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I.

Introduction
1. Securitization Market after the Credit Crisis The securitization markets in the U.S. and Japan were struck a devastating blow by the credit crisis that started in 2008. The total issuance of asset-backed securities (ABS) in the U.S. was only $125 billion in 2011 in stark contrast to $754 billion in 2006. The total volume of Japanese ABSs rated by Standard & Poors was only 0.75 trillion in 2011 in contrast to 3.16 trillion in 2006. Both markets have shown some signs of recovery in 2010 and 2011, but it is still too early to say that the securitization markets have got back on track. In the course of debate on securitization reform in response to the financial crisis, it is often pointed out that the true problem lay, not in securitization per se, but in certain deficiencies in the market practice, primarily in connection with residential mortgage-backed securities (RMBS). The performance of various non-RMBS securitizations were not seriously affected by the credit crisis. One of such segments is whole business securitization (WBS), one of the newest types of securitizations called the Final Frontier. This project aims to shed a new light on this innovative financing tool to explore new possibilities for securitization after the credit crisis. 2. Market Background of WBS WBS is an innovative financial technique that first appeared in the U.K. in the mid-1990s drawing on the U.K.s unique pro-creditor bankruptcy regime. The most striking feature of WBS is that it securitizes ongoing/future cash-flows generated from a certain business operated by a company or a group of companies. An originator can monetize future cash-flows to meet the current liquidity need at cheaper cost by separating the credit risk of a certain business from that of the originator and thereby obtaining a higher credit rating than its intrinsic corporate rating. In the U.K., after the first WBS transaction with a published rating by Standard & Poors was closed in 1998, the WBS market rapidly developed and WBS became established as one of the major financing options for various business sectors in the early 2000s. In 2010, for example, the total issuance of WBS in the U.K. was 4.5 billion, accounting for about 47% of the total ABS issuance (except RMBS and CMBS).

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After the turn of the century, WBS came to be contemplated as a new innovative financing method in the U.S. and Japan as well despite the fact that both countries bankruptcy regimes are substantially different from the U.K.s regime. In 2008, however, the financial crisis directly hit the entire securitization markets in the U.S. and Japan before WBS has taken hold firmly as a major financing option in both countries capital markets. The following are brief benchmarks to gauge the approximate scale of these markets. The first publicly-rated WBS deal in the U.S. (finance of $290 million) was closed in 2000, and the total volume of publicly-rated deals in the U.S. grew up to about $4.5 billion in issuance in 2007. But, the credit crisis devastated the nascent market almost entirely until 2011, when there was some recovery with $0.9 billion in issuance. On the other hand, Japan saw the first WBS deal with a published rating in 2002 and the WBS market grew gradually, peaking in 2006 at more than 1.5 trillion in issuance. However, just like the U.S., the credit crisis made the market dormant from 2008 through 2010 with a slight sign of recovery in 2011. WBS is not necessarily unique to the U.K, the U.S. and Japan. Some non-U.K. European countries and some emerging markets with the U.K.-style common law system (such as Malaysia, Australia) also worked on WBS previously. But, outside the U.K. jurisdictions, most deals have concentrated in the U.S. and Japan so far.

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II. Mechanism and Economics of WBS


1. Mechanism of WBS Unlike other securitizations of self-liquidating financial assets, a WBS transaction takes a wide variety of structures. In practice, a structure needs to be more or less tailor-made on a case-bycase basis because fundamental factors (such as characteristic of business, asset portfolio, existing corporate group structure) may be significantly different from company to company. This Part II briefly describes several prototypical structures in order to clarify essential mechanism and economics of WBS from theoretical perspectives. a. Original U.K. Model True Control Structure As discussed in I.2. above, WBS started in the U.K. against the backdrop of its unique bankruptcy regime. Set forth below is the most typical legal structure of the U.K. WBS deals.

An originator (a borrower) takes a secured loan from a special purpose vehicle (SPV) that raises money by issuing notes or bonds to investors. The loan provided by the SPV is secured by substantially all the borrowers assets, and the borrower repays the loan from cash-flows generated from its own business. But, what is different from ordinary secured loans? Under the U.K. bankruptcy regime (the Insolvency Act of 1986 and the Enterprise Act of 2002),18 even when a borrower goes bankrupt, a creditor secured by a floating charge over substantially all the borrowers assets is entitled to appoint an administrative receiver for the borrower without court approval so that such a receiver can control the borrowers assets and business solely for the benefit of the creditor.19 This means that such a creditor can continue to collect the loan from ongoing cash-flows generated by the insolvent borrowers business without

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any unpredicted hindrance by the bankruptcy procedure. Obviously, this structure does not involve any true sale of a borrowers asset, but a borrowers business (cash-flows arising there from) can be considered bankruptcy-remote in the sense that creditors can continue to exploit such cash-flows through bankruptcy of the borrower. This is the basic rationale for attaining a credit rating significantly (2-6 notches on average) higher than an originators intrinsic corporate rating, which is one of the major attractions of WBS for potential issuers (originators). b. Alternative Model in the U.S. and Japan True Sale Structure As the U.S. and Japan do not share the unique characteristics of the U.K. bankruptcy law which affords a creditor the absolute right to control a borrowers business, it is necessary to improvise an alternative bankruptcy-remote structure that separates the credit risk of a borrowers business from that of the borrower itself in order to contemplate WBS in the U.S. and Japan. To date, the most common method is to transfer substantially all the assets of an originator to a bankruptcy-remote SPV (or a trust) on a true sale basis, and such SPV procures finance from investors in the form of bonds, notes or loans backed by the assets and the business transferred to the SPV. 23 (As the originator is no longer a borrower in this scheme, such originator is often called a sponsor.)

