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Tranche ABX and Basis Risk in Subprime RMBS Structured Portfolios. Kevin Kendra February 20, 2007. Introduction. What are structured subprime RMBS portfolios? What is “basis risk”? Why is “basis risk” between these structures important now?. What are structured subprime RMBS portfolios?.

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Tranche abx and basis risk in subprime rmbs structured portfolios

Tranche ABX and Basis Risk in Subprime RMBS Structured Portfolios

Kevin Kendra

February 20, 2007


Introduction

Introduction Portfolios

What are structured subprime RMBS portfolios?

What is “basis risk”?

Why is “basis risk” between these structures important now?


What are structured subprime rmbs portfolios
What are structured subprime RMBS portfolios? Portfolios

  • Portfolio exposure to subprime Residential Mortgage-Backed Securities (RMBS) can be obtained using various structures:

    • Structured Finance Collateralized Debt Obligations (SF CDOs)

      • Cash SF CDOs

      • Bespoke SF CDOs

      • Hybrid SF CDOs

    • ABX.HE Indices

    • Tranche ABX.HE (TABX) Indices

www.derivativefitch.com


What is basis risk
What is “basis risk”? Portfolios

  • Basis risk describes the risk that offsetting investments in a hedging strategy will not experience cash flow or price gains in the same manner.

  • Basis risk has the potential to create an excess gain or loss and therefore is not directional. The amount of basis risk in a hedging strategy describes the how much risk is left behind due to imperfect correlation between the two investments.

  • Basis risk in subprime RMBS portfolios generally arises from:

    • Performance differences in the underlying portfolio assets

    • Structural differences in portfolio instruments

    • Liquidity differences in the different secondary markets

    • Timing of expected cash flows from the portfolio instruments

www.derivativefitch.com


Why is basis between these structures important now
Why is “basis” between these structures important now? Portfolios

  • Standard tranches of the ABX.HE Index commenced trading on Feb. 14, 2007

  • Index tranches promise to provide:

    • Liquidity

    • Transparency

    • Standardization

    • Market Consensus

  • Motivations for TABX participation:

    • Hedging

    • Relative Value Trading

    • Benchmarking

    • Leveraged Market Positions

www.derivativefitch.com


Framework for understanding basis risk in subprime rmbs portfolios
Framework for Understanding Basis Risk in Subprime RMBS Portfolios

  • Subprime RMBS 101

  • Credit Default Swaps on Subprime RMBS

    • Credit Default Swaps 101

    • ISDA Pay-As-You-Go Template 101

    • Subprime RMBS AFC Risk

  • Typical Subprime RMBS Portfolio Structures

    • Structured Finance CDOs 101

    • ABX.HE and TABX.HE Indices 101

  • Basis Risk between TABX.HE and Other Structures

www.derivativefitch.com


Subprime rmbs overview

Subprime RMBS Overview Portfolios

Subprime RMBS 101


Subprime rmbs 101
Subprime RMBS 101 Portfolios

  • Typical Subprime Borrower and Loan Characteristics

    • FICO credit score 650 and below

    • Prior mortgage delinquencies are acceptable

    • Bankruptcy filing within the last 3 to 5 years are acceptable

    • Foreclosure within the last 3 to 5 years are acceptable

    • Debt-to-Income (DTI) ratios of 40% or higher

    • Loan-to-Value (LTV) ratios greater than 80%

www.derivativefitch.com


Subprime rmbs 1011
Subprime RMBS 101 Portfolios

  • Typical Subprime Loan Types

    • Hybrid Adjustable-Rate Mortgages (ARMs)

      • 2/28 Mortgage is fixed for the first two years and then switches to adjustable rate for the remaining 28 years

      • Other common Hybrid ARMs 3/27 and 5/25 terms

    • Hybrid Interest Only (IO) ARMs

    • 40-Year Hybrid ARMs

    • Piggyback Second Liens

    • Limited Documentation Loan Programs

www.derivativefitch.com


Subprime rmbs 1012
Subprime RMBS 101 Portfolios

Sample Subprime RMBS Structure

Individual Mortgages

Mortgage

Pools

REMIC

Trust

RMBS

Bonds

2/28

Hybrid ARM

Mortgage

Pool

Special

Purpose

Vehicle

(RMBS

Trust)

‘AAA’

RMBS

M1

M2

M3

M4

M5

M6

M7

M8

M9

M10

M11

M12

M13

M14

M15

M16

M17

M18

M19

M20

M21

M22

M23

M24

M25

M26

M27

M28

M29

M30

M31

M32

M33

M34

M35

M36

M37

M38

M39

M40

M41

M42

M43

M44

M45

M46

M47

M48

M49

M50

M51

M52

M53

M54

M55

M56

M57

M58

M59

M60

M61

M62

M63

M64

M65

M66

M67

M68

M69

M70

‘AA’

RMBS

M71

M72

M73

M74

M75

M76

M77

M78

. . .

