Method of securitizing a portfolio of at least 30% distressed commercial loans

Abstract

A platform and a securitization methodology that provides lenders with an opportunity to maximize the returns on their distressed commercial credit facilities and overcomes the obstacles that have historically precluded the securitization of distressed commercial loans. The present invention is based upon an underlying portfolio of at least 30% distressed commercial loans for securitization that emulates the predictability and regularity of the cash flow and recovery characteristics of a portfolio of generally performing commercial loans, thus eliminating crucial historical barriers to securitization of such distressed commercial loans, such as the absence of predictable and regular cash flows and predictable recoveries. The methodology of the present invention takes a specific mix of distinct classifications of distressed commercial loans with specified characteristics in confluence with structural specifications, such as specific reserves and safeguards, to create a synthetic asset class that emulates the characteristics of a portfolio of performing loans.

What is claimed is: 
     
         1 . Apparatus for assembling a commercial loan portfolio, comprising:
 at least one computer configured to select a plurality of commercial loans from among a group of commercial loans to create a loan portfolio in which loans comprising at least thirty percent (30%) of (i) the portfolio market value, (ii) the portfolio outstanding principal balance, or (iii) the portfolio commitment amount, are distressed loans which: (i) have a payment default, or (ii) where payment default is considered likely;   a data base memory coupled to said at least one computer, said data base memory having a data base for each commercial loan in the selected group of loans, said data base comprising tabulated information including: (i) recovery rate information comprising borrower cash flow, projected net payments, and related collateral; and at least one of the following: (ii) borrower cash flow information, (iii) loan information including principal amount, interest rate, unfunded commitment amounts, credit information, and amortization information, (iv) loan pricing parameters, (v) loan cash pay rate information, (vi) loan collateral value, (vii) workout parameters including borrower debt capacity and liquidation information, and (viii) loan discounted cash flow valuation;   said at least one computer determining anticipated cash flows from each commercial loan in the selected plurality of commercial; and   said at least one computer providing a purchase price for each commercial loan in the selected plurality of commercial loans.   
     
     
         2 . Apparatus according to  claim 1 , wherein the said at least one computer transfers the loan portfolio to a Special Purpose Entity (SPE), the SPE paying one or more lending institutions the purchase price for the transfer of the loan portfolio, the SPE issuing investment rated securities for the loan portfolio. 
     
     
         3 . Apparatus according to  claim 2 , wherein the said at least one computer receives information regarding the SPE collecting payments on its portfolio of loans and making payments on the securities that have issued. 
     
     
         4 . Apparatus according to  claim 1 , wherein the said at least one computer analyzes at least one of (i) the maturity date, (ii) the unsecured credit facilities, (iii) the borrower diversity, and (iv) the loan commitment diversity, of the loans in the portfolio. 
     
     
         5 . Apparatus according to  claim 1 , wherein the said at least one computer eliminates loans which meet any one of the following criteria:
 mature late in the term of the securitization;   are secured only by stock or other equity interests;   are denominated in foreign currency;   are extended to non-U.S. borrowers; and   are involved in litigation;   
     
     
         6 . Apparatus according to  claim 1 , wherein the said at least one computer ensures that the number of loan borrowers in the loan portfolio is greater than thirty (30). 
     
     
         7 . Apparatus according to  claim 1 , wherein the said at least one computer ensures that the loan the portfolio meets industry diversity criteria of at least one credit rating agency. 
     
     
         8 . Apparatus according to  claim 1 , wherein the said at least one computer ensures that the loans in the portfolio have been extended to borrowers representing at least twelve (12) industries. 
     
     
         9 . Apparatus according to  claim 1 , wherein the said at least one computer ensures that the loan commitments to any one borrower do not represent more than five percent (5%) of the aggregate loan commitments to all borrowers. 
     
     
         10 . Apparatus for creating a capital structure to securitize a loan portfolio, comprising:
 at least one computer configured to select a plurality of commercial loans from among a group of loans to create a loan portfolio in which loans comprising at least thirty percent (30%) of (i) the portfolio market value, (ii) the portfolio outstanding principal balance, or (iii) the portfolio commitment amount, are distressed loans which: (i) have a payment default, or (ii) where payment default is considered likely;   a data base memory having a database for each loan in the selected group of loans, said data base comprising tabulated information including: (i) recovery information comprising borrower cash flow, projected net payments, and related collateral; (ii) loan information including principal amount, interest rate, unfunded commitment amounts, credit information, and amortization information; (iii) loan pricing parameters; (iv) loan collateral value; (v) workout parameters including borrower debt capacity and liquidation information; and (vi) loan discounted cash flow valuation, said data base being stored in a computer-readable memory; and   the at least one computer adds loans to, and/or subtracting loans from the loan portfolio in order to emulate the cash flow and recovery characteristics of a portfolio of performing loans.   
     
