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Moody's Comments On Off-Balance-Sheet Financing And Securitization's Effect On Issuers' Credit Strength

March 22, 2002

New York, NY -- In a report released yesterday, analysts at Moody's Investors Service emphasize that there is an important distinction between the special-purpose vehicles (SPVs) used in the $305 billion asset-backed and mortgage-backed market and those used for other purposes. They note that this well-established form of financing may be receiving undeserved negative attention. Indeed, more than 90% of structured finance ratings are unchanged over the course of one year and, moreover, the default rate of these types of transactions is miniscule.

"Simply by creating an SPV, a company has not necessarily entered into a securitization transaction," says Barbara Havlicek, a senior vice president in Moody's Asset-Backed Finance department and the manager of the agency's Securitization Standing Committee. "An SPV can be created for other types of financing purposes."

Most structured transactions are highly creditworthy, primarily because of their three main requirements, according to the report: a pool of assets sold through a true sale to a bankruptcy-remote SPV; debt issued by the SPV, which is backed by the asset itself and the payment streams associated with it; and repayment of the debt, which comes strictly from the cash flow generated by the asset pool, not from the original company's cash flows.

Structured financings provide liquidity to companies by giving them access to the proceeds from the debt sale. In addition, it is possible for a company to transfer certain risks associated with the assets sold into the SPV.

Securitization has become an accepted form of financing, as illustrated by the market's dramatic growth from $1.2 billion in outstanding transactions in 1985 to $280 billion in 2001. Approximately $305 billion in new issuance is anticipated in 2002.

Since its inauguration as a financial tool, securitization has been a focus of Moody's research. In 1997, Moody's established the Securitization Standing Committee comprising seasoned analysts from various rating groups to more closely examine the developments in the field and sharpen the rating agency's understanding of the various consequences of securitization on the originating company and on investors in the transaction.

Havlicek says that "although market innovations have prompted new avenues of investigation and refinements in our views, the framework and basic premise of our initial research have weathered the test of time."

"Market events over the last several months have led to a closer examination of balance sheets and accounting practices," notes Havlicek, "but our message to the market is that securitization continues to be a valid and viable financing method."

In the 114-page report, titled "Moody's Perspective 1987 - 2002: Securitization and its Effect on the Credit Strength of Companies," Moody's responds to the questions most frequently asked about securitization. Also included is a compendium of previously published reports on various aspects of the structured finance market, including its use by European corporations, financial services firms, and auto manufacturers in the management of their finances.

Source: Moody's

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