M

2000

‘A’

RMBS

Fixed Rate

Mortgage

M1

M2

M3

M4

M5

M6

M7

M8

M9

M10

M11

M12

M13

M14

M15

M16

M17

M18

M19

M20

‘BBB’

RMBS

M21

M22

M23

M24

M25

M26

M27

M28

M29

M30

‘BBB-’

RMBS

M31

M32

M33

M34

M35

M36

M37

M38

. . .

Residual

M

1000

www.derivativefitch.com


Subprime rmbs 1013
Subprime RMBS 101 Portfolios

$ P

Sample Subprime RMBS Payments

$ I

Principal

Payments

Monthly Mortgage

Payments

REMIC

Trust

Accounts

Interest

Payments

Scheduled

Principal

&

Prepayments

Servicer

Interest

‘AAA’

L + % or Net WAC

M1

M2

M3

M4

M5

M6

M7

M8

M9

M10

M11

M12

M13

M14

M15

M16

M17

M18

M19

M20

M21

M22

M23

M24

M25

M26

M27

M28

M29

M30

‘AAA’

$

M31

M32

M33

M34

M35

M36

M37

M38

M39

M40

M41

M42

M43

M44

M45

M46

M47

M48

M49

M50

$ I

M51

M52

M53

M54

M55

M56

M57

M58

M59

M60

M61

M62

M63

M64

M65

M66

M67

M68

M69

M70

‘AA’

L + % or Net WAC

‘AA’

M71

M72

M73

M74

M75

M76

M77

M78

. . .

M

2000

‘A’

L + % or Net WAC

‘A’

M1

M2

M3

M4

M5

M6

M7

M8

M9

M10

M11

M12

M13

M14

M15

M16

M17

M18

M19

M20

$

‘BBB’

L + % or Net WAC

‘BBB’

M21

M22

M23

M24

M25

M26

M27

M28

M29

M30

$ P

‘BBB-’

L + % or Net WAC

‘BBB-’

Scheduled

Principal

&

Prepayments

M31

M32

M33

M34

M35

M36

M37

M38

. . .

Residual

Excess Interest

Residual

M

1000

www.derivativefitch.com


Subprime rmbs 1014
Subprime RMBS 101 Portfolios

  • Standard Structural Features of Subprime RMBS

    • Subordination serves as credit enhancement to account for credit risk

    • Interest rate instruments to hedge interest rate risk

    • Performance test at three year mark

      • If test fails then the priority of payments remains unchanged with the senior notes receiving all principal proceeds

      • If test passes then principal proceeds repays subordinated notes until targeted subordination is met.

    • Defaulted loans worked out by servicers

  • Each Subprime RMBS will have somewhat unique performance profiles

www.derivativefitch.com


Subprime rmbs 1015
Subprime RMBS 101 Portfolios

Principal Waterfalls

  • Sequential pay

    • All scheduled principal and prepayments go to repay the senior bond holders first until paid-in-full, then to the next senior note holder, etc.

    • Subprime RBMS are initially sequential pay for the first three years and will remain sequential pay if the performance tests fail

  • Credit Enhancement (CE) “Step Downs”, if performance tests pass

    • If overcollateralization (OC) targets have been met, the CE is stepped down by repaying subordinate bond holders.

    • OC targets are set to double the original subordination, ie. If the original ‘AAA’ bond subordination is 7.5% then the target is 15%

    • Test senior note target for compliance first and if passing then check the next senior bond and so on.

