trust Certificates.
[0988] Except as noted above, amendments to the provisions of this
Agreement can be made which, in the reasonable judgment of the
Regulated Guarantor, do not materially adversely affect the rights
or obligations of either Supported Bonds or Trust Certificates;
provided, however, that each Rating Agency shall confirm that such
amendments do not result in any reduction of the rating of any
Supported Obligations or Trust Certificates.
[0989] The Trustee may conclusively rely on an opinion of Counsel
with respect to the interpretation of any aspect of this Agreement.
The Trustee shall interpret this Trust Agreement in accordance with
an opinion of Chief Legal Counsel provided that the Trustee also
receives a concurring opinion from Counsel.
Exhibit I
Calculation of the Aggregate Loss Subclass Percentage and Loss
Subclass Percentage Requirement for an A Rated City or County
General Obligation Bond Issue
TABLE-US-00007 [0990] Discount Percentage (Based on Bond Issue
Supported Rating vs. Bond Rating Subclass Loss Achieved by
Structure Aggregate Position Targeted Subclass, Rating for Loss
Subclass Subclass together with Default Minimum next higher
Coverage Subclass (from low Structure Lower Percentage Coverage
Subclass) Factor Percentage Subclasse to high) Rating Subclasses
(a) (b) (c) (d) =a * b * c * d Percentag 1st NR BB 7/4 = 1.75 .56 2
Steps 2/1.25 = 1.6 .35 .392 lower; 15% 2nd BB BBB 7/4 = 1.75 .64 1
Step lower; 2/1.25 = 1.6 .53 .056 20% 3rd BBB A 7/4 = 1.75 .80
Same; 25% 2/1.25 = 1.6 .84 .112 4th A AA 7/4 = 1.75 1.00 1 step
higher; 3/1.25 = 1.6 4.20 2.24 100% 5th AA AAA 7/4 = 1.75 1.25 2
step higher; 2/1.25 = 1.6 3.5 .70 100% Supported AAA 3.5 Bond
Rating & Aggregate Trust Bond Requirement
Exhibit II
[0991] Capital Charges Percentages for Various Credit Types
Representing Assumed Aggregate Percentage Defaults over a Four-Year
Depression Scenario
TABLE-US-00008 Single-risk Ratings CCC B BB BBB A AA AAA category
General Obligation States 30 21 15 4 2 2 1 1 Cities and counties
100 70 50 13 7 5 4 1 Schools--elementary and secondary 40 28 20 5 3
2 2 1 Special district 120 84 60 16 8 6 5 1 Community college
district 100 70 50 13 7 5 5 1 Tax-Supported Debt Sales, gas,
excise, gas and vehicle registration Local 150 105 75 20 11 8 6 2
Statewide 80 56 40 10 6 4 3 1 Guaranteed entitlements 100 70 50 13
7 5 5 1 Special assessments, Mello Roos, tax increment 250 175 125
33 18 13 10 4 financings Hotel/motel 250 175 125 33 18 13 10 4
Personal income Less than 1.0 million population 150 105 75 20 11 8
6 2 More than 1.0 million population 80 56 40 10 6 4 3 1 Cigarette,
liquor 250 175 125 33 18 13 10 4 Health Care Hospitals 350 245 175
46 25 18 14 6 Hospital systems (three or more hospitals with 300
210 150 39 21 15 12 5 geographic dispersion) Hospital equipment
loan program 350 245 175 46 25 18 14 6 Health maintenance
organization 350 245 175 46 25 18 14 6 Clinic practices closely
affiliated with hospital 350 245 175 46 25 18 14 6 Nursing home 350
245 175 46 25 18 14 6 Nursing home system (three or more homes with
300 210 150 39 21 15 12 5 geographic dispersion) Life-care center
350 245 175 46 25 18 14 6 Life-care center system (three or more
centers 300 210 150 39 21 15 12 5 with geographic dispersion) Human
service providers 200 140 100 26 14 10 8 3 Utilities Public power
agencies and utilities with special 400 280 200 52 28 20 16 6
project risk (1) Public power agencies and utilities with high 300
210 150 39 21 15 12 5 dependence on nuclear (2) Public power
agencies and utilities with no special 150 105 75 20 11 8 6 2
project risk and little nuclear dependence (3) Water, sewer,
electric, and gas utilities (revenue- 120 84 60 16 8 6 5 1 secured)
(4) Solid waste disposal to energy or landfill project 250 175 125
33 18 13 10 4 (single site) Solid waste system with landfill and/or
waste-to- 200 140 100 26 14 10 8 3 energy facility Solid waste
transfer stations, trucks (no 150 105 75 20 11 8 6 2
landfill/waste-to-energy facility) Special Revenue Private colleges
and universities and independent schools General obligation 250 175
125 33 18 13 10 4 Auxiliary enterprises 350 245 175 46 25 18 14 6
Public colleges and universities and community college revenue
bonds General obligation - unlimited-fee pledge 90 63 45 12 6 5 4 1
General obligation - limited-fee pledge 100 70 50 13 7 5 5 1
Auxiliary enterprises and related foundations 150 105 75 20 11 8 6
2 Guaranteed student loans 100 70 50 13 7 5 5 1 Not-for-profit and
501(c)3s 350 245 175 46 25 18 14 6 Charter schools 350 245 175 46
25 18 14 6 Airports 120 84 60 16 8 6 5 1 Limited tax-backed 100 70
50 13 7 5 5 1 Passenger facility charge 200 140 100 26 14 10 8 3
Special facility (with rate flexibility) 160 112 80 21 11 8 7 2
Ports 180 126 90 23 13 9 7 2 Limited tax-backed 140 98 70 18 10 7 6
1 Special facility (with rate flexibility) 300 210 150 39 21 15 12
5 Parking 250 175 125 33 18 13 10 4 Toll roads Five-year operating
history 200 140 100 26 14 10 8 3 Less than five-year operating
history 300 210 150 39 21 15 12 5 Bridges Five-year operating
