Transcript Slide 1

ABS/CMBS-CDS
Credit Default Swaps Referencing Structured Products
Louis Nees, Senior Managing Director
Structured Product Derivatives
212-272-4879
[email protected]
ABS-CDS : Volumes
Public ABS Issuance
Asset Type
2005 ABS-CDS (PAUG)
2005
Issuance
Percentage
of Total
Automobile
$82.8
11.71%
Credit Cards
60.6
8.57%
HLTV
0.2
0.03%
Home Equity
461.3
65.22%
Lease
9.8
1.39%
AAA/Aaa = 18%
Manufactured Housing
0.3
0.04%
AA/Aa2 = 0%
Rate Reduction Bonds
5.5
0.78%
Student Loans
60.8
8.60%
Other
25.9
3.66%
Estimated at $150Billion
RMBS = 60%
CMBS = 35%
CDO = 3%
Other = 2%
Single A = 8%
BBB+/Baa1 = 9%
Source: BMA
Total
$707.3
BBB/Baa2 = 27%
BBB-/Baa3 = 35%
Single & Double B = 3%
Assume BBB stack of HEQ is 4%, then 2005 saw $18.4 billion of BBB HEQ
2005 saw ~$64 billion of BBB HEQ (150x60%x(9+27+35)%) = 3.4x the market
ABS-CDS : Investor Type
Dealer
16%
Manager
11%
CDO
39%
Hedge
Fund
34%
Current Players and Uses
Client Type
Uses
Pros
Concerns
Hedge Funds
-Establish negative
view on market
-Capital structure trades
-Relative value between
originators
-Establish positions
quickly
-only way to take a
negative view
-Liquidity when
unwinding transaction
Dealers
-Hedge inventory
-Express a view
-First time able to
actively hedge spread
risk
-Tend to be long newer
origination while hedge
seasons
CDO Managers
-Ramp up 100%
synthetic deals
-Fill buckets of hybrid
deals
-Establish position until
cash bond can be found
-Deals can be ramped
up much more quickly
-Whole asset class
universe is potential
investment, not just
what is in dealer
inventory
??
60
40
20
0
-20
Basis (CDS - Cash)
ABS-CDS : Basis Cash vs. Synthetic
120
Baa1
100
Baa2
Baa3
80
-40
-60
-80
6
00
/2
22
2/ 006
/2
15
2/ 06
20
8/
2/ 06
20
1/
2/ 006
/2
25
1/ 006
/2
18
1/ 006
/2
11
1/ 06
20 5
4/
1/ 200
8/
/2 05
0
12
2
1/
5
/2
12 200
4/
/1 5
0
12
0
/2
5
/7
12 200
0/
/3 05
0
11
2
3/
5
/2
11 200
6/
/1
11 005
/2
/9
11 005
/2
/2 05
0
11
2
6/
5
/2
10 200
9/
/1
10
Time
ABX.HE (Launched January 19, 2006)
•
Each Index will be created from qualifying deals of 20 of the largest
sub-prime home equity ABS shelf programs from the six month
period preceding the roll
– Dealers will select one of the two largest deals from the 20 shelves
•
Diversification obtained by:
– Limiting the same loan originator to 4 deals
– Limiting the same master servicer to 6 deals
– If the algorithm process results in originator or master servicer overconcentration, the deal from the shelf program with the smallest issuance
(i.e., lowest priority) will be excluded. The largest qualifying deal from the
issuer with the lowest ranking will be chosen, as long as concentration
limits are not breached
ABX.HE
• Reference obligations from deals issued within the six months prior to the
launch/roll date
– Minimum deal size of $500M
– No more than four deals with the same originator
– No more than six deals with the same master servicer
– Each tranche must have a weighted average life between 4-6 years as of the
issuance date (except the AAA tranche which must be greater than 5 years)
– Must be rated by Moody’s and S&P; the lesser of all ratings will apply
• Five indices based upon the rating of reference obligations: AAA, AA, A,
BBB, and BBB– One bond from each deal will be referenced in each index (AAA will be
comprised of the longest average life AAA tranche with an initial issuance size
of at least $15M)
– Reference obligations equally weighted by initial par amount as of roll date,
subsequent weightings may change based on the prepayment and credit
experience of the underlying transactions
– Based on standard ISDA Pay-As-You-Go template
– Index represents aggregate performance of the basket of credit default swaps
ABX.HE: Indicative Terms & Conditions
•
Indices:
•
•
Notional:
Fixed Rate:
•
•
Floating Rate Payments:
Additional Fixed Payments:
•
Quotations:
•
•
Credit Events:
Physical Settlement:
Scheduled
Termination Date
Fixed Rate
ABX.HE.AAA.06-1
7/25/2045
0.180%
ABX.HE.AA.06-1
7/25/2045
0.320%
ABX.HE.A.06-1
7/25/2045
0.540%
ABX.HE.BBB.06-1
7/25/2045
1.540%
ABX.HE.BBB-.06-1
7/25/2045
2.670%
Indices
Amortization mirrors that of the underlying bonds
Established on roll date premium. Subsequent trades require upfront
exchange of premium/discount
Interest Shortfall, Writedown, Principal Shortfall
Interest Shortfall Reimbursement, Writedown Reimbursement, Principal
Shortfall Reimbursement
Dealers will quote price and exchange upfront amounts based on the
difference between that price and par
Principal Shortfall and Writedown (2005 ISDA PAYG Template Definitions)
Not Applicable
CMBX.NA (Launched March 7, 2006)
•
•