    • Over periods of rapid prepayments all bonds may be meeting the OC targets, then principal prepayments become inverse sequential pay.

www.derivativefitch.com


Sample principal waterfalls
Sample Principal Waterfalls Portfolios

Scenario 2: Performance Test Passes the Credit

Enhancement “Steps Down” by Paying Principal

to Subordinated Notes

Scenario 1: Sequential Principal Repayment

$ P

$ P

Principal

Payments

Accounts

Principal

Payments

Accounts

Scheduled

Principal

&

Prepayments

Payments

Before Step Down

Scheduled

Principal

&

Prepayments

Payments

Before Step Down

‘AAA’

After Step Down

‘AAA’

‘AA’

‘AA’

‘A’

‘A’

‘BBB’

‘BBB’

‘BBB-’

‘BBB-’

After Step Down

Residual

Residual

www.derivativefitch.com


Subprime rmbs 1016
Subprime RMBS 101 Portfolios

Interest Waterfalls

  • Regular interest

    • Paid sequentially to bonds, capped at weighted average mortgage rate net of expenses (Net WAC) or available funds cap (AFC)

  • Excess Interest

    • Excess interest is the remaining interest proceeds in the interest collection account after paying bondholders regular interest above

    • First, excess interest is used to recover realized collateral losses

    • Second, excess interest is used to recover any interest shortfalls created where Net WAC is lower than the stated bond coupon

    • Finally, the remaining excess interest goes to the residual bond holder

www.derivativefitch.com


Sample rmbs interest waterfall
Sample RMBS Interest Waterfall Portfolios

Step 3 – Remaining

Excess Interest to

Pay AFC Shortfalls

Step 2 – Excess

Interest to

Cover Collateral

Losses

Step 1 – Interest

Paid Sequentially

to Bonds, Capped

at AFC

$ I

Interest

Shortfalls

Principal

Payments

Accounts

Interest

Payments

Scheduled

Principal

&

Prepayments

Interest

‘AAA’

L + % or Net WAC

‘AAA’

‘AA’

L + % or Net WAC

‘AA’

‘A’

L + % or Net WAC

‘A’

‘BBB’

L + % or Net WAC

‘BBB’

L + % - Net WAC

‘BBB-’

L + % or Net WAC

‘BBB-’

L + % - Net WAC

Residual

Excess Interest

Residual

Step 4 – Remaining

Excess Interest to

Residual Holder

Losses

www.derivativefitch.com


Subprime rmbs 1017
Subprime RMBS 101 Portfolios

AFC Interest Shortfall

  • AFC Shortfall is the difference between the stated bond coupon and the Net WAC

  • AFC Shortfalls accrue over time and may be recoverable

  • AFC Shortfalls manifest themselves in times of rising interest rates

    • Typical subprime RMBS deals have 75% hybrid ARM mortgages

    • RMBS bonds are generally floating rate bonds based on the London InterBank Offering Rate (LIBOR)

    • If short-term LIBOR interest rates rise during the 2- or 3-year fixed rate period then the interest coupon from the mortgages is insufficient to pay the RMBS bond holders LIBOR plus the stated spread

  • AFC shortfalls may be unrecoverable if excess interest is eroded.

www.derivativefitch.com


Credit default swaps on subprime rmbs

Credit Default Swaps on Subprime RMBS Portfolios

Credit Default Swaps (CDS) 101

ISDA Pay-As-You-Go (PAUG) Template 101

Subprime RMBS AFC Risk


Credit default swaps 101
Credit Default Swaps 101 Portfolios

Protection Seller

  • Receives CDS premium payment and reimbursement payments in exchange for providing protection payments if a credit event occurs.

  • CDO note holders are protection sellers in a synthetic CDO.

    Protection Buyer

  • Pays CDS premium in exchange for protection payments if a credit event occurs.

  • CDS Swap Counterparty is the protection buyer in a synthetic CDO.

    Calculation Agent

  • Determines the amount of the protection payment upon a credit event per the terms of the credit default swap

  • Usually the Protection Buyer serves this role

www.derivativefitch.com


Credit default swaps 1011
Credit Default Swaps 101 Portfolios

Collateral or Eligible Investment

  • Highly rated, highly liquid financial instruments purchased from the sales proceeds of the initial CDO notes.

