Transcript CDO Manager Focus Michael Wasserman, Director

Global CDO
Market Update
Richard Gugliada
Managing Director
+1-212-438-2474
[email protected]
S&P’s Global CDO Rated Transactions
by Region (1996-2002)
320
# 280
o 240
f 200
D 160
E 120
A 80
L
S 40
0
GLOBAL
U.S.
02
20
2
01
20
00
20
99
19
98
19
97
19
96
19
7/7/2015
Europe
Asia/Australia
S&P’s Global CDO Rated Transactions
by Region (1996-2002)
Issuance
U.S.
Europe
Asia/Australia
Global
Year
Transactions Classes* Transactions Classes* Transactions Classes* Transactions Classes*
1996
12
13
1
3
13
16
1997
34
57
3
6
37
63
1998
74
133
7
16
3
4
84
153
1999
109
235
12
44
3
5
124
284
2000
125
270
29
90
2
2
156
362
2001
142
359
81
186
7
11
230
556
2002
178
571
149
298
10
15
337
884
Total
674
1638
282
643
25
37
981
2318
*Credit classes (tranches) with the same Standard & Poor’s rating from the same transaction are treated
as a single credit class, and only the one with the longest maturity is included.
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3
EVOLUTION OF CDOs
HY DEBT
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Leveraged
Loans
Trust Preferred
ABS
Private Equity
MBS
Hedge Funds
REITs
Distressed Debt Municipal Bonds
Synthetic CDOs Correlation Trades
Other
4
Cash Flow CDOs
• Interest and principal for Corporate obligations are
used to pay down the investors.
• Liabilities are subordinated to provide different levels
of credit protection.
• Assets

SPV

Class A “AAA”
Class B “BBB”
Equity
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5
NR
Cash Flow CDO Structure
Loan/Bond
Portfolio
Market /
Sponsor
7/7/2015
cash
notes
SPV
6
cash
Class A
Class B
Class C
Equity
Synthetic CDO
• Investors sell credit protection to 3rd party on a referenced
pool of obligations.
• SPV holds the money in Eligible Investments (EI)
• Investors get interest from EI and 3rd party.
• If an obligation in the pool defaults, SPV pays 3rd party from
EI, based on an agreed upon settlement process to value the
defaulted obligation.
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Synthetic CDO
Eligible Investments
fee
Sponsor/
Protection Buyer
notes
SPV
cash
contingent
payment
Reference
portfolio
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8
Class A
Class B
Class C
Equity
Global Rated Volume
Global Rated CDO Volume:
2001 vs. 2002
2001
Arbitrage CBO
Cash
Synthetic
Arbitrage CLO
EMCBO
Balance Sheet
Cash
Synthetic
SCDO & CDS
Funded
Un-Funded
Real Estate CBO
CBO of ABS
Cash
Synthetic
Distressed Debt
Trust Preferred
Project Finance
TOTAL
US
Europe
54
12
23
3
12
18
1
2
3
1
14
6
7
13
9
-
-
28
2
2
2
153
3
2
64
6
2002
Asia TOTAL
96
24
5
19
2
4
31
9
33
2
2
2
223
$Billion
35.67
10.18
1.18
27.45
25.92
0.25
25.67
3.03
13.58
1.09
0.98
0.65
119.73
US
Europe
Asia
13
13
36
2
7
55
6
2
7
-
2
1
36
3
11
49
3
16
-
-
37
1
2
10
167*
5
1
139
10
TOTAL
88
$Billion
27.19
49
4
17
14.72
0.65
25.85
88
14
44
47.84
1.41
46.43
5.84
17.23
2
10
316
0.95
2.91
143.18**
* Excludes 11 US re-pack deals
Source: S&P Global Deal List
** Rounded two decimal places
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10
Global CDO Volume :
YTD September ’02 vs. YTD September ‘03
US
Arbitrage CBO
Cash
Synthetic
Arbitrage CLO
EMCBO
Balance Sheet
Cash
Synthetic
SCDO & CDS
Funded
Un-Funded
Real Estate CBO
CBO of ABS
Cash
Synthetic
Distressed Debt
Trust Preferred
Project Finance
TOTAL
11
10
27
1
1
21
10
23
2
5
111
2002 (9/30/02)
Europe
Asia
TOTAL $Billion
57
19.90
4
32
5
7
39
11.61
1
2
0.39
9
18.07
2
6
28
2
51
24.30
0.48
23.82
10
4.69
25
9.99
2
2
0.95
5
1.56
80
9
200
91.46*
Source: S&P Global Deal List
Includes public and private rated transactions
* Rounded two decimal places
**Europe - Includes 111 single tranche deals with issuances less than 20 million
**US - Includes 25 single tranche deals
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11
US
1
6
27
2
1
39**
2003 (9/30/03)
Europe
Asia
TOTAL
16
1
8
9
1
37
12
3
3
3
174**
31
244
8
-
-
24
1
11
120
4
21
223
35
$Billion
4.39
12.41
12.35
8
50
25.24
10.79
14.45
3.37
15.43
11
378
3.16
76.34*
Economic and Regulatory Backdrop
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Economic Backdrop
•
•
•
•
HY issuance remains relatively low
Severe pool-level ratings migration
Stigma of Record Corporate Defaults
Too much liquidity to certain sectors
(e.g., telecom and healthcare)
• Depressed recoveries
• Corresponding negative correlation
 All contribute to poor performance in certain
sub-sectors of CDO market
 But, fixed income market sell-off creating
relative buy opportunities
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U.S. SPECULATIVE GRADE ISSUANCE*
(1992 – Aug. 25, 2003)
(US$ Billions)
Industrials
Telecommunications
Utility
Financials
140
120
100
80
60
40
20
0
1992
1993
1994
1995
1996
1997
1998
1999
* = Includes all public and rule 144a issuance of straight, convertible, floating-rate,
and medium-term notes issued into U.S. marketplace by financial and non-financial entities.