history 250 175 125 33 18 13 10 4 Less than five-year operating
history 350 245 175 46 25 18 14 6 Federal grant-secured obligations
160 112 80 21 11 8 7 2 Federal grant-secured obligations with
additional 120 84 60 16 8 6 5 1 credit support Housing Bonds HFA
ICRs 150 105 75 20 11 8 6 2 PHA (capital fund financings) 200 140
100 26 14 10 8 3 PHA ICRs 250 175 125 33 18 13 10 4 State agency
single-family** 100 70 50 13 7 5 5 1 Local agency single-family**
200 140 100 26 14 10 8 3 FHA-insured multifamily** 6 4.2 3 0.8 0.4
0.3 0.2 1 Stand-alone affordable housing/Section 8/student 350 245
175 46 25 18 14 6 housing Mobile home parks/single-borrower pools
300 210 150 39 21 15 12 5 Military housing/multi-borrower pools 250
175 125 33 18 13 10 4 Investor-Owned Utilities Electric
distribution system 120 84 60 16 8 6 5 1 Water, electric, and gas
120 84 60 16 8 6 5 1 Gas distribution 150 105 75 20 11 8 6 2
Telephones 150 105 75 20 11 8 6 2 Natural gas pipeline 450 315 225
59 32 23 18 6 Source: Standard and Poor's Single Risk
Categories
Exhibit III
Sample Form of Trust Certificate
[0992] This Trust Certificate is related to the following Trust
Bond: ______ in the amount of $______.
[0993] This Trust Certificate is entitled to the following Trust
Certificate Payments from such Trust Bond (subject to the right and
obligation of the Trustee to intercept such Trust Certificate
Payments to cure a payment default with respect Supported
Obligations under the Agreement): [0994] 100% of the principal and
redemption price payable on such Trust Bond [0995] 100% of a first
type of interest on such Trust Bond: ______% [0996] The following
supplemental coupon, which represents a portion of the supplemental
coupon payable on the such Trust Bond: ______%
[0997] Such Trust Bond is payable on ______ and ______ of each
year. The Trust Certificate Payments shall be payable to the holder
of this Trust Certificate (e.g., on the same dates as the Trust
Bonds are paid).
[0998] This Trust Certificate is part of a series of Trust
Certificates (the "Certificate Series") issued on the date hereof
and in the amount of $______ by ______ as Trustee under the Trust
Agreement dated as of ______ between the Regulated Guarantor and
such Trustee (the "Agreement"). Unless otherwise defined herein or
the context otherwise requires, terms used herein shall have the
meaning set forth in the Agreement. The rights of the holder of the
Trust Certificate and the limitations thereon are fully set forth
in the Trust Agreement.
[0999] The Certificate Series is related: [1000] A. To the
following bond issue: ______ (the "Supported Bond Issue") and
[1001] B. More particularly, to a portion of such issue (the
"Series Trust Bonds") in the same amount as such Certificate
Series.
[1002] The Series Trust Bonds and the related Series Trust
Certificates are both related to a portion of the Supported Bond
Issue in the amount of $______ (the "Series Supported Bonds") which
is the beneficiary of a Support Requirement under the
Agreement.
[1003] At any time, the Supported Bond Issue shall be deemed to
include (and to be related to): [1004] I. All outstanding Series
Supported Bonds related to the Certificate Series together with all
outstanding Supported Bonds related to any additional series of
Trust Certificates related to the Supported Bond Issue that the
Trustee has theretofore issued (the "Supported Bonds" related to
the Supported Bond Issue), together with any Other Related
Obligations; and [1005] II. All outstanding Series Trust Bonds
related to the Certificate Series together with all outstanding
Trust Bonds related to any additional series of Trust Certificates
related to the Supported Bond Issue that the Trustee has
theretofore issued (the "Trust Bonds" related to the Supported Bond
Issue).
[1006] The Trust Certificates related to such outstanding Trust
Bonds represent the Trust Certificates related to such Supported
Bond Issue.
[1007] This Trust Certificate is part of the ______ Loss Position
Subclass. This Trust Certificate can also be part of the following
Loss Category Subclass within such Loss Position Subclass:
______
[1008] Pursuant to the Support Requirement under the Agreement
which benefits all Supported Bonds, the Trustee has the right and
obligation in the event of a payment default on: [1009] a. The
Supported Bonds (and Other Related Obligations) related to the
Supported Bond Issue, or [1010] b. Any Supported Bonds (and Other
Related Obligations) related to any other Trust Certificates issued
by the Trustee under the Agreement, to utilized Trust Resources,
including Trust Certificate Payments which would otherwise be
payable to the holder of this Trust Certificate, in order (1) to
cure the default or (2) to reimburse certain amounts that have been
used to cure such default together with interest on such amounts
and/or related expenses. In the event that Trust Certificate
Payments are used to fund such amounts, any payments thereafter
made in respect of such amounts shall be payable to the holder of
record of this Trust Certificate on the date such Trust Certificate
Payments were due.
* * * * *