  • Provides the index portion of the note coupon

  • Provides protection payments or the return of principal to note holders

    Reference Entity and Reference Obligation

  • Reference entities are security issuers like a corporation or sovereign

  • Reference obligations are securities with specific debt seniority levels

    • Reference obligations in a corporate CDS is usually informational to establish the seniority of debt to be valued if a credit event occurs

    • Reference obligations in CDS of structured finance assets or leveraged loans or in total return swap structures

www.derivativefitch.com


Credit default swaps 1012
Credit Default Swaps 101 Portfolios

Sample Credit-Linked Note (CLN) using a CDS

Protection

Buyer

Credit Default

Swap

Protection

Seller

CDS Premium

(bps)

Note Coupon

(L + bps)

CDS Swap

Counterparty

Credit-Linked

Note Trust

Protection

Seller

CLN Proceeds

($)

Protection

Payments ($)

CLN

Proceeds

($)

LIBOR

(L)

Reference

Entity or

Obligation

Collateral or

Eligible

Investments

www.derivativefitch.com


Credit default swaps 1013
Credit Default Swaps 101 Portfolios

Credit Events

  • Applicable credit events will vary by CDS

  • Typical credit events may include:

    • Bankruptcy

    • Failure to Pay (FTP)

    • Restructuring

    • Repudiation/Moratorium, usually emerging markets and sovereigns only

    • Obligation Acceleration, usually emerging markets sovereigns only

  • Once a credit event has been called and settled then the credit default swap is terminated

www.derivativefitch.com


Credit default swaps 1014
Credit Default Swaps 101 Portfolios

Settlement and Valuation Procedures

  • Protection Buyer calls a credit event by sending notice to the Protection Seller what credit event has occurred

  • Settlement method is determined by the CDS contract

    • Physical settlement means the Protection Buyer gives the Seller the reference obligation, or equivalent, in return for cash par amount

    • Cash settlement means the parties look to the market value of the reference obligation to determine the net protection payment

  • Fitch’s preferred valuation process includes:

    • Dealer poll of at least 5 dealers, not including the Protection Buyer

    • Polls typically held 30 to 60 days after credit event notification

www.derivativefitch.com


Isda pay as you go paug template 101
ISDA Pay-As-You-Go (PAUG) Template 101 Portfolios

  • ISDA PAUG template is designed to replicate the cash flow profile of the cash bond with a credit default swap (CDS) contract

  • CDS contracts for corporate and sovereign issuers are insufficient to replicate the payment profile of a structured finance bond

  • ISDA PAUG template was introduced in the U.S. in XXXX 2005 for RMBS and CMBS securities for CDO securities in June 2006

  • Introduces the concept of “floating payments”

    • Floating payments are paid by the Protection Seller in the event of an AFC Interest Shortfall

    • Floating payments may be reimbursed by the Protection Buyer if the AFC Interest Shortfall is ultimately recovered

www.derivativefitch.com


Isda pay as you go paug template 1011
ISDA Pay-As-You-Go (PAUG) Template 101 Portfolios

Sample CLN using a PAUG CDS

Floating

Payments

Protection

Buyer

Credit Default

Swap

Protection

Seller

CDS Premium

(bps)

Note Coupon

(L + bps)

CDS Swap

Counterparty

Credit-Linked

Note Trust

Protection

Seller

CLN Proceeds

($)

Protection

Payments ($)

CLN

Proceeds

($)

LIBOR

(L)

Reference

Obligation

Collateral or

Eligible

Investments

www.derivativefitch.com


Isda pay as you go paug template 1012
ISDA Pay-As-You-Go (PAUG) Template 101 Portfolios

PAUG Credit Events

  • Failure to Pay (FTP) Principal

  • Writedown

  • Distressed Rating Downgrade (‘CCC’ or below)

  • FTP Interest for CDO reference obligations only

    PAUG Floating Amount Events

  • Interest Shortfalls

  • Principal Shortfalls

  • Writedown Amounts

  • Protection Buyers typically have an option whether to call a credit event or a floating amount event

  • www.derivativefitch.com


    Isda pay as you go paug template 1013
    ISDA Pay-As-You-Go (PAUG) Template 101 Portfolios

    PAUG Settlement

    • The secondary market for structured finance securities is not liquid and therefore valuation procedures are not applicable

    • Floating payments are designed to replicate the actual loss amounts

    • If a credit event occurs then the Protection Buyer has the option to physically deliver all or part of the notional amount to the Seller

      • If the entire notional is physically settled then the CDS is terminated

      • If a portion of the notional is settled then the CDS continues on the remaining amount

    www.derivativefitch.com


    Isda pay as you go paug template 1014
    ISDA Pay-As-You-Go (PAUG) Template 101 Portfolios

    Interest Shortfalls

    • RMBS reference obligations are called AFC shortfalls

    • CMBS reference obligations are called WAC shortfalls

    • CDO reference obligations are called PIK-ing shortfalls

      Interest Shortfall Cap Options

    • Fixed Cap: Floating payments are limited to the amount of the CDS premium

    • Variable Cap: Floating payment are limited to LIBOR + premium

    • No Cap: No limit to the floating rate payments

      • Completely replicates the payments of the cash bond or total return swap

      • May require principal to be liquidated to pay interest shortfall

    www.derivativefitch.com


    Subprime rmbs afc risk
    Subprime RMBS AFC Risk Portfolios

    • Available Funds Cap (AFC) Risk

      • REMIC law limits a floating rate RMBS bond pass-through rate to the lesser of:

        • Bond spread plus some index (typically 1 month LIBOR), or

        • Underlying mortgage collateral pool’s weighted average coupon, net of expenses (Net WAC).