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Usually, an SPV as a borrowing vehicle is wholly owned by the sponsor at the outset, and the sponsor retains the equity portion in the securitized business. Also, the sponsor is normally supposed to continue to operate the securitized business in a position of primary servicer on behalf of the SPV unless the sponsor fails. When any of certain adverse triggers is hit by the sponsor, the management of the securitized business will be handed over to a back-up servicer and the sponsor will lose its equity position in the business (shares of the SPV will be transferred to the lender or a third party designated by the lender). c. Bankruptcy-remoteness in the True Sale Structure From the legal perspective, the most important point in structuring this type of true sale scheme is how to secure the adequate level of bankruptcy-remoteness of an SPV. An SPV in this scheme needs to be bankruptcy-remote in two senses. First, an SPV must not be adversely affected by bankruptcy of the sponsor. Second, any voluntary or involuntary bankruptcy filing for the SPV itself must be prevented. As for the first point (insulation from the sponsors credit), it is necessary to minimize the risk that the court might deny the true sale nature of the initial transfer of assets from the sponsor to an SPV and the risk that the court might consolidate the assets of an SPV into those of the insolvent sponsor in its bankruptcy procedure. Also, care should be taken so that the existing liabilities of the sponsor cannot be succeeded to an SPV as a result of the initial asset transfer. Finally, we also must mitigate the risk that the initial asset transfer from the sponsor to an SPV might be considered to be fraudulent conveyance or voidable preference. All of these concerns may come from the courts potential motivation to prioritize the interest of the sponsors creditors over that of the securitization investors. As for the second point (prevention of the SPVs bankruptcy), various measures are to be taken to minimize the risk of voluntary or involuntary bankruptcy filings for the SPV itself. Set forth below are examples of common devices to be built in transaction schemes. Limited purposes of the SPV Business covenants Financial covenants Outsourcing operation and employment

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Allocating assets to multiple subsidiaries under the SPV Ex ante consent to non-petition Appointment of independent director Insertion of intermediate holding company between the sponsor and the SPV Issuance of golden shares to creditors Automatic rescission of the sponsors voting right in the SPV Pledge of shares of the SPV Through these measures, transaction parties aim to separate the credit risk of a certain business from that of the originator (sponsor) to the greatest extent possible. However, this is just one side of the story. On the other hand, even if an SPV is adequately remote from the sponsors bankruptcy, the SPV and investors need to find a new servicer in order to continue to operate the securitized business where the sponsor actually fails; otherwise you cannot say that you have successfully securitized a business or cash-flows. Accordingly, it is crucially important to provide a proper mechanism to enable investors to transfer the servicing operation from the sponsor to a new manager quickly and smoothly once the sponsor hits a trigger indicative of its dysfunction or possible failure. 2. Economic Value of WBS a. Differences from Other Traditional Financing Methods Preparatory to analyzing the fundamental economic value of WBS, it seems useful to analyze the major differences between WBS and other traditional financing methods from theoretical perspectives. Differences from Ordinary Corporate Loans It is often pointed out that WBS is, more or less, akin to ordinary corporate loans in the sense that a borrower is supposed to make repayment from cash-flows generated by its entire business. In other words, creditors are exposed to the risk intrinsic in a borrowers business to some extent. This is why WBS is often called a hybrid between securitization and corporate credit. That said, WBS is essentially different from ordinary corporate loans in the sense that WBS is built upon a structure that separates the credit risk of the securitized business from that of the

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originator by using a bankruptcy-remote SPV and a back-up servicing arrangement. Also, as WBS transactions usually attempt to control risks arising from the securitized business in more stringent ways through various mechanisms as described in 1.c. above, the risk of the securitized business itself tends to be more mitigated in WBS than in ordinary corporate loans. Differences from Traditional Asset Securitizations WBS is similar to other traditional asset securitizations in the sense that an originator attempts to attain a higher credit rating by insulating certain assets from the originators own credit risk. In traditional securitizations, however, financial assets to be securitized are self liquidating assets such as mortgage loans, auto loans, credit-card obligation, student loans, and other contractual receivables. By contrast, a business to be securitized in WBS is not self-liquidating, but a source of future cash-flows, which means the sponsor or a back-up servicer has to continue to exploit the securitized business in order to generate cash-flows constantly. In other words, what is securitized in WBS is not the liquidating value of certain assets, but the going-concern value of a certain business as a whole. Differences from Securitization of Future Receivables In both the U.S. and Japan, it is legally permitted to transfer a pool of future receivables within a certain scope defined by some measures such as the type of transactions that will cause future receivables and the time period during which such receivables will be generated. Securitization of future receivables was established as a segment of structured finance more than a decade ago. Securitization of future receivables is substantially close to WBS in the sense that both of them aim to monetize future cash-flows to meet the current funding need. Especially, if the securitized pool of certain future receivables comprises the most part of the originators revenues, securitizing such receivables would be nearly equal to WBS in terms of economics. Therefore, some future receivables securitizations are categorized as WBS by credit rating agencies depending on the structure both in the U.S. and Japan. Precisely speaking, however, there are substantial differences. In the case of future receivables securitization, it is only a pool of certain future receivables that are securitized into an SPV, while in the case of WBS an originator transfers the entire business (substantially all the assets of the originator) into an SPV. If the

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originator goes bankrupt, creditors in future receivables securitization would be unable to capture the originators assets other than the securitized pool of future receivables or to change the operator of the entire business. In that sense, future receivables securitization (without bankruptcy-remoteness devices as used in WBS) generally tends to be more exposed to the inherent corporate risk of an originator. b. Economic Value Added by WBS There has been some debate about potential economic value of WBS in practical and academic circles. Set forth below is my understanding of major economic value created by WBS based on the analysis of actual transactions closed in the U.S. and Japan. (1) From Issuers Perspectives

Lower Funding Cost & Higher Leverage First, an issuer could attain a higher credit rating than its intrinsic corporate rating through WBS, which enables the issuer to get finance in more favorable terms (especially, at a lower interest rate). In that sense, the benefits from WBS tend to be greater for companies that do not have access to cheap finance in the form of loans or debt due to the lack of their own creditworthiness. Also, it is generally said that a WBS issuer can usually achieve higher leverage based on the huge amount of the securitized future cash-flows compared with other traditional financial methods, which reduces or even eliminates the need for the issuer to turn to other creditors or other expensive funding such as equity. Longer Maturity It is generally said that in many cases, debt issued in conjunction with a WBS transaction tends to have longer maturity than traditional finance including acquisition finance. One credit research in the U.K. points out that the debt duration is often up to 20-25 years in contrast with 7-10 years for traditional acquisition finance. However, as discussed later in III.1.a., WBS is also used in connection with acquisition finance, where the maturity tends to be as short as normal acquisition finance.