2000
2001
2002
2003
Source: Standard & Poor's Global Fixed Income Research, Thomson Financial
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14
Annual Default Rates
Investment Grade & Speculative Grade
USA+Havens
EU
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
19
8
19 1
8
19 2
19 83
8
19 4
8
19 5
8
19 6
8
19 7
8
19 8
19 89
9
19 0
9
19 1
9
19 2
9
19 3
19 94
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
20 00
0
20 1
'0 02
3
An
(%)
Global
Source: Standard & Poor's Risk Solutions CreditPro® 6.4
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15
Quarterly Default Rates
Speculative Grade
Global
United States
European Union
7
6
5
(%)
4
3
2
1
0
1997-Q1
1998-Q1
1999-Q1
2000-Q1
Quarte r
Source: Standard & Poor's Risk Solutions CreditPro® 6.4
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2001-Q1
2002-Q1
2003-Q1
Standard & Poor’s LossStatsTM
Recovery Rates Based on Pre-Default Interest
1988 – 2003 Q2*
1998 – 2003 Q2**
Discounted
Ultimate
Recovery
Trading
Price
Recovery
Discounted
Ultimate
Recovery
Trading
Price
Recovery
Bank Debt
78.8%
58.0%
73.3%
55.9%
Senior Secured
Notes
65.1%
48.8%
49.9%
41.5%
Senior
Unsecured
Notes
46.4%
30.3%
37.2%
25.1%
Senior
Subordinated
Notes
31.6%
28.4%
20.9%
20.0%
* 1741 observations
** 868 observations
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Current Regulatory-Driven Issues
Impact on Investor Appetite
• FIN 46 / FAS 140
• EITF 99-20
• Traditional non-US investors under increased
regulatory scrutiny
• Efficiency of holding downgraded assets for
portions of CDO investorbase
(e.g., conduits, SIVs, insurance companies, etc.)
 All combine to create buying opportunities
 But ramp-up difficult
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GLOBAL CDO PERFORMANCE
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19
Most Downgrades Are Caused By
These Problems:
• Credit migration – reduction in the credit quality of the
performing assets within the collateral pool
• Par erosion – reduction in the par value of the collateral pool
securing the rated notes
• Spread deterioration – reduction of the weighted average
coupon or weighted average spread generated by the
performing assets within the collateral pool
• Hedging issues – mismatch between the fixed rate of interest
received off the assets in the collateral pool and the floating rate
of interest paid on the liabilities
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Global CDO* 1997 to 2002
Average One-Year Transition Rates (%)
Rating
AAA
AA
A
BBB
BB
B
CCC
CC
AAA AA
A BBB BB
B CCC CC
D
95.88 1.66 1.19 1.03
0 0.16 0.08
0
0
0.46 90.11 3.68 3.22 1.84 0.23 0.46
0
0
0 0.41 89.21 5.3 2.85 1.02 1.02 0.2
0
0
0 0.7 86.62 3.76 3.52 4.93 0.23 0.23
0
0
0 0.94 86.83 2.51 5.64 2.51 1.57
0
0
0
0
0 82.02 10.11 6.74 1.12
0
0
0
0
0
0
50 33.33 16.67
0
0
0
0
0
0
0 100
0
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*includes all CDO segments
U.S. CDO* versus U.S. Corporate
2002 One-Year Transition Rates (%)
CDOs
From
AAA
AA
A
BBB
BB
B
CCC
# of Credit Classes
453
136
139
167
123
34
10
To
AAA
92.9
0.7
AA
3.1
82.4
0.7
A
2.4
5.9
84.9
0.6
BBB
1.3
7.4
4.3
82.0
BB
2.9
6.5
3.6
82.9
B
0.2
0.7
