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Introduction to ABS / MBS for Investors

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Introduction to ABS / MBS for Investors Introduction to ABS / MBS for Investors January 2001 Bea von Gneisenau Credit Products - Head of European ABS Trading & Investments (MEF 2) International Markets January 2001 - page 1 12345 Introduction to ABS/MBS for investors Definitions ABS-classes Market development in Europe Valuation (structure, pool, pricing) special terms advantages for investors attractive investment January 2001 - page 2 12345 What are asset backed securities (ABS) ? Securities entirely based on the performance of a pool of assets Backed by pool, not by issuer risk Usually independent from the credit risk of the assets‘ owner (originator or seller) New approach to assessing credit risk Using statistical methods instead to analyse and predict portfolio performance January 2001 - page 3 12345 How works Securitization? AAA A BBB Risk transfer of asset pool Issue of different Not rated Sponsor/ Special Purpose tranches Originator Vehicle Investors Through (SPV) or CP’s or True Sale, Guarantee or Credit Derivatives ABCP’s January 2001 - page 4 12345 Securitization Asset Backed Commercial Paper . Term Deals • revolving issues • one time issue • established for a longer period • Pool exactly specified and all historic • usually originators unknown to investors statistics available • pool basics available • maturity > 1 year, up to 30 years • CP maturity between 7 and 270 days • publicly placed transactions • no tranching • rated by 1 or more rating agencies • short term rating, highest ratings achieved A-1+/P1 or A-1/P1 • private placements January 2001 - page 5 12345 ABS ( term deals ) MBS CDO ABS (Mortgage Backed (Collateralized Debt (specific Securities) Obligations) asset classes) Residential MBS CLO CARDS (Collateralized Loan (credit card receivables) Obligations) Commercial MBS / CBO consumer loans CRE (Collateralized Bond (HEL, auto loans ...) Obligations) Lease receivables Cashflow CBO's market value CBO's Future Flow ABS classes Receivables Others (infrastructure, project finance, taxes non-performing loans, royalties...) January 2001 - page 6 12345 Market development in Europe in 2000 ABS CBO/CLO CMBS/CRE MBS NPL Sonstige 100 87,3 bn 161 trades 90 69,6 bn 80 127 trades 70 60 41,0 bn 50 38,0 bn 62 trades 85 trades bn USD bn 40 30 20 10 0 1997 1998 1999 '2000 source: Fitch IBCA January 2001 - page 7 12345 European market breakdown 2000 Switzer- Benelux ABS CBO/CLO Multi land 16% 16,6% 21,8% 5% 1% Ireland France 3% 4% Scandi- CMBS navia Germany Others 7,0% 3% 7% 8,2% NPL Italy 2,2% 9% Iberia UK 8% MBS 44% 44,1% Source: Fitch IBCA, issues 01/00 - 12/00 January 2001 - page 8 12345 Valuation Understanding the transaction appeal and motivation Structure Analysis - form of transfer - form of credit enhancement - form of cashflow allocation (waterfall...) - form of transformation of cashflows (interest rate or currency swaps…) - who else is involved Pool Analysis (of the underlying assetsassets)) Bank regulations and capital treatment Relative Value Analysis (Pricing) January 2001 - page 9 12345 Structure What to look for: How the credit risk of the assets is separated from the credit risk of their seller (bankruptcy remoteness) How the asset cash flows are matched with the bond cash flows Why the transaction makes economic sense (capital relief, funding, risk transfer) January 2001 - page 10 12345 Structure Major Participants Servicer Trustee AAA Risktransfer Special Purpose Bond- Sponsor/ A of the asset pool Vehicle issue of Originator Investors By true sale, (SPV) different BBB guarantee or tranches BBB credit-derivatives Not rated Rating Agency Credit Enhancement January 2001 - page 11 12345 Structure analysis - key parties Originator / Sponsor - Entity (Corporate, bank, public issuers) - have funding needs - own assets, which can be used as collateral for ABS/MBS funding Issuer of ABS/MBS „Special Purpose Vehicle“ (SPV), specifically created for the purpose of the securitisation, very often located in Channel Islands or Ireland Outside Credit Enhancer Entity providing credit enhancement through guarantee, insurance, reserve fund etc. Servicer - Entity, which collects and distributes the cash flows from the assets, looks after delinquent loans, reminds borrowers of the missing payments … - in Europe very often = originator January 2001 - page 12 12345 Structure analysis - key parties Liquidity Provider Entity which balances the timing mismatching between the collected cashflows from the pool and the cashflows to be distributed under the structured bonds Rating Agencies - determine the credit strenght of an ABS - size the credit enhancement to achieve desired rating Trustee controls and checks cashflows Structurer structures the issue in close cooperation