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Reaching Out for a Wider Investor Base An issuer can reach out for a wider range of investors in the capital markets by drawing on the value of future cash-flows of its entire business, even when the issuers own credit is substantially low. This benefit might be somewhat greater in the U.S. than in Japan because there are unique legal restrictions on issuing bonds secured by collateral in Japan.

(2) From Investors Perspectives

Alternative Investment WBS is a new way to create high credit by securitizing the going-concern value of an entire business instead of securitizing certain discrete pool of self-liquidating assets. Certainly, it would add a new alternative investment to investors options. Especially, in the current post-crisis environment, the Term Asset-Backed Securities Loan Facility (TALF) program initiated by the Federal Reserve in November 2008 significantly helped compress the spreads of plain vanilla consumer ABSs in the recovering market. Standard & Poors points out that the current compressed spreads of conventional ABSs may create a good opportunity for investors to look beyond the on the- run ABSs and explore new possibility for innovative asset classes. Low Correlation, More Diversification Although the market for new issuance of WBS was shut down in 2008 and 2009 in both the U.S. and Japan, the performance of on-the-run WBSs has been fairly robust despite the serious economic downturn after the credit crisis. 58 In the U.S., it was reported that, despite the weakness of the entire restaurant industry, the performance of restaurant WBS transactions was generally in line with the original expectations in 2009 and 2010. In 2011, there were three cases of rating downgrade in the entire WBS segments, but also eight cases of upgrade as well. 60 In Japan, Standard & Poors upgraded three WBS transactions and downgraded only one (due to the fall of the land prices) in 2010. Similar trends can be found in Europe as well. WBS can create more risk diversification by securitizing the entire business of an originator rather than

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securitizing a discrete pool of certain financial assets. Indeed, WBS investors are still more or less susceptible to risks unique to a certain business sector to which the originator belongs. But, as discussed in c. below, WBS is usually arranged only for an originator whose business is expected to produce stable cash-flows over the long term with substantially lower correlation to the general macro-economic conditions and other traditional ABSs. Control of an Issuers Business As discussed in a. above, investors in WBSs usually have somewhat firm grip on an issuers entire business through various mechanisms such as restrictive covenants, independent directors, golden shares, and the like. This aspect is one of the biggest differences from ordinary corporate loans and acquisition finance. In addition, WBS tends to make it easier to align the incentives of creditors (investors) with shareholders and other stakeholders of an originator because creditors and shareholders tend to share the common goal of generating stable cash-flows over the long term. Theoretically, shareholders should refrain from excessive risk-taking for the short-term profits because they would lose the entire business once they fail to continue to generate adequate cash-flows to repay the WBS debt during the long duration.

c. Businesses Suitable for WBS Given the fundamental features of WBS as described above, the types of businesses suitable for WBS are limited to some extent. The most crucial prerequisite is that a candidate business must be able to produce adequate and stable cash-flows over the long term without being interrupted by various macro-economic stresses. Set forth below are major factors dictating the adaptability of a business for WBS. Control of an Issuers Business High market shares Relatively high barriers to entry Predictable and widespread public demand Limited risk of fundamental changes to revenues and costs Adequate track records of high performance in the past

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Availability of replacement servicer Low reliance on unique expertise of the sponsor Liquidity and potential alternative use value of assets Interestingly, there have been certain different market trends in the U.S., Japan, and the U.K. with respect to the market application of WBS. In the U.K., starting with a nursing home in 1997, WBS extended to motorway service stations (1997), pubs and social housing (1998), rails, airports, and Formula 1 sponsorship (1999), forestry, ports, telecoms, and water (2001), death are (2002), shipping and insurance (2003), football (2005), and so on. 66 Many of those industries belong to the sectors with high public demand (such as infrastructure, transportation, and utility) or non-infrastructure with utility-like stable cash-flows (such as pubs and football). In the U.S., the previous WBS transactions have largely concentrated on the restaurant franchise sector such as Dominos Pizza (2012 and 2007), Churchs Chicken (2011), Sonic Corp. (2011 and 2006), IHOP (2007), Applebees (2007), Dunkin Donuts (2006), and Arbys (2000). Besides these, there have been a few non-restaurant WBS transactions in the U.S. such as NuCO2 (seller of carbonation gas for fountain beverages) (2011, 2010 and 2008) and Local Insight Media (telephone directory business) (2007). It is also understood that traditional sectors that have engaged in royalty securitization (such as film revenue, music royalty, and patent/trademark royalty) are also more or less adaptable to WBS transactions. By contrast, the Japanese WBS market has been relatively closer to that of the U.K. Starting with a toll road (2002), the Japanese WBS extended to golf courses (2002), casinos (pachinko parlors) (2005), telecoms (2006), rent insurance (2007), nursing home (2007), leisure hotels (2007), waste disposal (2011), and so on. In any of the U.K., the U.S. and Japan, WBS is used not only for the purpose of securing working capital for an issuers business, but also for other purposes such as acquisition finance (LBO/MBO finance), corporate restructuring, and project finance.It is noteworthy that the surge of acquisition finance contributed significantly to the growth of the WBS markets both in the U.S. and Japan in 2006 and 2007 before the credit crisis.

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III. Specific Case Study in the U.S. and Japan


This part provides a specific case study on particular transactions conducted in the U.S. and Japan. Such comparative analysis leads us to some takeaways for further development of WBS in both markets. 1. Deals in the U.S. a. Pre-crisis Transaction Dunkin Brands Case in 2006 A typical WBS structure in the U.S. can be seen in a pre-crisis deal of financing $1.7 billion for the famous Dunkin Brands (Dunkin Donuts and Baskin-Robbins) in 2006, which was arranged by Lehman Brothers Inc. The proceeds of this securitization were used to refinance the leveraged buy-out (LBO) of Dunkin Brands Inc. (DBI) by a consortium of three private equity funds (Carlyle Group, Bain Capital, and Thomas H. Lee Partners). DBI is one of the leading quickservice-restaurant franchisors in the world with a long operational history and strong market shares on the global level. Its ability to produce stable cash-flow over the long term made it a suitable candidate for WBS.

