Securitisation the poster child of everything that went wrong in the 2008 financial crisis is now making a come back but the rules of changed. Out with the old, in with the very old. Gone are the complexities of structure that attempted to leverage every last cent from the assets . The securitisation market has now undergone a full circle and returned to the basic structures that marked the nascence of the market in the late 1990s. 

 As well as studying the cash flow mechanics, we will also visit some recent topics:

• Three aspects of securitisation that triggered the financial crisis. Has the market learnt from its mistakes?
• Cash Flow Structures compared to synthetic structures – why the distinctions?
• The emergence of a new securitization market.
• Back to basics and standardization of reports and structures.
• Applying rating agency techniques to calculate the default probabilities for portfolio
• Simulating loss scenarios for different assets
• Constructing a fully working rating agency cashflow model using a recent pre-sale report
• New capital requirements for securitization – what effect will that have on the securitization market?

 

Day 1

Preview to cashflow modelling for securitisation

• Interpreting the rating agencies’ residential mortgage criteria for a European deal
•  The criteria in context and detail and building a collateral analysis model from rating agencies’ criteria
•  Derivation of base default probability from LTV ratios and borrower’s debt to income strength
•  Adjustments to base default probability based on borrower features
•  Calculation of loss severity using cash in-cash out
•  Different loss severity calculations for insured deals, cash flow deals and synthetic securitisations
•  Market value declines and property indexation weighted average default probability and weighted average loss severity as calculated by Fitch Ratings and Standard & Poor’s

RMBS collateral analysis for cashflow modelling

(pricing risk)

•  Developing the collateral analysis model to price mortgage risk based on borrower’s features
•  How to tranche a RMBS using the weighted average default probability and weighted average loss severity from a pool of residential
• Converting credit enhancement figures to risk premiums
• Other factors to account for in the calculation of loss severity

Practical: Fitch ratings European RMBS - reviewing a Fitch’s collateral analysis of a European RMBS using their latest criteria. The module will look at the theory behind Fitch’s analysis including the concept of base default probability and how adjustments are

calculated based on the characteristics of both the individual assets as well as the pool diversity.

Collateral analysis – RMBS pool analysis (pricing risk)

• Using the model to price mortgage risk
•  What determined credit enhancement?
•  Credit enhancement for cash flow deals
•  Converting credit enhancement figures to risk premiums
• Other factors to account for cash flows

Practical: Fitch Ratings European RMBS - using the different credit enhancement sizing for the different rating levels can be used to both tranche and price mortgage risk.

Day 2

Review of RMBS cashflow securitisation model

•  What the RMBS model has been designed to test
•  How a model designed for Moody’s will differ in its results to one designed for Fitch Ratings and Standard & Poor’s
•  Analysing credit insured transactions short term delinquencies and defaults from a timing perspective
•  How credit can be given to scheduled repayments
•  Reinvestment rates on cashflows within the structure
•  Contingency reserves within structure – default vectors for the various rating agencies 
•  The three key tests of cashflow stressing for Standard & Poor’s and Fitch Ratings
•  Interest and prepayment rates scenarios – what are designed to stress in the transaction step down of credit enhancement – when and how does it occur
•  Designing a capital structure to meet the different structures
•  Why certain transactions use combined waterfalls and why others use separate waterfalls
•  Structural features designed to reduce credit enhancement needs including principal loss ledgers and deferral of interest on lower rated notes
•  How cashflow deals differ from synthetic securitisations  and which type of synthetic securitisations require cashflow programmes

Practical: cashflow models for RMBS - using a pre- designed Excel model to test a multi-tranche structure against a range of default probability and loss severity for each rating level – this allowing them to optimise the capital structure. We also analyse Fitch Ratings and Standard & Poor’s approach to cashflow programming for residential mortgages included interest rate and prepayment stresses.

