The structured finance market represents a world of entrepreneurship, churning out new asset classes since the 1980s. Yet a newly minted patent from the United States Patent Office sheds light on how that innovation may soon be affected, should market participants owe a fee for using patented methodologies for securitizations.

Patent No. 6,654,727 was awarded on Nov. 25, 2003 for a method of securitizing a portfolio of at least 30% distressed commercial loans, according to government documents.

The inventor is listed as Lynn Tilton, a Florida resident, who filed the claim on Jan. 18, 2002. Calls to Tilton were unreturned as of press time.

While no other information was available about the inventor, according to the abstract, the patent was granted for the invention of "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."

Patents aren't exactly new to securitization, as a general patent search will reveal. But affording intellectual property rights protection to processes that are routinely employed in the normal course of business has at least one highly respected CDO pundit perturbed.

Giving patents to this kind of "invention" could be very negative for the market, because it would impair innovation and creativity, said Arturo Cifuentes, managing director at Wachovia Securities. "What if [Moody's Investors Service] had patented the bi-nominal method eight years ago, or if someone had patented the first emerging-market CBO?" he said, stressing the CDO landscape would look very different today, having been impaired by the patent protection.

Cifuentes stressed he is not against patents, just against claims of original innovation in the securitization market when plenty of prior examples exist. CDOs of distressed assets and/or non-performing loans were structured well before January 2002, said Cifuentes, who noted a June 2001 talk in Milan by analysts from Moody's entitled "Rating Non-Performing Loan Transactions" and a 2001 report from Standard & Poor's entitled "Distressed Debt CDOs." Cifuentes highlights these events because both involved the discussion of distressed debt

securitization deals prior to January 2002, when Tilton's claim was

initially filed.

A brief description of the newly patented platform was included in Cifuentes' newest research report released last week, alongside his notations of where the platform, in his opinion, is not inventive.

Patents directly linked to structured finance have been filed since 1986, when Peter Roberts, Hamish Norton and John Finnerty filed for protection of "methods and apparatus for restructuring debt obligations." The trio was awarded patent No. 4,739,478 in 1988 for a data processing system that evaluated the cash flows and present value (PV) of an existing bond and then created a serial issue of zero coupon bonds, among other things. However, the key word is "apparatus" as this trio's patent references a 1976 patent for a general-purpose calculator that performs the yield-to-maturity of a bond calculation.

Market participants may not be aware that two patents were also awarded in September 2003 that directly relate to securitizations. Patent No. 6,622,129, awarded to Brian Whitworth of California, was for a "method of creating an index of residual values for leased assets, transferring residual value risk and creating lease securitizations." Patent No. 6,615,187 - awarded to Warren Ashenmil of New York, Daniel Berns of California and John Drury of Colorado - was for a "method of securitizing and trading real estate brokerage options."

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