As shown in the chart above, DBI as an originator transfers (in the form of capital contribution) substantially all the revenue-generating assets (including intellectual properties and existing/future franchise agreements executed or to be executed all over the world) to

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bankruptcy-remote SPVs (DB Master Finance LLC and other securitization vehicles whollyowned by DBI) to isolate the entire business from DBIs own credit risk. In turn, such SPVs issue notes backed by the transferred assets (in effect, DBIs entire business) to investors. On the other hand, DBI enters into a servicing agreement with those SPVs and continues to operate the same business as a primary servicer (manager). A back-up manager is already appointed on Day 1 and it stands by to replace DBI and succeed operation of the business just in case where DBI ceases to function for some reason (typically, bankruptcy). In order to confirm the bankruptcy-remoteness of those SPVs, legal opinions were rendered to the effect that the true sale nature of the initial asset transfer by DBI would not be denied by the court and the assets of the SPVs would not be consolidated into those of DBI in the case of its bankruptcy. Just like other traditional securitizations, various structural mechanisms for credit enhancement were built in; such as overcollateralization, reserve accounts, and cash trapping (rapid amortization).Also, financial guarantee (so-called wrap) was provided to the senior tranches by Ambac Assurance Corp., a major monoline insurer, as a result of which those tranches were afforded AAA rating. Until the financial crisis, the use of monoline wraps was a major driving force to increase the volume of issuance of commercial and esoteric ABSs including WBS in the U.S. Other major deals closed around the same period had more or less similar structures as Dunkins deal above; Dominos Pizza Inc. ($1.85 billion, 2007),78 Sonic Corp. ($0.8 billion, 2006),Local Insight Media Inc. ($0.6 billion, 2007),80 and the like. b. Post-crisis Changes Dominos Pizza Refinance in 2012 The financial crisis in 2008 dried up the WBS market in the U.S. almost entirely in 2009 and 2010. In 2011, however, the U.S. saw a number of newly issued WBSs with a good sign of recovery. These newest deals indicated that the post-crisis environment has brought significant changes to the structural features and other aspects of WBS transactions. One good example is the very newest deal which was just closed in March 15, 2012 by Dominos Pizza Inc. As mentioned just above, Dominos Pizza financed $1.85 billion by WBS

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with almost the same structure as Dunkins deal in 2007, and now it has refinanced the debt by another WBS deal arranged by Barclays Capital this time.

The basic legal structure of this new deal is similar to Dunkins deal in 2006 and Dominos own deal in 2007; Dominos Pizza as the originator transfers substantially all the revenue-generating assets to wholly-owned SPVs, which in turn issue notes to investors. However, Dominos new deal contains significant differences from its pre-crisis deal as follows, epitomizing changes to the general landscape of the market. Unavailability of Monoline Wraps Just like Dunkins deal above, the original Dominos WBS in 2007 was wrapped by Ambac Assurance Corp. and MBIA Insurance Corp. As mentioned in a. above, monoline wrapping was the prevalent trend prior to the financial crisis. During the period between 2000 and 2007, seven out of ten WBS transactions with published ratings by Moodys were insured by monolines.

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However, as the crisis totally melted down monoline insurers business, it is virtually impossible to wrap ABSs (not limited to WBSs) by monolines.86 As a result, this Dominos refinance deal is not wrapped, and BBB+ ratings are afforded to the senior tranches as of March 15, 2012. Indeed, there would be some room to explore stronger structures and further credit enhancement in order to attain higher ratings. However, it would not necessarily be easy to regain AAA ratings just by adopting structural devices for additional credit enhancement in the absence of any financial guarantee. It is noteworthy that Japan did not go through this type of change because many of Japanese WBS deals did not rely on third-party insurance even before the crisis. This fact influenced the structure of Japanese deals as discussed later in 2. below. Need for a Neutral Servicer as a Control Party In the original Dominos deal, the financial guarantors (Ambac and MBIA) as the ultimate risktakers were expected to exercise certain important creditors rights on an expedited basis on behalf bondholders; such as the right to replace the master servicer (manager) and the right to accelerate the debt after the occurrence of an EOD (event of default). However, in the absence of those financial guarantors, some transaction party has to be designated as a neutral servicer or the control party to exercise important creditors rights in accordance with the discretion of the controlling class of bond/notes. In this Dominos refinance deal, Midland Loan Services, a division of PNC Bank N.A. is appointed as a CMBS-type bond servicer (separately from Dominos Pizza Inc. as the manager), and supposed to instruct the bond trustee to act or act on behalf of the trustee at the discretion of the controlling class representative with respect to certain matters such as approving contractual waivers, replacing the manager, acceleration of repayment, liquidation of collateral, and the like. Less Tolerance for High Leverage and Balloon Risk Given the current weak market condition, investors are presumed to have less tolerance for high leverage and balloon risk than before the crisis.

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For example, restaurant WBS deals closed in 2011 reportedly had 5x-6x leverage on average, while restaurant deals closed in 2006-2008 had 6x-7x on average. Generally, lower leverage is considered to be credit positive because it means stronger cash-flows and higher DSCR (debt service coverage ratio). Also, investors are presumed to be more sensitive to balloon risk or refinancing risk at the maturity of debt. For example, the payment structure of the pre-crisisDominos WBS had a fiveyear interest-only period with a bullet repayment at the final maturity, while the Dominos refinance deal has scheduled amortization for senior notes. No More Covenant-lite; Closer Scrutiny of Borrowers Operation In the pre-crisis period, some WBS deals in the U.S. were said to be even less stringent than ordinary corporate debt in terms of restriction (covenants) imposed on borrowers business operation. This feature called covenant-lite was made possible primarily by the existence of monoline wraps and was viewed as one of the advantages of WBS deals. Although it is difficult to know specifically what types of covenants were agreed upon in the new Dominos deal, it is expected that more and more WBS deals would likely come to impose more stringent covenants upon the borrowers business to make up for the absence of third-party insurance. Recently, it is reported that, while blind faith in monoline wraps made the marketing process of WBSs similar to that of public bond offering (limited negotiation during a short time period) five years ago, todays investors come to engage in repeated negotiation on specific terms and require more information not only on the underlying assets but also on the sponsors financials. In this context, Japanese WBS deals may have significant implication to the U.S. As Japanese WBS deals have relied much less on third-party insurance, they have paid more attention to structural mechanisms to control the business risk of the sponsor such as restrictive covenants, independent directors, golden shares, and the like. One of such examples is analyzed in the next section.