Case study: of CDOs using binomial expansion method as applied to Moody’s expected loss approach

• Assessing the portfolio credit risk using diversity scores, weighted average rating and rating sought, calculating diversity scores for a collateralisation loan obligation
•  Weighted average collateral ratings using Moody’s tables 
•  Workshop exercise using the diversity score tables
•  Developing a time based cashflow programme to confirm the ratings using an expected loss approach
•  Moody’s calculation of the expected loss and how it differs from the traditional definition
•  Using the idealised loss tables and the weighted average life to reverse into ratings

Practical: introduction to CDO structures – looking at the Moody’s binomial expansion method for analysing CDO structures. The binomial expansion method relies on the diversity score concept to equate a pool

of bank loans or bonds to a virtual pool of homogeneous assets with a zero default correlation.

Securitization of SME Loans

Using Fitch’s latest criteria, we introduce the delegates to the securitisation issues that surround SME loans. The course module will go through the theory and the data requirements and how this can be achieved using the latest rating agency criteria. It also looks at granularity, key stress tests and the derivation of default rates as a function SME delinquency and cure rates. As a practical, we look at two rating agency compliant models for European SME deals

Day 3

Securitisation of non-performing loans Different types of structure for securitisation of non- performing loans. Uses of external liquidity sources to assist with timing of interest on the notes. Typical stress analysis for secured non-performing loans methods of analysis for unsecured loans. Building a cashflow model to test for return

of principal and receipt of interest. Testing a cashflow model

for different rating levels. Optimisation of capital structure to meet imposes stresses.

Practical: identifying how the recovery rates and durations can be derived for both secured and unsecured asset types. The programme will require the use to participate in programming and testing the final workbook.

Moody’s Lognormal Analysis

• Moody’s uses of probability distributions for different asset types
•  Choice of probability curve for consumer ABS and RMBS the lognormal distribution is deemed to be the most appropriate
•  How a lognormal distribution can be derived from the mean and standard deviation of the expected losses or defaults under the portfolio distributions

Practical: utilising a working cash flow programme showing how the lognormal theory interacts with a the probability weighted loss curve. Extremely useful for

all those wishing to model for Moody’s ABS and

RMBS portfolios.

Analysis of Consumer Assets

•  Static pool analysis
•  How is this stressed in a cash flow model
•  Coupon compression and prepayments

Case study: European consumer loan deal Q & A

Day 4

Case study: reverse engineering ABS for Italian leases using offering circular and pre-sale reports

•  Building a rating agency compliant cashflow model based on a very recent European ABS. The module has been designed to train the delegates how to interpret from both a pre-sale report and an

offering circular how to build a cashflow programme from the bottom up. The course instructor will be supplying an initial template as well as periodic updates to ensure that all the delegates will be able to maintain their momentum throughout the day. Also the delegates will be shown how to apply the Excel skills that they

learnt on the first 2 days to into a live deal.

Practical: the delegates will be provided with a template worksheet which contains minimal formulas and formatting. Equipped with a course book containing the theory behind each line of programming as well as the correct formula’s, they will be taken through building a programme step by step by the instructor. In order to ensure that each delegate is keeping pace with the rest of the class the instructor will distribute versions of his “programme in progress” at key points of the session. The recent deal has been chosen because of its relevance in the ABS market as well as certain

nnovative features. All in all one of the most instructive object lesions in cashflow programme available.

• Luke Mellor

  Luke Mellor is Managing Director of an investment boutique established in 1999 that specialises in securitisation, structured finance and internet based technology. Prior to this, Luke was Head of International Securitisation at ABN AMRO, where he was responsible for ABN AMRO's internal and external term securitisation. For the past 14 years he has specialised in mortgage and asset backed securitisation both in Europe and worldwide. Luke also spent 8 years at Barings, structuring issues for the bank's UK clients. Since the late 1990s Luke has also presented Euromoney's highly regarded ‘Cashflow Modelling for Securitisation’ and ‘CLO/CBO Securitisation’ training courses. These courses have trained thousands of delegates and continue to provide a key training forum for securitisation and structured finance professionals, with regular attendance from leading European and global banks and financial institutions.

Cashflow Modelling in Securitisation

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