The Workshop
Asset-backed
securities
and CDOs play a central but complex role in the global capital markets
and have
become widely employed in corporate finance. These sessions provides a
brief insight into
the techniques of
securitization and structured credit risk transfer, in the context of
current disrupted market conditions. In addition to
covering ABS risks, credit enhancement and the rating process, we look
at current developments in asset-backed commercial paper, commercial
mortgage-backed securities, collateralized
debt obligations, auction rate securities, ABS indices, and the role of
credit derivatives in synthetic and
leveraged asset securitization.
Method and Materials
This 2-day workshop will include
case studies of actual deals, as well as hands-on
exercises, and will give participants the opportunity to demonstrate
their
understanding of deals through group interaction and workshop
discussions. Participants
will be
provided with a package of materials useful to the structuring and
analysis of asset-backed deals, including pertinent articles and
rating agency reports.
Pre-Course Reading
Learning Objectives
- What
is the technique of asset securitization? How is this technique applied
to different classes of assets?
- Where
is the asset-backed securities market headed?
- What
are the key credit and market risk issues in the asset-backed market
today, and what drives value in the ABS market?
- What
drives credit ratings on credit enhancement for different
tranches in ABS, and how have ratings methods
altered?
- What
are collateralized debt obligations, auction-rate securities,
commercial MBS and indexes such as the ABX index?
- How
do they relate to credit
risk, valuation and default swaps?
Securitization
Workshop: Agenda
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Topics
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Resources
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Day
1
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The
Securitization Process (90
minutes)
- Securitization defined
- The fundamental
securitization process
- Getting an ABS deal
to market
- Tiering the funding
structure
- Cash flow analysis
and pricing
- Key legal
prerequisites of ABS; rating and regulatory bodies
- Team Exercise: Hyundai Auto ABS.
What
is
the legal status of this securitisation? Is it a true sale? Is the SPV
independent? How would you assess trhe credit condition of the pool?
When are investors repaid? What is the economics of the
deal from the point of view of Hyundai?
An Overview of Risk Assessment (90 minutes)
- Pool analysis,
structure analysis, and determinants of credit risk
- Counterparties and
servicer risk
- Interest rate and
liquidity risk
- Structural elements
of a deal
- Loss of liquidity in
2008
- Liquidity -- what is
it, and where did it go?
- Measuring the
liquidity risk premium
- Asset-backed
commercial paper
- Exercise: What is Hannover's credit
enhancement?
The Rating Agency Process (60 minutes)
- What ratings mean in
the ABS world
- Getting a rating:
sequence and requirements
- Data requirements and
the review process
- The sources of
credit enhancement
- Exercise: Assessing a Citibank credit card
securitization. How would you assess the credit
risk in this
deal? What are the other risks? What protections do investors have?
Credit Enhancement and Risk
Modeling (60 minutes)
- How to structure the credit
enhancement for an ABS
- Using ratings loss tables to
structure credit enhancement in ABS
- Developing a senior-sub model
- Models rating agencies use
- Application: Risk analysis and rating of
corporate CDOs
- Credit Enhancement with Vector
- Ratings
Revised:
Assessing a Mortgage Securitization. Using
information in the report, participants
evaluate the pool,
legal structure and credit enhancement of an RMBS securitization.
ABS, Ratings and the Credit Crunch (60 minutes)
- Mortgage
securitization and the subprime collapse
- Implications for
CMBS, ABCP and othe forms of securitization
- What were the
fundamental mistakes made in the rating agency process?
- What are the basic
conflicts of interest?
- Has the process
changed? If so, how?
- Assignment: Moodys Ratings Revisions.
Please identify where Moody's is implementing changes to ratings
methodologies.
- Prospects for
oversight and regulation of ratings.
- Application: Auction Rate Securities.
What risks are inherent in these securities? What went wrong with
liquidity in this market?
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Presentations
ey2-day1.pdf
Applications
Hyundai
Auto ABS
Hannover ABCP
Rating Corporate CDOs
Ratings
Revised
Moodys
Ratings Revisions
ARS
Offering
Auction
Rate Securities Technique
Auction
Rate Securities Fitch
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Day
2
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ABS Credit Enhancement and
Monoline Insurance (60
minutes)
- Overview of monoline
insurance model and ratings leverage
- Monoline risk
absorption
- Disruption from
misconceived insurance at the triple-A level
- Misconceived
insurance at the first-loss level
- When things went
wrong: counterparty risk and erosion of capital
- Case study: Arsenal. List the
parties involved in this kind of securitization. What are the roles of
each?
How are investors protected?
Credit Derivatives and the ABS
Market (120 minutes)
- Market derivatives
versus credit derivatives
- Credit derivatives
- Credit default swaps
- Application: Jackfruit Records. A
credit default swap
- What are the ABX and
CMBX?
- How indexes are
applied, and how they have affected the market
- Credit linked notes
- Links
between synthetic ABS and the market for credit derivatives
- Example
of synthetic CDO
- Funded and
partially funded synthetic CDOs
- Role
of CDO squared and monolines in structured finance CDOs
- Case study: Leveraged Synthetic
Securitization (Magnolia Finance). Participants analyze the
structure, pricing and risks of a
synthetic
CDO with a super-senior tranche.
CMBS and Valuation Issues (90 minutes)
- Classic MBS vs CMBS
- Credit risk analysis in CMBS
- Special features of CMBS
securitization
- Case
study: Bear 2007 CMBS. What are the assets in this CMBS deal,
and how is pool analysis done? How do you think the credit enhancement
was determined?
- Is the residential housing market
linked to the CMBS market?
- What caused the drama in CMBS?
- Evaluating the current market and
valuation issues in CMBS
Restructuring in the ABS Market (60 minutes)
- What is ABS restructuring?
- The state of downgrades and restructuring opportunities
- Application: Fitch SF
Downgrades. Structured finance rating actions and
pricing/valuation implications
- Downgrades and pricing in the leveraged finance market
- Team exercise: A leveraged loan portfolio.
Using the techniques of securitization, show in detail how you would
restructure a
credit a portfolio of downgraded loans from the Leveraged Finance Weekly.
- Conclusion:
problems and opportunities and the future of securitization
- Review
and Discussion
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Presentations
ey2-day2.pdf
Applications
Impact
of Monoline Downgrades
Arsenal
Jackfruit
CDS
ABX
and CMBX
Magnolia
Finance
Bear Stearns CMBS 2007
SF
Downgrades
Leveraged
Opportunities
Future
of Securitization
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Workshop
Instructor
Ian Giddy is
on the faculty of finance at New York University, USA. He has taught
finance at NYU, Columbia,
Wharton, Chicago and abroad for the past thirty years. He was
Director
of International Fixed Income Research at Drexel Burnham Lambert from
1986
to 1989. The author of more than fifty articles on international
finance,
Dr Giddy has served at the International Monetary Fund and the U.S.
Treasury
and has been a consultant with numerous financial institutions and
corporations
in Europe, North America, the Middle East and Asia. He has lectured in
more than forty countries, and has been involved in the asset-backed
securities market for over 15 years. He is the author or co-author of
The
International
Money Market, The Handbook of International Finance, Cases
in International Finance, Global Financial Markets, Asset
securitisation in Asia, and The
Hudson River Watertrail Guide. He and his
wife are the founders of Cloudbridge, a nature reserve in Costa
Rica.
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