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2. Deals in Japan Since the Japanese market saw the first publicly-rated WBS transaction closed in 2002 (toll road), there have been a number of WBS deals. The total number of previous transactions with published ratings in Japan is not very different from that of the U.S. so far. The comparative analysis of previous WBS transactions with published ratings in the U.S. and Japan leads us to recognize some significant differences in the market trends. a. Is True Sale a Must? Softbank Mobile (Vodafone Japan) Case in 2006 To the best of my knowledge, it seems that, in the U.S., all the previous deals with published ratings were based on the true sale structure. Likewise, true sale deals are prevalent in Japan as well. But, at the same time, Japan has seen a number of deals based on an alternative structure called secured loan structure which seems more or less closer to the U.K.- style WBS. Below is one major example of such alternative structure used in Japan.

Softbank Corp., a Japanese Internet business giant closed a massive WBS transaction of 1.45 trillion to refinance an LBO acquisition (1.75 trillion in total) of former Vodafone Japan K.K.

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from Vodafone Group Plc, a U.K.-headquartered mobile telecom giant. In this deal, Softbank Mobile (former Vodafone Japan, not an SPV!) borrowed a loan directly from a lender (a trustee of syndicated investors) instead of transferring the entire mobile phone business to SPV. The rationale for this extremely highly-leveraged finance is that Softbank Mobile would be able to repay the huge loan from high and stable cash-flows to be generated by its mobile communication business. But, why is it to be categorized as WBS? Is it possible to secure the bankruptcy-remoteness of the securitized business without any asset transfer to an SPV? In this deal, instead of a true sale of assets, various structural mechanisms are built in through contractual covenants, security agreements and, corporate governance structure. Below are major examples. Various business & financial covenants are imposed on Softbank Mobile; such as limit on the scope of business activities, limit on CAPEX (capital expenditure), prohibition of sale/disposal of important assets, financial benchmarks (EBITDA, cumulative debt amount, etc.), and the like. Intermediate holding companies (Mobile Tech Co. and BB Mobile Co.) are inserted to prevent unfavorable exercise of power by the sponsor, Softbank Corp. Also, BB Mobile Co. issues to the lender certain golden shares with veto on additional funding, origination of new businesses, amendment of the corporate by-law, issuance of stocks or stock options, filing for bankruptcy or resolution, and other important corporate decisions. The lender is entitled to appoint an independent director at the level of an intermediate holding company, BB Mobile Co. Major assets and the entire shares of Softbank Mobile are put up as collateral. When certain performance triggers (such as EBITDA, leverage ratio, market share) are hit, the covenants get even more restrictive and the lender obtains greater control over the business operation. Ultimately, certain triggers would lead to perfection of collateral, change of the majority of board members, and the transfer of the entire equity position to the lender. Indeed, this type of structure would not necessarily succeed in realizing the same level of bankruptcy-remoteness as the U.K.-type true control structure. As the Japanese bankruptcy regime does not have a system equivalent to the unique receivership of the U.K., creditors have

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to take the risk of their rights being hampered or diminished if an originator actually goes bankrupt. However, the crux of this secured loan structure is to minimize the risk of an originators own bankruptcy up to a substantially high level through alternative structural mechanism as described above. In the world of securitization, the concept of bankruptcy remoteness has been understood as a matter of degree in the first instance; there can be no such thing as 100% bankruptcy-remoteness. As a matter of fact, in this deal, Softbank Mobile succeeded in obtaining single A rating for the senior tranches without any third-party insurance. Even the subordinated Class B debt with BBB rating on Day 1 was raised to BBB+ in 2010 and to single A in 2011. Besides this case, a number of previous WBS deals on secured loan structure were rated at investment grades in Japan. Interestingly, in Japan, both Standard & Poors and Moodys clarified that they may recognize as WBS this kind of secured loan structure as well as true sale structure in their respective rating criteria. By contrast, in the U.S., both of them expressly require a true sale of assets to an SPV in order to rate a deal as a WBS transaction. It is an intriguing topic why the same credit rating agencies adopted seemingly different policies about the legal structure of WBS in the U.S. and Japan. However, given that the bankruptcy laws in the U.S. and Japan are not considered different in a way affecting the validity of the secured loan structure, I suspect that the historical path dependence is the major reason for these different market trends. At any rate, in both the U.S. and Japan, WBS is still a niche market, where not many schemes have been tested in actual transactions. The Japanese market indicates that even secured loantype transactions could meet the demand for higher ratings by issuers and investors, even in the absence of third-party insurance. Some issuers have incentives to choose a secured loan structure rather than a true sale structure for various reasons. For example, a true sale of assets to an SPV is not cost-effective; it could entail transfer of various types of tangible/intangible assets between many parties, it could entail some internal reorganization of the entire corporate structure to build in SPVs. Furthermore, such asset transfer or internal reorganization could bring some tax issues and/or regulatory issues. The Japanese practice of secured loan structure suggests that the same type of WBS can be added to the menu of valid structures in the U.S. as well, provided that additional analysis would be

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needed to make necessary adjustment due to differences in relevant legal frameworks between the U.S. and Japan. b. Alternative True Sale Structure Use of Trust At the other end of the spectrum, there is another type of WBS structure seen in Japan that might bring some inspiration to the U.S. market. It is a true sale structure that uses a trust as a securitization vehicle instead of an SPV. Although it may depend on whether we define WBS broadly or narrowly, as far as I know, the vast majority of pure WBS deals in the U.S. use a corporation (especially, an LLC) and such SPV is directly or indirectly owned by a sponsor. Similarly, in Japan, the majority of deals use a corporation; Kabushiki-Kaisha (a normal corporation), Godo-Kaisha (an LLC in Japan), or Tokutei-Mokuteki-Kaisha (a statutory securitization vehicle). Here, I would like to briefly introduce one Japanese deal with published rating that uses a trust as a securitization vehicle.

