Securitization and Structured Finance Post Credit Crunch: A Best Practice Deal Lifecycle Guide (The Wiley Finance Series)

477 Pages·2011·7.62 MB·English

by  Markus Krebsz

‘‘Krebsz has provided a thorough and helpful reference book on all aspects of structured finance. For the
layman, the opening chapters will provide a useful account of the processes and motivations behind
structured finance products. For those involved in the ongoing management of data and risk processes,
the detail in later chapters on systems and infrastructure available is unique and it is good to find all of this
information in one place.’’
Faten Bizzari, Principal at Eastfield Capital Ltd
‘‘Markus Krebsz has achieved a rare feat. He has written a book about securitization that is practical and
useful for practitioners but at the same time provides enlightenment to the general reader.
When the structured finance markets froze up as a result of sub-prime contagion in July 2007, many
practitioners walked away, assuming the game was over for good. But Krebsz, who has worked for a
variety of global financial institutions, remained a firm believer, always confident the market would come
back—albeit perhaps in modified form. He took advantage of the lean years to write this book.
The book provides real value-added for market practitioners of what is a mind-numbingly complex
area, including easy-to-follow lifecycle charts of structured products, detailed checklists, graphs, and
illustrations. In the second half he also talks you through how to use some of the new analytical and risk
management tools available from Principia Partners, Bloomberg, and others.
Given the recent dribbles of new issuance, Krebsz was right to persevere with the market, and one of his
main predictions (which almost verges on a plea) is that when securitization does fully return, it will be
characterized by transparency, standardization, and simplicity—traits which seemed noticeable by their
absence during the rapid growth years of 2003–07. In the introduction to his chapter on Bloomberg he
reveals how the expected transformation of the market has been galvanized by the shift in power away
from issuers and towards investors. Clearly, if the investors are in charge, they are going to be a lot more
discriminating about what they actually buy.
Krebsz is a passionate believer in the need for a healthy securitization market. If all market participants
and investors were to read, learn, and inwardly digest this book, common sense would doubtless prevail.’’
Ian Fraser, Financial Times correspondent and consulting editor at Bloomsbury Publishing’s Qfinance
‘‘... an authoritative text on the practicalities of securitization, providing a wealth of detailed information
on the lifecycle of a typical deal. As the market for structured finance products comes gradually back to
life, this book is likely to become a valuable reference for market participants.’’
Professor Alexander J. McNeil, Department of Actuarial Mathematics and Statistics, Heriot-Watt
University
‘‘This is a fantastically researched in-depth publication that I learned a great deal from reading and will
continue to consult on an ongoing basis. No matter which angle you come from this should be a must-read
for all market participants both old and new.’’
Martin Sampson, European ABS Business Manager, Bloomberg L.P.
‘‘... a book that is both encyclopaedic in its coverage of the structured products business and a model of
clarity of exposition.’’
Paul Wilmott, financial engineer and founder of Wilmott.com
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Ruth Martin
Managing Director
Securitization and Structured Finance

Post Credit Crunch

A Best Practice Deal Lifecycle Guide
Markus Krebsz
A John Wiley and Sons, Ltd, Publication
This edition first published 2011
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Contents
Preface xi