Each Index will be created from qualifying deals of 25 of the largest
CMBS issuances
Qualification requirements:
– Minimum deal size of USD 700 million
– Be a debt or pass-through security referencing a pool of fixed rate
securities
– Have a factor of 1.0
– Be secured by obligations from at least 50 separate mortgages from at
least 10 unaffiliated borrowers
– No more than 40% of underlying obligations can be from the same state
– No more than 60% of underlying obligations can be of the same property
type
– Ratings provided by at least two of the following: Moody’s, Fitch, and
S&P; the lesser of all ratings will apply
CMBX.NA
• Five indices based upon the rating of the reference obligations:
– AAA/Aaa, AA/Aa2, A/A2, BBB/Baa2, & BBB-/Baa3
– One bond from each deal will be referenced in each index
•AAA will be comprised of the most credit enhanced tranche with the longest
average life with an initial issuance size of at least $100MM & a weighted
average life between 8 & 12 years based on 0% CPY at issuance
•AAA must be a publicly issued security, whereas other rating classes can
be publicly or privately issued
– Reference obligations equally weighted by initial par amount as of roll date
(4.0% each), subsequent weightings may change based on the prepayment
and credit experience of the underlying transactions
– Based on standard ISDA Pay-As-You-Go template
– Index represents aggregate performance of the basket of credit default swaps
– Each index will contain this same list of reference obligations until all reference
obligations have been fully paid off or have matured
CMBX.NA: Indicative Terms & Conditions
•
Scheduled
Termination Date
Fixed Rate
CMBX.NA.AAA.1
10/12/2052
0.100%
CMBX.NA.AA.1
10/12/2052
0.250%
CMBX.NA.A.1
10/12/2052
0.350%
CMBX.NA.BBB.1
10/12/2052
0.760%
CMBX.NA.BBB-.1
10/12/2052
1.340%
Indices
Indices:
•
Notional:
Amortization mirrors that of the underlying bonds
•
Fixed Rate:
Established 1-day prior to roll date. Payable monthly based on average balance
•
Floating Rate Payments:
Interest Shortfall, Writedown, Principal Shortfall
•
Additional Fixed Payments:
•
Quotations:
I
Interest Shortfall Reimbursement, Writedown Reimbursement, Principal Shortfall Reimbursement
Dealers will quote a current market spread and exchange upfront amounts based on the
difference between the current market spread and the Fixed Rate
•
Credit Events:
Principal Shortfall and Writedown (2005 ISDA PAYG Template Definitions)
•
Physical Settlement:
Not Applicable
•
Accruals:
Accrues 25th to 25th with no following convention
•
Payments:
Payments made on the 25th of each month
•
Day Count:
Actual/360
ABX.HE & CMBX.NA Potential Trading Strategies
• Capital Structure Plays
A rated
BBB rated
• Vintage Plays
BBB 1st
2006
BBB 2nd
2008
ABX.HE & CMBX.NA Potential Trading Strategies
• IO Plays
Index
Investor
Premium
$
Investor shorts IO
Single Name
swaps at 100
ABX.HE & CMBX.NA Potential Trading Strategies
• Tranching of:
– Single index
ABX.HE.BBB
35-100%
25-35%
ABX.HE.BBB
15-25%
5-15%
0-5%
ABX.HE & CMBX.NA Potential Trading Strategies
– Combine Indices within asset type (i.e., equally weight all 5 ABX Indices)
ABX.HE.AAA
35-100%
ABX.HE.AA
25-35%
ABX.HE.A
15-25%
ABX.HE.BBB
5-15%
ABX.HE.BBB-
0-5%
ABX.HE & CMBX.NA Potential Trading Strategies
– Combine Indices across asset type (i.e., 50% ABX BBB/50% CMBX BBB)
ABX.HE.BBB
35-100%
25-35%
15-25%
CMBX.NA.BBB
5-15%
0-5%
The Year Ahead
New Products
•
Tranching of ABX/CMBX
ABX
Tranching
Sub-Index Thoughts
Combined
0 - 4%
Equally
4 - 7%
Weighted
7 - 12%
12 - 24%
24 - 100%
•
•
•
Implied
Ratings
B1/BBaa3/AA2/AA+
Aa2/AAA
Aaa/AAA
AA
0 - 10%
10 - 100%
A3/BBB
Aaa/AAA
A
0 - 10%
10 - 20%
20 - 100%
Ba1/BBBAa3/AAA
Aaa/AAA
ABX
Tranching
Sub-Index Thoughts
BBB
0 - 10%
10 - 20%
20 - 30%
30 - 40%
40 - 100%
BBB-
0 - 10%
10 - 20%
20 - 30%
30 - 50%
50 - 100%
Implied
Ratings
Ba3/BBBaa1/AAAa3/AAA
Aa1/AAA
Aaa/AAA
B2/B+
Baa3/BBB+
A3/AA+
Aa2/AAA
Aaa/AAA
Tranching of CMBX
Correlation/Bespoke trading
Standard ISDA Document referencing Note-Structures (CDOs)
–
Utilization of CDOLibrary will be essential for this market to develop
The Year Ahead
New Players
•
Insurance Companies
–
–
–
•
Asset Originators
–
•
First time have the ability to reduce exposure to assets on the books without actually
selling them
Gain exposure to market segments in a size not available before
Not constrained by what is currently in dealer inventory, allowing grater leverage of credit
expertise
Hedge pipeline/securitization execution risk
More traditional money managers
–
Not constrained by what is currently in dealer inventory, allowing grater leverage of credit
expertise