In 2006, a major broad-band internet company, UCOM Corp. (as the settlor) transferred the optic-fiber network facilities and other assets necessary for its broad-band internet business to Mitsubishi UFJ Trust & Banking Corp. (as the trustee) in the form of trust. In turn, the trustee issued trust beneficial interests to UCOM, and UCOM got finance of 20 billion through the

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redemption of those beneficial interests on Day 1.112 UCOM continues to manage the roadband internet business as a primary servicer by being leased back the securitized assets from the trustee. A primary advantage of using a trust as a securitization vehicle is somewhat higher bankruptcyremoteness of the securitized business in a true sale transaction. In the majority of previous deals with published ratings, an SPV wholly owned by the sponsor is not absolutely free from the potential risk of arbitrary influence from the sponsor despite various prophylactic mechanisms. In a trust scheme, the sponsor would not directly retain any equity in the securitized business, and as a result, the risk of adverse influence from the sponsor may be further mitigated.

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IV. Issues and Recommendation for Further Growth


Although more and more participants have come to pay attention to WBS in the U.S. and Japan, WBS is still a niche market in both countries in contrast with the U.K. For example, in 2010, the WBS issuance in the U.K. accounted for about 47% of the total ABS issuance (4.5 billion / 9.5 billion). By contrast, even before the financial crisis, the U.S. issuance of publicly-rated WBS accounted only for 0.3% in 2006 ($2.5 billion / $754 billion) and 0.9% in 2007 ($4.5 billion / $510 billion). Similarly, Japans publicly-rated WBS accounted only for 0.4% in 2005 (70 billion / 1.74 trillion) and 0.2% in 2007 (5 billion / 2.15 trillion). In this Part IV, I analyze the possible reasons why WBS has not been widely used yet in the U.S. and Japan and what needs to be done to overcome those impediments and pursue the maximum possibility of WBS in the future. 1. Issues from Issuers Perspectives a. Initial Transaction Cost Generally, the legal structure of each WBS deal is highly complex and tailor-made, which is why it tends to take higher cost and longer time to complete structuring and marketing of a WBS deal than other standardized asset securitizations such as CMBS, RMBS, etc. Presumably, there are a couple of reasons for this. The type of business (industry), asset portfolio, existing corporate structure, regulatory framework and other relevant factors are different from company to company. Also, the number of precedents is so limited that standardized templates for structuring WBS have not been established yet in the U.S. and Japan. However, these impediments are considered surmountable. Needless to say, issuers just choose a WBS transaction as a financing tool only if it pays. A number of successful deals in the past indicate that high upfront cost and longer preparation time can be viewed as a necessary premium for lower funding cost (lower interest rate). If we accumulate more deals in more diverse industries, we would be able to gradually reduce initial transaction cost and preparation time through more standardized templates, less legal

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research, expedited rating process, and the like. Then, such streamlined process would further increase new issuances, leading to positive spirals. b. Limited Scope of Suitable Businesses As discussed in II.2.c. above, some types of businesses are suitable for WBS and some are not. A candidate business must be able to produce adequate and stable cash-flows over the long term without being interrupted by various macro-economic stresses. Indeed, this is an inevitable limitation intrinsic in WBS, but this does not seem to fully explain the limited use of WBS in the U.S. and Japan. Historically, while the U.K. has utilized WBS in a wide range of industries for more than a decade, the U.S. has more or less focused on restaurant franchises, and Japan on telecoms, golf courses, and casinos, respectively. 121 But, in my view, this is not considered a logical consequence reflecting the differences among those three markets. Rather, it should be viewed as a mere result of historical path dependence. No wonder it would be easier for a potential issuer to try an innovative financing method if there are some prior activities in the same industry. Also, investors and credit rating agencies would be able to analyze and estimate new deals relatively more easily if they have some precedents in similar industries. If this hypothesis of path dependence is correct, we can expect that gradual accumulation of future deals would produce positive spirals beyond borders of diverse business segments even in the U.S./Japan. c. Heavy Restrictions on Business Operation As described before, WBS deals usually entail various restrictions on a sponsors business operation (through covenants, independent directors, veto rights, and other mechanisms) because it is crucially important for creditors to have adequate control over the securitized business in order to generate stable cash-flows while staving off the sponsors bankruptcy. These restrictions on business operation could be a hurdle for potential issuers, although the height of such hurdle would vary depending on the issuer. Given that LBO loans, DIP (debtor in possession) finances and other large syndicated loans often impose more or less similar restrictions on a borrowers business, this point would not necessarily be a determinative hindrance in many cases.

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As discussed in III.a.2.above, in the U.S., some deals closed prior to the financial crisis contained relatively few restrictions on a sponsors business operation, but now investors have reportedly come to demand a much closer scrutiny on the underlying business and assets in the absence of third-party insurance. By contrast, in Japan, as many WBS deals were structured without thirdparty insurance, originators have tended to be subject to heavy restrictions on the business operation. In this context, the previous practice of Japanese WBS might contain some implications to the U.S. monoline-free practice after the crisis. 2. Issues from Investors Perspectives Although the foregoing factors would be quite important when issuers weigh the utility of WBS as a financing method, none of them seems to fully explain the limited use of WBS in the U.S. and Japan. Despite those impediments, there have been quite a number of successful WBS deals as a matter of fact. For example, some issuers such as Dominos Pizza and Sonic Corp. have used WBS for large funding repeatedly.128 In that sense, issues on the investors side may be even more important. a. Relative Attractiveness Compared with Other Financing Methods Needless to say, how attractive WBS is for potential investors would depend on the relative attractiveness of other financing tools (such bank loans, bond, and notes) in the changeable markets at a given point in time. Especially, in the Japanese financial market, the indirect financing through bank loans has had a big presence historically, and the Japanese market for bank loans and corporate debt has been fairly stable even after the financial crisis. These circumstances might help prolong the current stagnation of the WBS market in Japan in the near term. On the other hand, in the U.S., the indirect financing through bank loans has not had such a big proportion compared with direct financing from the capital markets, and, furthermore, the Term Asset-Backed Securities Loan Facility (TALF) by the Federal Reserve significantly helped contract the spreads of some conventional ABSs. In contrast with Japan, these factors might help expedite the recovery and growth of the WBS market in the U.S.