      • AFC Risk varies by RMBS transaction based on:

        • Actual prepayment speeds of underlying mortgages

        • Effectiveness of interest rate hedges in the RMBS structure

        • Short-term interest rate increases before Hybrid ARM mortgages switch to floating interest rate payments

    www.derivativefitch.com


    Subprime rmbs afc risk1
    Subprime RMBS AFC Risk Portfolios

    • Unrecovered AFC Interest Shortfalls can be prevalent by vintage

    • Unrecovered AFC Interest Shortfalls can be present across all rating categories

    www.derivativefitch.com


    Key risks afc risk
    Key Risks – AFC Risk Portfolios

    • Unrecovered AFC Interest Shortfall amounts have been small

    • Difference in CDS premium required for No Cap protection may exceed the actual unrecovered AFC interest shortfalls experience in the cash bond market

    www.derivativefitch.com


    Subprime rmbs portfolio structures

    Subprime RMBS Portfolio Structures Portfolios

    Structured Finance CDOs 101

    ABX.HE and TABX.HE 101


    Structured finance cdos 101
    Structured Finance CDOs 101 Portfolios

    • Generic Types of SF CDOs

      • Cash SF CDOs

      • Bespoke SF CDOs

      • Hybrid SF CDOs

    www.derivativefitch.com


    Structured finance cdos 1011
    Structured Finance CDOs 101 Portfolios

    Sample Cash SF CDO Structure

    CDO Portfolio

    CDO

    Trust

    CDO

    Bonds

    Special

    Purpose

    Vehicle

    (CDO

    Trust)

    ‘AAA’

    CDO

    RMBS

    Bond 1

    RMBS

    Bond 2

    RMBS

    Bond 3

    RMBS

    Bond 4

    RMBS

    Bond 5

    RMBS

    Bond 6

    RMBS

    Bond 7

    RMBS

    Bond 8

    RMBS

    Bond 9

    RMBS

    Bond 10

    Note Coupon

    (L + bps)

    RMBS

    Bond 11

    RMBS

    Bond 12

    RMBS

    Bond 13

    RMBS

    Bond 14

    RMBS

    Bond 15

    RMBS

    Bond 16

    RMBS

    Bond 17

    RMBS

    Bond 18

    RMBS

    Bond 19

    RMBS

    Bond 20

    Bond Coupons

    (L + bps)

    Proceeds

    ($)

    RMBS

    Bond 21

    RMBS

    Bond 22

    RMBS

    Bond 23

    RMBS

    Bond 24

    RMBS

    Bond 25

    RMBS

    Bond 26

    RMBS

    Bond 27

    RMBS

    Bond 28

    RMBS

    Bond 29

    RMBS

    Bond 30

    Proceeds

    ($)

    ‘AA’

    CDO

    RMBS

    Bond 31

    RMBS

    Bond 32

    RMBS

    Bond 33

    RMBS

    Bond 34

    RMBS

    Bond 35

    ‘A’

    CDO

    RMBS

    Bond 36

    RMBS

    Bond 37

    RMBS

    Bond 38

    RMBS

    Bond 80

    . . .

    ‘BBB’

    CDO

    CDO

    Bond 1

    CDO

    Bond 2

    CDO

    Bond 3

    CDO

    Bond 4

    CDO

    Bond 5

    Preferred Shares

    or Equity

    CDO

    Bond 6

    CDO

    Bond 7

    CDO

    Bond 8

    CDO

    Bond 9

    CDO

    Bond 10

    www.derivativefitch.com


    Structured finance cdos 1012
    Structured Finance CDOs 101 Portfolios

    • Cash SF CDO Asset Portfolio Highlights

      • Portfolios contain between 60 and 140 bonds

      • Assets may be diversified by market sector, however recent vintage SF CDOs have been concentrated in subprime RMBS