1.4
6.0
2.4
73.5
CCC/CC
D
2.2
7.8
13.0
26.5
90.0
10.0
CCC
D
1.6
Stable/Up
92.9
83.1
85.6
82.6
82.9
73.5
90.0
CORPORATES
From
AAA
AA
A
BBB
BB
B
CCC
Issuers
119
296
699
809
540
597
105
To
AAA
93.3
0.2
AA
6.7
79.4
0.3
0.1
0.4
A
BBB
17.2
86.8
1.5
0.4
2.4
11.0
87.3
2.0
0.7
1.0
BB
0.3
1.3
6.3
86.5
4.2
1.9
B
0.7
0.3
2.6
7.4
78.4
8.6
0.1
0.9
0.4
10.1
52.4
0.1
1.4
2.8
6.7
36.2
*includes all CDO segments
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Stable/Up
93.3
79.4
87.1
88.9
89.4
83.2
63.8
European CDO* versus European Corporate
2002 One-Year Transition Rates (%)
CDOs
From
AAA
AA
A
BBB
BB
B
CCC
# of Credit Classes
64
43
42
39
36
3
2
To
AAA
84.4
AA
3.1
86.1
A
3.1
4.7
83.3
2.6
BBB
6.3
BB
B
1.6
4.7
4.8
7.7
69.4
7.7
8.3
BBB
6.1
BB
B
7.2
84.7
5.1
0.3
7.2
81.0
6.7
4.8
64.1
2.8
CCC/CC
1.6
4.7
7.1
15.4
11.1
66.7
50.0
D
2.6
8.3
33.3
50.0
CCC
D
Stable/Up
84.4
86.1
83.3
66.7
72.2
0.0
50.0
CORPORATES
From
AAA
AA
A
BBB
BB
B
CCC
Issuers
33
160
321
222
79
45
6
To
AAA
84.8
0.6
AA
6.1
86.2
1.9
A
3.0
13.1
90.3
4.5
0.3
1.8
7.6
64.4
0.5
1.3
6.7
16.7
1.4
5.1
22.2
83.3
*includes all CDO segments
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Stable/Up
84.8
86.9
92.2
89.2
86.1
71.1
16.7
DO COLLATERAL MANAGERS
ADD VALUE?
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Cash Flow CBO Rating Transitions:
Ten Collateral Managers with the Most Downgraded
Senior Tranches (HY and IG CBO transactions only)*
Ten CBO Managers with Most
Rating Deterioration
Notches Lowered
Tranches Rated
#
% of total
#
% of total
Manager # 1
-77
8.73%
8
2.18%
Manager # 2
-66
7.48%
10
2.72%
Manager # 3
-63
7.14%
6
1.63%
Manager # 4
-58
6.58%
8
2.18%
Manager # 5
-49
5.56%
5
1.36%
Manager # 6
-38
4.31%
15
4.09%
Manager # 7
-34
3.85%
3
0.82%
Manager # 8
-34
3.85%
10
2.72%
Manager # 9
-30
3.40%
4
1.09%
Manager # 10
-30
3.40%
2
0.54%
TOTAL
-479
54.31%
71
19.35%
*as of Aug. 31, 2003
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Leverage via Par-Building Trades
EXAMPLE 1:
Before a payment date in 2000, Manager X purchased two bonds at discounted prices (i.e., 14% and
17%), even though the obligors were rated “B” and “B-” and on credit watch negative. Net result
was a gain of $5mm in par because assets carried at 100%. Class B O/C ratio to pass by 80 bps.
Two weeks after the payment date one defaults. Manager X insists not credit risk when purchased.
EXAMPLE 2:
Transaction has a 5% CCC bucket. Manager Y continued to purchase CCC-rated assets, even after
bucket exceeded. Through discounted trades (e.g., 28.5% and 30%) increased par by more than
$200mm since closing. Several assets defaulted less one month after purchase.
EXAMPLE 3:
Immediately prior to pay date, Manager Z purchases several heavily discounted securities in 2 CLOs
it manages because “they are dollar good” (e.g., 6% rated “B-” watch negative). Carrying those
assets at par allows monies to pay subordinate management fee and an equity distribution (n.b.,
some equity held by Manager Z). Direct proceeds to Manager Z from both deals exceeded $1.5mm.
Assets subsequently downgraded to “CC”. Despite conference call, Manager Z does similar (but less
egregious) trade last month.