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b. Inadequate Bankruptcy-remoteness? When we think about the difference between the U.K. and the U.S./Japan, someone might point out that the limited bankruptcy-remoteness of WBS structures is the greatest impediment to growth of WBS in both markets. This view seems to make sense at first glance. But, is it a truly valid argument? In conclusion, such a view is considered somewhat naive for the following reasons. Indeed, the true control structure in the U.K. based on its unique bankruptcy law may be the most expedient for WBS, but various alternative credit enhancements are available to make up for limited support from bankruptcy regimes even in the U.S./Japan. That is exactly why major rating agencies have afforded investment grade ratings to certain WBS deals even without thirdparty insurance in the U.S./Japan. As discussed in II.2.b. above, despite the post-crisis economic downturn, the overall performance of WBS transactions has been fairly robust in the U.S./Japan as well as in the U.K. Post-crisis deals which came back to the U.S. market in 2011 adopt basically the same structure as the pre-crisis deals and are assigned investment grade ratings without third-party insurance. Rating agencies do not seem to have made substantial changes to their rating criteria on WBS in response to the financial crisis. Therefore, the extent of bankruptcy-remoteness per se does not explain why such investmentgrade structures have not been widely used yet. But, on the other hand, it is somewhat understandable that some investors might feel skeptical about the validity of such credit ratings on WBS. Actually, the adequacy of bankruptcy-remoteness in previous deals has never been rigorously tested because, fortunately or unfortunately, none of the sponsors in publicly-rated WBS deals has ever gone bankrupt. In that sense, it is an important mission for financial lawyers to continue to pursue more robust legal structures with even higher bankruptcy remoteness without being satisfied with the status quo. c. Esoteric and Complex Character Quite simply, WBS is esoteric. It is one of the newest securitizations with highly complex structures and mechanisms. There are still many market participants who have not heard about WBS in the U.S. and Japan. Especially, after the financial crisis in 2008, many investors came to

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be risk-averse and stayed away from complex structured finance products for a while in the U.S. and Japan, which is presumably the main reason why the WBS markets in both countries were dormant almost entirely in 2009 and 2010. However, the market conditions have been changing gradually. Indeed, one of the primary causes for the financial crisis arose from the securitization market, but now it is generally understood that the problem largely focused on the practice of mortgage-backed securities and that there is no fundamental flaw with securitization per se as a financing method. Moreover, complex as WBS is, its structure is essentially different from multi-layer products such as CDOs criticized for its lack of transparency of the underlying assets. Last year, there were a number of new WBS issuances in the U.S., and Standard & Poors reports that WBS is promising for 2012 as more and more investors are beginning to show interest in this financing. 3. Policy Issues a. Standardization of Rating Methodologies Over-reliance on credit ratings has been criticized as one of the major causes of the financial crisis, but it is an undeniable fact that credit rating agencies (CRAs) have played vital roles to provide investors with effective sorting tools in securitization markets. In particular, as the WBS markets in the U.S. and Japan do not have many precedents yet, the roles of CRAs are considered even greater with respect to WBS than other traditional securitizations. Also, in the absence of monoline wraps, investors would naturally need to scrutinize the quality of credit ratings afforded to innovative financing like WBS. Then, what can be done or should be done to further improve the quality of credit ratings? Among numerous regulatory proposals regarding CRAs, the following proposal contained in Dodd-Frank Act seems to be noteworthy here in connection with WBS. Dodd-Frank Act Section 939(h) requires the SEC to undertake a study on whether the standardization of credit rating methodology and terminology is feasible and desirable. Historically, major CRAs have used different methodologies and terminologies to date. In theory, standardization would make it easier for investors to understand and compare multiple credit ratings by different CRAs. This benefit might be even greater especially in the field of

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WBS because its esoteric structure and scarce precedents might make it even harder for investors to understand and analyze different credit ratings. However, market participants point out that uniform rating methodology and terminology may be rather counterproductive by restricting use of new information, diversity of views, and competition among CRAs. It is also pointed out that governments should never interfere with rating methodology to ensure the market mechanism in ratings will function properly. Moreover, forcing all the rating agencies to use similar methodology might make the financial markets even more susceptible to systemic risks, especially the correlation problem. Recently, Standard & Poors released a report which emphasizes the importance of providing diverse ratings and views to the markets and warned that if investors try to hire only agencies which afford AAA or high ratings so-called ratings shopping diverse rating opinions would not be published in the markets. Especially, in the field of innovative finance like WBS, it seems important to ensure that different CRAs are able to provide diverse ratings and views to form new rating methodologies through the market mechanism. The fact that there were a number of newly-issued WBSs rated BBB or BBB+ in 2011 might be a sign that investors are getting more willing to hear diverse opinions instead of sticking to AAA ratings. From such perspectives, as some already pointed out, what we should aim is to increase disclosure of rating methodologies and underlying assumptions rather than standardization of rating methodologies. Increased disclosure of rating methodologies and underlying assumptions would enable investors to examine different ratings and views more closely, which would facilitate the market mechanism to create better methodologies in response to ongoing financial innovation. Accordingly, it is considered a significant progress that Dodd-Frank Act Section 932(a)(8) and the proposed rules149 require increased disclosure of rating methodologies. b. Regulatory Uncertainties Since the financial crisis, there have been an overwhelming number of proposals on reform of financial regulation in the U.S. and other major countries in the world. But, uncertainties about application of regulation could potentially constitute another impediment to new issuance of innovative products including WBS.