      • Assets may be diversified by risk profile (intial ratings)

      • Assets may be diversified by vintage

      • Asset acquisition and selection

        • Asset manager warehouses bonds prior to issuing CDO notes

        • CDO notes typically issued when asset manager has accumulated approximately 60-80% of the target portfolio

        • Initial portfolio is typically fully ramped within 6 months of CDO note issuance

    www.derivativefitch.com


    Structured finance cdos 1013
    Structured Finance CDOs 101 Portfolios

    • Managed vs Static Portfolios

      • Static portfolios are typically fully ramped at closing and principal proceeds are used to amortize the senior notes

      • Managed portfolios are typically partially ramped at closing and principal proceeds are typically reinvested for a finite period between 3 and 6 years

        • If the portfolio experiences negative credit migration then discretionary trading is limited to “maintain or improve” credit quality

        • If the portfolio significantly under performs then the transactions may shift to a static portfolio

    www.derivativefitch.com


    Structured finance cdos 1014
    Structured Finance CDOs 101 Portfolios

    • Cash SF CDO Note Highlights

      • Credit enhancement comes from subordination and excess spread

      • Interest is paid sequentially to note holders

      • Overcollateralization (OC) and Interest Coverage (IC) performance tests are checked prior to distributions to subordinate notes

      • Excess interest may be used to:

        • If tests are passing then distributed to Preferred Shares or Equity

        • A portion may be used to repay mezzanine notes

        • If tests are failing then distributions may be used to cure the tests

          • Purchase new assets

          • Pay down senior notes

    www.derivativefitch.com


    Structured finance cdos 1015
    Structured Finance CDOs 101 Portfolios

    Sample Bespoke SF CDO Structure

    Reference Portfolio

    CDO

    Trust

    CDO

    Structure

    Special

    Purpose

    Vehicle

    (CDO

    Trust)

    Unfunded

    Super-Senior

    Revolver

    CDS Swap

    Counterparty

    RMBS

    Bond 1

    RMBS

    Bond 2

    RMBS

    Bond 3

    RMBS

    Bond 4

    RMBS

    Bond 5

    RMBS

    Bond 6

    RMBS

    Bond 7

    RMBS

    Bond 8

    RMBS

    Bond 9

    RMBS

    Bond 10

    RMBS

    Bond 11

    RMBS

    Bond 12

    RMBS

    Bond 13

    RMBS

    Bond 14

    RMBS

    Bond 15

    CDS

    Premium

    Unfunded

    CDS

    RMBS

    Bond 16

    RMBS

    Bond 17

    RMBS

    Bond 18

    RMBS

    Bond 19

    RMBS

    Bond 20

    RMBS

    Bond 21

    RMBS

    Bond 22

    RMBS

    Bond 23

    RMBS

    Bond 24

    RMBS

    Bond 25

    Protection

    Payments

    Note

    Coupon

    (L + bps)

    RMBS

    Bond 26

    RMBS

    Bond 27

    RMBS

    Bond 28

    RMBS

    Bond 29

    RMBS

    Bond 30

    ‘AAA’

    Note

    RMBS

    Bond 31

    RMBS

    Bond 32

    RMBS

    Bond 33

    RMBS

    Bond 34

    RMBS

    Bond 35

    Proceeds

    ($)

    First Loss

    Unfunded

    CDS

    RMBS

    Bond 36

    RMBS

    Bond 37

    RMBS

    Bond 38

    RMBS

    Bond 80

    . . .

    Proceeds

    ($)

    LIBOR

    (L)

    Collateral or

    Eligible

    Investments

    www.derivativefitch.com


    Structured finance cdos 1016
    Structured Finance CDOs 101 Portfolios

    • Bespoke SF CDO Asset Portfolio Highlights

      • Portfolios reference between 60 and 100 securities

      • Assets may be diversified by market sector but typically have a concentration in subprime RMBS

      • Assets may be diversified by risk profile (initial ratings

      • Assets may be diversified by vintage

      • Asset selection

        • Portfolio is negotiated between the Bespoke CDO note holder and the CDS Swap counterparty

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    Structured finance cdos 1017
    Structured Finance CDOs 101 Portfolios

    • Bespoke SF CDO Note Highlights

      • Attachment points define the amount of portfolio losses the structure needs to sustain before a protection payment would be made

      • Detachment point defines the maximum amount of protection payments that the notes could be required to make