with the originator Underwriter takes the issue and places it in the market January 2001 - page 13 12345 Structure Depends on the type of collateral Risk Transfer (page 15) • True Sale • Credit Derivatives • Guarantees Pass through/Pay through, Sequential Pay Form of SPV (corporate, charity, trust) Credit Enhancement - protection against losses •„„„insideinside structurestructure““ / often through originator Senior-subordinated structure (page 16) Reserve account (Cash account) Overcollateralization Excess spread corporate guarantee •„„„outsideoutside structurestructure““ / through external counterpart Insurance („Wrap“ through „monoline insurer“), guarantee, liquidity-reserve January 2001 - page 14 12345 Struktur - Risk transfer synthetic risktransferrisktransfer:: true sale (credit derivatives / guarantee) Originator Originator Pool of Assets Pool of Assets Assets proceeds Portfoliorisk Protection funded unfunded ABS Issuer (SPV) ABS Issuer (SPV) Collateral Proceeds Proceeds of issue are of issue invested in High Quality Collateral Bond Issue Bond Issue January 2001 - page 15 12345 Structure Analysis Hypothetic Payments „Waterfall“ in Subordination Structures Cash Flows of Fees AAA the Collateral Coupon AAA Principal A Coupon A Principal BBB Coupon BBB => Losses hit lowest tranche first Principal Equity January 2001 - page 16 12345 Structure analysis Targets and advantages of the originator - Regulatory capital release - diversification of funding sources, alternative to classic loan and entry to the international capital market - Securitization will free capital for new business - „Marketpricing“ of loan portfolio - portfolio management - Possibility of true credit risk transfer of illiquid assets - release of credit lines - no correlation between performance of the originators and risk of the assets - Improving own ratings by separating delinquent assets - Improving of balance sheet figures („active balance sheet management“), more efficient use of capital, increase of Return on Equity - better pricing (through higher rating) January 2001 - page 17 12345 Important terms Cash-Flow Structures • hard bullet CLO/CBO • soft bullet Credit Cards, (MBS) • amortizing, with prepayments MBS, consumer loans, HEL • sequentials MBS, consumer loans, HEL Faktor shows the actual outstanding principal of a tranche and how much has been prepayed until now e.g. factor 0,963456 means 96,34% principal outstanding and 3,65 being prepayed. Maturity • WAL (weighted average life) average maturity of the capital (Endpayment + Prepayments, no interest) • Expected Maturity expected day of last capital repayment • Final Maturity legal final maturity, maximum possible maturity Terms/Figgures • LTV Loan to Value • DSCR („Debt Service Coverage ratio“) Cashflows bond compared to Cashflows of the assets • seasoning age of the assets • WART „weighted average remaining term“ of the assets January 2001 - page 18 12345 Pool analysis Type of Receivables Every type of receivable can theoretically be put in an ABS Interest bearing receivables - Consumer Loans Home Equity Loans (HEL) Credit Cards (CARDS) Autoloans / -leasings (CARS) - Balance Sheet Structures Collateralized Loan Obligations (CLO) - Mortgage Loans Mortgaged Backed Securities (RMBS, CMBS) - Project Loans Receivables bearing no interest - Non performing loans Mortgaged Backed Securities, Consumer Loans, Social Security Payments - Trade receivables Future Flow Receivables - licence and patent funding Actively managed portfolios (CDO) January 2001 - page 19 12345 Pool Analysis Pooltype revolving / static amortizing / bullet homogen / heterogen fixed / floating performing / non-performing Statistical Features Level of Diversification - according to region - according to industry - according to number of loans Collateral specific benchmarks (e.g. LTV, DSCR) Historical portfolio performance (defaults and losses) General economic influences on the assets January 2001 - page 20 12345 Rating Three important rating agenciesagencies:: S & P‘s Moody‘s Fitch The rating process Originator and Pool (stress tests) Due Diligence Legal Structure - “bankcruptcy remoteness“ of SPV - True Sale to SPV? size the credit enhancement to achieve desired rating January 2001 - page 21 12345 Relative Value USA Europa Market exists since the 80ties substantial increase in issuance volume standardized structures from since 1996 established vehicles differences in structure from deal to high liqudity (market size comparable deal (a new “twist” in every to treasury market) transaction) Positions are either by and large a „buy-and-hold“ market -very short term or so far main driving force has been the -buy and hold securitization of bank portfolios (CLOs), influenced by ROE pressures aswell as the most important collateral types are mortgages and consumer credits (credit
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