     
         11 . Apparatus according to  claim 10 , wherein the at least one computer simulates cash flows for a plurality of recovery scenarios, and stores the simulated cash flows in said data base memory. 
     
     
         12 . Apparatus according to  claim 11 , wherein each of the plurality of recovery scenarios includes recovery parameters of (i) cumulative payment default rate, (ii) a target pre-default revolver utilization percentage, (iii) a recovery rate for performing principal, (iv) a recovery rate for defaulted principal, (v) a recovery rate for deferred interest, (vi) a recovery time lag, (vii) a quarterly interest rate step-up or step-down, (viii) an indication of the quarter of interest rate adjustment, (ix) a principal amortization percentage for each payment date, (x) a default loading pattern, and (xi) proceeds from pre-closing principal amortization and pre-closing interest payments. 
     
     
         13 . Apparatus according to  claim 10 , wherein the workout parameters include (i) an annual revenue assumption, (ii) an earnings before interest, taxes, depreciation, and amortization assumption, (iii) a maintenance capital expenditures assumption, (iv) the maximum annual interest expense the borrower is likely able to pay, (v) an interest rate assumption, and (vi) the borrower's total debt capacity. 
     
     
         14 . Apparatus according to  claim 10 , wherein the liquidation information includes (i) low and high estimates of recovery value for each asset category in the portfolio, (ii) the book value for each asset class in the portfolio, (iii) the book value for total current assets in the portfolio, (iv) wind-down expenses, (v) trustee fees, (vi) professional fees, and (vii) administration expenses. 
     
     
         15 . Apparatus according to  claim 10 , wherein the at least one computer:
 provides a bankruptcy Special Purpose Entity (SPE) as an investment vehicle for said portfolio; and   determines a price to be paid to a lending institution for its loans within said portfolio, said price being determined in accordance with the tabulated information from the database memory for said portfolio.   
     
     
         16 . Apparatus according to  claim 15 , wherein the at least one computer:
 forms a capital structure for the SPE for said portfolio, said capital structure including a source of funds and an enforcement mechanism; and   completes the creation of a securitization by (i) the SPE paying one or more lending institutions the determined price for the lending institution to transfer the portfolio to the SPE, and (ii) the SPE issuing securities.   
     
     
         17 . Apparatus according to  claim 16 , wherein the at least one computer models cash flows of said capital structure, and provides the modeled cash flows and said tabulated information to one or more credit agencies in such a form that said one or more credit agencies provides investment grade credit ratings to all of the securities, other than equity or equity-like tranches, issued by the SPE upon completing the creation of the securitization. 
     
     
         18 . Apparatus according to  claim 16 , wherein the at least one computer receives information regarding the SPE collecting payments on its portfolio of loans and making payments on the securities that have issued. 
     
     
         19 . Apparatus according to  claim 10 , wherein the at least one computer:
 eliminates from the portfolio loans which mature late in the term of the securitization;   eliminates from the portfolio loans which are secured only by stock or other equity interests;   eliminates from the portfolio loans which are denominated in foreign currency;   eliminates from the portfolio loans which are extended to non-U.S. borrowers;   eliminating from the portfolio loans which are extended to borrowers that are tainted by accounting irregularities;   eliminates from the portfolio loans which are extended to borrowers that are tainted by environmental problems;   eliminates from the portfolio loans which are extended to borrowers that are tainted by litigation;   eliminates from the portfolio loans which are extended to borrowers supported by no collateral; and   eliminates from the portfolio loans which are extended to borrowers supported by minimal restrictive covenants.   
     
     
         20 . Apparatus according to  claim 10 , wherein the at least one computer balances the portfolio so that the number of borrowers is greater than thirty (30). 
     
     
         21 . Apparatus according to  claim 10 , wherein the at least one computer balances the portfolio so that the selected loans have been extended to borrowers representing at least twelve (12) industries. 
     
     
         22 . Apparatus according to  claim 10 , wherein the at least one computer selects the loans so that the portfolio meets the industry diversity criteria of one or more credit rating agencies. 
     
     
         23 . Apparatus according to  claim 10 , wherein the at least one computer selects the loans to meet predetermined loan commitment concentration criteria of one or more selected credit rating agencies. 
     
     
         24 . Apparatus according to  claim 10 , wherein the at least one computer analyzes (i) the maturity date of each loan, (ii) the unsecured credit facilities in the selected group of loans, (iii) the borrower diversity in the selected group of loans, and (iv) the loan commitment diversity in the selected group of loans.