      • Credit enhancement comes solely from subordination

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    Structured finance cdos 1018
    Structured Finance CDOs 101 Portfolios

    Sample Hybrid SF CDO Structure

    CDS Portfolio

    CDO

    Trust

    CDO

    Structure

    Special

    Purpose

    Vehicle

    (CDO

    Trust)

    Unfunded

    Super-Senior

    Revolver

    RMBS

    CDS 1

    RMBS

    CDS 2

    RMBS

    CDS 3

    RMBS

    CDS 4

    RMBS

    CDS 5

    CDS Premium

    RMBS

    CDS 6

    RMBS

    CDS 7

    RMBS

    CDS 8

    RMBS

    CDS 9

    RMBS

    CDS 10

    CDS Premium

    RMBS

    CDS 11

    RMBS

    CDS 12

    RMBS

    CDS 13

    RMBS

    CDS 14

    RMBS

    Bond 15

    Unfunded

    CDS

    Protection

    Payments

    RMBS

    CDS 16

    RMBS

    CDS 17

    RMBS

    CDS 18

    RMBS

    CDS 20

    Super-Senior

    Protection

    Payments

    . . .

    CDO

    CDS 1

    CDO

    CDS 2

    CDO

    CDS 3

    CDO

    CDS 4

    CDO

    CDS 5

    Note Coupon

    (L + bps)

    Bond Portfolio

    ‘AAA’

    CDO

    RMBS

    Bond 1

    RMBS

    Bond 2

    RMBS

    Bond 3

    RMBS

    Bond 4

    RMBS

    Bond 5

    ‘AA’

    CDO

    Bond Coupons

    (L + bps)

    RMBS

    Bond 6

    RMBS

    Bond 7

    RMBS

    Bond 8

    RMBS

    Bond 9

    RMBS

    Bond 10

    ‘A’

    CDO

    Funded

    Notes

    RMBS

    Bond 11

    RMBS

    Bond 12

    RMBS

    Bond 13

    RMBS

    Bond 14

    RMBS

    Bond 15

    ‘BBB’

    CDO

    Proceeds

    ($)

    RMBS

    Bond 16

    RMBS

    Bond 17

    RMBS

    Bond 18

    RMBS

    Bond 20

    . . .

    Preferred Shares

    or Equity

    CDO

    Bond 1

    CDO

    Bond 2

    CDO

    Bond 3

    CDO

    Bond 4

    CDO

    Bond 5

    Proceeds

    ($)

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    Structured finance cdos 1019
    Structured Finance CDOs 101 Portfolios

    • Hybrid SF CDO Asset Portfolio Highlights

      • Portfolio assets may be in a cash or synthetic form

      • Portfolios contain between 60 and 140 bonds or CDS

      • Asset attributes similar to the cash SF CDO portfolios

      • Portfolios are typically managed

        • Asset managers can find relative value on the same asset between cash and synthetic markets

        • Asset managers can use the synthetic market to access collateral from vintages that are not available in the secondary market

        • Asset managers can use the synthetic market to get full exposure to cash bonds where they received a partial allocation

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    Abx he and tabx he indices 101
    ABX.HE and TABX.HE Indices 101 Portfolios

    RMBS

    10

    RMBS

    8

    RMBS

    9

    . . .

    RMBS

    4

    RMBS

    6

    RMBS

    7

    RMBS

    11

    RMBS

    20

    RMBS

    2

    RMBS

    3

    RMBS

    5

    RMBS

    1

    ‘AAA’

    RMBS

    ‘AAA’

    RMBS

    ‘AAA’

    RMBS

    ‘AAA’

    RMBS

    ‘AAA’

    RMBS

    ‘AAA’

    RMBS

    ‘AAA’

    RMBS

    ‘AAA’

    RMBS

    ‘AAA’

    RMBS

    ‘AAA’

    RMBS

    ‘AAA’

    RMBS

    ‘AAA’

    RMBS

    . . .

    ABX.HE.AAA

    ABX.HE.AA

    ‘AA’

    RMBS

    . . .

    ‘AA’

    RMBS

    ‘AA’

    RMBS

    ‘AA’

    RMBS

    ‘AA’

    RMBS

    ‘AA’

    RMBS

    ‘AA’

    RMBS

    ‘AA’

    RMBS

    ‘AA’

    RMBS

    ‘AA’

    RMBS

    ‘AA’

    RMBS

    ‘AA’

    RMBS

    ABX.HE.A

    . . .