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Striking a Balance is Key
Bondholders vs. Equityholders
BONDHOLDERS
Timely Interest
Ultimate Principal
EQUITYHOLDERS
Current Income
Upside Relative to Risk Profile
Structural Mitigants
Compromising to Build Rainy Day Cushion
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Static versus Managed Transactions
• Lessons Learned by looking at Corporate Static Pools
• Flexibility to Move In and Out of Credits Based on Market
• Conditions Comes at a Cost and Increases Risk / Leverage
• Collateral Mangers’ True Added Value Difficult to Gauge
• Mandatory Redemptions Following Breach of Coverage
Tests Make Meaningful Comparisons to Most
Indexes Difficult
• Certain Structures Incentives Gaming
• Adverse Selection versus Rational Decisions to Avoid
Shutting Down Deal Given Constraints
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S&P’s CDO Manager Focus
• A comprehensive report of a CDO Manager’s
capabilities & track record developed through indepth site visits & transaction evaluation
• Manager capability report focuses on Manager &
team depth, coverage & expertise; organizational
support; investment process; credit evaluation
practices & CDO structural management
• Transaction evaluation addresses managers’ results
relative to their peers by evaluating default rates;
covenant breaches; par erosion trends; sales &
purchase prices; portfolio credit quality &
diversification of their outstanding CDO’s
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NEW INITIATIVES FROM S&P
INCREASED TRANSPARENCY
• Pre-Sale Reports Globally
• Post-Sale Reports Globally
• CDO Manager Focus Reports
• CDO Explorer – Collateral Info
Expanding CDO Indices
CDO BENCHMARKS
• CDO Evaluator version 2.2 just out
• Roll-Out ROC Performance Tool
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Structural Mitigants address
non-rating related issues
•
•
•
•
•
•
•
•
Notching Assets on Credit Watch
Haircut Low-Rated Collateral
Additional Credit Risk Disclosure / Purchase Discounts
Applying Additional Defaults to Reinvested Monies
Modeling Defaults After Breach of Traditional
Coverage Tests, Absent Additional Coverage or
Other Reinvestment Tests
Treating All Monies from Defaulted Securities as
Principal
• Limitation on Pass-Through of Trading Gains
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S&P CDO Benchmarks
Dissecting a Sample ROC Report
1
2
3
4
5
Table 1 S&P CDO Benchmarks
Transaction
nam e
Riviera Finance 1
S.A.
Riviera Finance 1
S.A.
Riviera Finance 1
S.A.
Arranger
BNP
Paribas
BNP
Paribas
BNP
Paribas
Type
Balance Sheet
CBO
Balance Sheet
CBO
Balance Sheet
CBO
Closing
date
WAR DM (%)
VM (%)
CM
Orig.
Class
Rating
S&P
Monthly
Rating
Orig.
Av
Rating Current Change in
Loss
Rating
Notional
Notes
(Sept. 5, ROC (%)
ROC bps
Threshol
ROC
($)
2003)
gain (loss)
d ($)
16-Mar-01
BBB-
0.81%
1.34%
1.0118
A
AAA
97.61%
A+
100.01%
+35
19.148m
0.046m
16-Mar-01
BBB-
0.81%
1.34%
1.0118
B
AA
95.66%
BB+
100.15%
+5
19.148m
1.398m
16-Mar-01
BBB-
0.81%
1.34%
1.0118
C
BBB+
95.61%
CCC+
100.68%
+81
19.148m
6.352m
Note 3 : Recent Dow ngrade : Since ROC measures performance relative to current rating level, a dow ngrade w ill necessarily improve ROC Ratios.
1.
2.
3.
4.
5.

Since ROC speaks to the stability of the current rating it is necessary to show ROC for original
rating to demonstrate relative decline or improvement
Current ROC levels
Change on last month in basis points – this shows ‘collateralisation shifts’ – relative dollar values
for rating migration.
Average Notional of Pool = Pool Balance / # of Entities
Rating Loss Threshold = Dollar loss the deal can sustain at each tranche level given current
tranche rating. This is equal to (100%-ROC) * Portfolio Balance.
For one (average sized) default CCC+ will be maintained on the C notes if 1 - (6.35 / 19.148)
recoveries are achieved. i.e. 1 - (33%) = 67% Recoveries are required given average default.
7/7/2015
33
3
3
What’s Hot and What’s Not
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Money market tranches
Structural mitigants
Marks in lieu of ratings
ROC and other performance
measures
Single-tranche correlation
trades
Retranchings
CDO squared technology
Additional transparency
Template to address FIN 46
CDOs of alternative assets
7/7/2015
•
•
•
•
•
•
34
Excessive leverage
Unrealistic equity returns
Diversity for diversity’s sake
Discretionary trading
Difficulty in replacing
collateral managers
Abandoning transactions
Cosmetic structural mitigants
Inadequate staffing
Lack of drill-down technology
Restructuring
Style drift
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35