Acknowledgments xvii

1 Introduction 1

1.1 Setting the scene: About this book 1

1.2 Diagrammatical overview of deal lifecycle stages 2

1.3 Role-based roadmap to the book 2

PART I THE CREDIT CRISIS AND BEYOND 5

2 Looking back: What went wrong? 7

2.1 Overview 7

2.2 Data, disclosure, and standardization 8

2.3 Paper reports 8

2.4 Electronic reports 9

2.5 Data feeds 10

2.6 Definitions 10

2.7 Reporting standards 10

2.8 Underwriting standards 11

2.9 Due diligence 11

2.10 Deal motives 13

2.11 Arbitrage 13

2.12 Rating shopping 13

2.13 Overreliance on credit ratings 14

2.14 Models, assumptions, and black boxes 15

2.15 Proprietary analysis 16

2.16 Risk management and risk mitigants 17

2.17 Senior management awareness 17

2.18 Lack of drilldown capability and group-wide controls 18

2.19 Mark to market, mark to model, and pricing of illiquid bonds 19

2.20 Government salvage schemes: What’s next? 19

2.21 Re-REMICS: Private vs. public ratings 20

2.22 Conclusion 20
vi Contents
3 Looking ahead: What has happened since? 21

3.1 Current initiatives: An overview 21

4 Sound practice principles 23

4.1 Data 24

4.2 Definitions 30

4.3 Standards 32

4.4 Investor focused 35

4.5 Motivation and deal drivers 36

4.6 Analysis 39

PART II DEAL LIFECYCLE 47

5 Strategy and feasibility 49

5.1 Strategic considerations 49

5.2 Key signs for securitization 63

5.3 Deal structure type 63

5.4 Asset classes 68

5.5 Private issuance, public issuance, or conduit financing 70

5.6 Credit enhancement and pricing 70

5.7 Asset readiness and feasibility studies 75

5.8 Documentation review 91

5.9 Target portfolio and deal economics 94

5.10 Indicative rating agency and financial modeling 97

5.11 Ratings models 101

5.12 Rating methodologies 105

6 Pre close 111

6.1 Typical execution timing 111

6.2 Execution resources 111

6.3 Transaction counterparties 114

6.4 Transaction documents 120

6.5 Deal configuration 127

7 At close 133

7.1 Deal documents, marketing, and roadshow 133

7.2 Pre-sale report 135

7.3 Deal pricing and close 135

7.4 New-issuance reports 136

8 Post close 137

8.1 Servicing and reporting 137

8.2 Deal performance measurement 144

8.3 The performance analytics process 145

8.4 Deal redemption 154

PART III TOOLBOX 155

9 Understanding complex transactions 157

9.1 Structure diagrams 157
Contents vii
9.2 Analytical capabilities 158

9.3 The risk of overreliance on ratings 159

9.4 Analytical roadmap 164

10 Data 167

10.1 The ‘‘meaning’’ of data 167

10.2 Static information 170

10.3 Dynamic data points 170

10.4 Data providers 172

PART IV ANALYTICAL TOOLS 175

11 Vendors 177

12 ABSXchange 179

12.1 Introduction 179

12.2 Performance data 180

12.3 Pool performance 181

12.4 Portfolio monitoring 183

12.5 Creating benchmark indexes 186

12.6 Cash flow analytics 187

12.7 Single-bond cash flow analysis 187

12.8 Single cash flow projection results 190

12.9 Advanced functionality 191

13 Bloomberg 193

14 CapitalTrack 195

14.1 Changing the data model used for structured finance instrument administration 195

14.2 The big fly in the ointment 197

14.3 CapitalTrack—the new model 199

15 Fitch Solutions 207

15.1 Products and services 207

15.2 Research services 209

15.3 Structured finance solutions 210

15.4 Residential mortgage models 212

16 Intex 217

16.1 Company history 217

16.2 Overview 218

16.3 Cash flow models and data 218

16.4 New developments/releases 223

16.5 Partners 224

17 Lewtan Technologies 227

17.1 Pioneers in a fast-growing industry 227

17.2 Broadening the horizon 227
viii Contents
17.3 A global solution 232

17.4 Responding to regulatory requirements 233

17.5 Streamlining workflows with automation tools and data feeds 233

17.6 ABSNet scheduled export 234

17.7 Home price depreciation and the need for better tools 236

17.8 The demand for greater granularity 236

17.9 A brighter future 240

18 Moody’s Wall Street Analytics 241

18.1 ABS/MBS investors tools: Structured Finance Workstation 241

18.2 CDO investors’ tools 242

18.3 ABS/MBS issuer tools 243

18.4 CDO tools for asset managers 244

18.5 CDOEdge for structurers 245

18.6 CDOnet Underwriter 246

19 Principia Partners: The Principia Structured Finance Platform 247

19.1 Portfolio management 248

19.2 Risk management: Cash flow and exposure analysis 254

19.3 Operations and administration 262

19.4 Summary 265

20 Trepp 267

20.1 Company history 267

20.2 Product suite 267

20.3 Trepp for CMBS 269

20.4 Trepp derivative 273

20.5 Trepp loan 274

20.6 Powered by Trepp 277

20.7 Recent developments 279

20.8 Trepp’s market affiliations 280

20.9 The future 281

21 Author’s toolbox 283

21.1 Overview 283

21.2 Ratings tools 283

22 Bloomberg’s structured finance tools: Tricks and tips 289

22.1 Structure paydown function (SPA) 289

22.2 Super Yield Table (SYT) 302

22.3 Mortgage Credit Support (MTCS) 323

22.4 Collateral Performance function (CLP) 326

22.5 CMBS Loan Detail screen (LDES) 336

22.6 Delinquency Report (DQRP) 355

22.7 Collateral Composition Graph (CLCG) 358

22.8 Cash Flow Table (CFT) 362

22.9 Class Pay Down (CPD) 377