    ‘A’

    RMBS

    ‘A’

    RMBS

    ‘A’

    RMBS

    ‘A’

    RMBS

    ‘A’

    RMBS

    ‘A’

    RMBS

    ‘A’

    RMBS

    ‘A’

    RMBS

    ‘A’

    RMBS

    ‘A’

    RMBS

    ‘A’

    RMBS

    ‘A’

    RMBS

    ABX.HE.BBB

    . . .

    ‘BBB’

    RMBS

    ‘BBB’

    RMBS

    ‘BBB’

    RMBS

    ‘BBB’

    RMBS

    ‘BBB’

    RMBS

    ‘BBB’

    RMBS

    ‘BBB’

    RMBS

    ‘BBB’

    RMBS

    ‘BBB’

    RMBS

    ‘BBB’

    RMBS

    ‘BBB’

    RMBS

    ‘BBB’

    RMBS

    ABX.HE.BBB-

    ‘BBB-’

    RMBS

    ‘BBB-’

    RMBS

    ‘BBB-’

    RMBS

    ‘BBB-’

    RMBS

    ‘BBB-’

    RMBS

    ‘BBB-’

    RMBS

    ‘BBB-’

    RMBS

    ‘BBB-’

    RMBS

    ‘BBB-’

    RMBS

    ‘BBB-’

    RMBS

    ‘BBB-’

    RMBS

    ‘BBB-’

    RMBS

    . . .

    . . .

    Residual

    Residual

    Residual

    Residual

    Residual

    Residual

    Residual

    Residual

    Residual

    Residual

    Residual

    Residual

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    Abx he and tabx he indices 1011
    ABX.HE and TABX.HE Indices 101 Portfolios

    • ABX.HE Asset Portfolio Highlights

      • Portfolios reference 20 bonds

      • Assets are all subprime RMBS

      • Assets are homogenous by risk profile (intial ratings)

      • Assets are originated in a 6 month time frame

      • Asset selection

        • Aggregate a list of the largest volume subprime RMBS issuers

        • Select two representative transactions from each issuer

        • Index participants vote on transactions to be included in each index

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    Abx he and tabx he indices 1012
    ABX.HE and TABX.HE Indices 101 Portfolios

    TABX.HE.BBB

    Tranches

    TABX.HE.BBB

    Reference Obligations

    ABX.HE.BBB

    07-1 Portfolio

    ABX.HE.BBB

    06-2 Portfolio

    35 – 100%

    ‘BBB’

    RMBS 1

    ‘BBB’

    RMBS 1

    ‘BBB’

    RMBS 2

    ‘BBB’

    RMBS 2

    ‘BBB’

    RMBS 3

    ‘BBB’

    RMBS 3

    ‘BBB’

    RMBS 4

    ‘BBB’

    RMBS 4

    ‘BBB’

    RMBS 5

    ‘BBB’

    RMBS 5

    ‘BBB’

    RMBS 6

    ‘BBB’

    RMBS 6

    ‘BBB’

    RMBS 7

    ‘BBB’

    RMBS 7

    ‘BBB’

    RMBS 8

    ‘BBB’

    RMBS 8

    20 – 35%

    .

    .

    .

    .

    .

    .

    12 – 20%

    7 – 12%

    3 – 7%

    ‘BBB’

    RMBS 20

    ‘BBB’

    RMBS 20

    0 – 3%

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    Abx he and tabx he indices 1013
    ABX.HE and TABX.HE Indices 101 Portfolios

    • TABX.HE Asset Portfolio Highlights

      • Portfolios reference 40 bonds from two ABX.HE indices

      • Assets are all subprime RMBS

      • Assets are homogenous by risk profile (intial ratings)

      • Assets are originated in a one year time frame

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    Conclusions

    Conclusions Portfolios


    Abx he and tabx he conclusions
    ABX.HE and TABX.HE Conclusions Portfolios

    • The ABX.HE has proven to be effective in providing market transparency in an otherwise opaque market

      • Allows market participant to express market views

    • The TABX.HE promises to provide similar benchmarking and relative value views for the Bespoke SF CDO market

    • TABX.HE will be less effective in benchmarking for cash and hybrid SF CDOs

      • Portfolios have significantly different portfolio characteristics

      • Portfolios are typically managed in SF CDOs

      • TABX.HE is equally weighted by the largest issuers whereby SF CDOs portfolios are typically selected by an asset manager

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