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From such perspective, the following two regulatory proposals in the U.S. seem noteworthy here; 1) additional disclosure requirements proposed by the SEC, and 2) riskretention requirements proposed by Dodd-Frank Act. Additional Disclosure Regulation AB II Proposal In Regulation AB II, 150 the SEC proposed a new disclosure requirement for privately-issued structured finance products, which conditions the availability of a private resale under Rule 144A of the Securities Act of 1933 and a private placement under Rule 506 of Regulation D upon granting to investors the right to obtain from the issuer, upon request, the same information that would be required of public offering. This proposal is criticized for leading to dysfunction of the private placement markets that have been tapped by many issuers of structured finance products. WBS is also one of the categories which have been issued primarily in the private markets. On top of that, even assuming the case of public offering, WBS would NOT considered subject to the existing Regulation AB because most WBSs would not fit the definition of asset-backed security in Item 1101(c). But, once WBS becomes subject to newly proposed Regulation AB II, issuers would be required to disclose the information required of public offering including items under Regulation AB regarding the assets and parties such as static pool data,155 which would not fit products like WBS. According to the SECs release, structured finance product, which demarcates the scope of regulation, would be defined more broadly than the Regulation AB Item 1101(c) definition of asset-backed security so that the new proposals would cover synthetic ABSs, CDOs and any securities commonly known as asset-backed security or a structured finance product.156 WBS could be covered by this new definition even though it is not included in asset-backed security of Regulation AB. It is understood that the major goals of this proposal is to newly require private issuers to disclose loan-level-data and static pool data of securitized assets in response to the abusive practices in the RMBS market during the recent housing bubble. However, both of them hardly make sense in the case of WBS deals because WBS issuers usually do not have such data, and,

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even assuming they have, such data would not have important relevance to the overall performance of a WBS deal, which is based on the ongoing cash flows from an entire business. Therefore, even if the basic content of this new proposal is to be maintained, the scope of its application currently proposed is too broad. It must be refined so as not to include unsuitable products such as WBS. Risk Retention Requirements Another regulatory uncertainty worth discussion in connection with WBS is risk retention requirements or skin-in-the-game rules proposed by Dodd-Frank Act in the U.S. It is highly questionable whether such risk retention proposals should be applied to WBS for the following reasons. Section 941 of Dodd-Frank Act proposes to require any securitizer to retain an economic interest in a portion (in principle, not less than 5%) of the credit risk for any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells, or conveys to a third party. There can be found two main rationales for adopting this type of risk retention requirement. Obviously, one is to align incentives of originators with those of investors in order to prevent an erosion of underwriting standards in the RMBS segment, which could not be stopped by the mere market discipline during the recent housing bubble in the U.S. The Second point is that a clearer commitment by originators and arrangers to underwriting quality may be needed to bring new investor bases to some markets, including segments that did not suffer from erosion of underwriting quality. However, these rationales would not apply to WBS because incentives of an originator (sponsor) in a WBS transaction are substantially different from those in the originate-to-distribute models such as RMBS. In a WBS transaction, the basic scenario for an originator is to repay in full the debt and have the entire securitized business returned from the control of creditors. The originator conducts a WBS to get finance for the benefit of its own business and never intends to abandon the business until it goes bankrupt.158 In that sense, the originator can be considered retaining 100% skin in the game even after it transfers substantially all the vital assets to an SPV. Therefore, it seems obvious that this type of risk retention requirement is not necessary as far as WBS is concerned.

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Although Dodd-Frank Act Section 941 broadens the definition of asset-backed security in the Securities Exchange Act of 1934 in connection with the scope of risk retention requirement, overextending the lesson from the RMBS practice to other unsuitable segments might unnecessarily diminish the attraction of securitization in the capital markets. Dodd-Frank Act itself provides that the regulations shall establish asset classes with separate rules for securitizers of different classes of assets and shall provide for exemption of any securitization, as may be appropriate in the public interest and for the protection of investors. Accordingly, regulators should clarify that WBS would not be included in the new definition of asset-backed security, or should provide for some clear exemption for unique segments which are not adaptable for risk retention requirement such as WBS.

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V. Conclusion
Given the issues discussed in this project, it is far from clear whether WBS will be established as a major segment of securitization markets in the foreseeable future. But, the fact that WBS has long constituted a major part of the ABS market in the U.K. seems to indicate that there should be potentially decent demand for WBS in the U.S. and Japan as well, as long as we can achieve the same economic value by alternative structures. It is the role of policy makers to provide a sound legal basis to such innovative deals without precedents. The important thing is that financial regulation should not inhibit the sound development of innovative transactions in financial markets. Debate on a series of regulatory reforms after the crisis seems to have focused too much on imposing restrictions on financial institutions to prevent another crisis. But when we consider introducing new regulation, we should also discuss how to avoid potential side effects of inhibiting financial innovation if we ever aim to increase or maintain the competitiveness of our financial markets in the long run. It is also the role of policy makers to envisage optimal regulatory frameworks which minimize systemic risks but promote future growth. From such perspective, WBS seems to provide us with one interesting case study to see how financial innovation should be developed and regulated in the post-crisis financial markets.

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VI. Bibliography Whole Business Securitization: An Investigation of the Value Drivers and the Requirements for Successful Transactions -M. Zandstra., Erasmus Universiteit. Faculteit Bedrijfskunde Securitization: The Financial Instrument of the Future - Vinod Kothari Standard & Poors, New Issue: Dominos Pizza Inc., May 3, 2007. Roundtable 2010, supra note 56, at 3; Roundtable 2012, supra note 57, at 5; Ronald S. Borod, Madeleine M.L. Tan & Brian P. Gallogly, After the Fall: Redemption for Whole Business Securitization? GLOBAL SECURITISATION AND STRUCTURED FINANCE 2008, at 49, 53 (2008). http://en.wikipedia.org https://www.moodys.com

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