‘‘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 The Chartered Institute for Securities & Investment Mission Statement: To set standards of professional excellence and integrity for the investment and securities industry, providing qualifications and promoting the highest level of competence to our members, other individuals and firms. Formerly the Securities & Investment Institute (SII), and originally founded by members of the London Stock Exchange in 1992, the Institute is the leading examining, membership and awarding body for the securities and investment industry. We were awarded a royal charter in October 2009, becoming the Chartered Institute for Securities & Investment. We currently have around 40,000 members who benefit from a programme of professional and social events, with continuing profes­ sional development (CPD) and the promotion of integrity, very much at the heart of everything we do. Additionally, more than 40,000 examinations are taken annually in more than 50 countries throughout the world. The CISI also currently works with a number of academic institutions offering qualifications, member­ ship and exemptions as well as information on careers in financial services. We have over 40 schools and colleges offering our introductory qualifications and have 7 University Centres of Excellence recognised by the CISI as offering leadership in academic education on financial markets. You can contact us through our website www.cisi.org Our membership believes that keeping up to date is central to professional development. We are delighted to endorse the Wiley/CISI publishing partnership and recommend this series of books to our members and all those who work in the industry. As part of the CISI CPD Scheme, reading relevant financial publications earns members of the Chartered Institute for Securities & Investment the appropriate number of CPD hours under the Self-Directed learning category. For further information, please visit www.cisi.org/cpdscheme 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 # 2011 John Wiley & Sons, Ltd Registered office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com The right of the author to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. For other titles in the Wiley Finance Series please see www.wiley.com/finance ISBN 978-0-470-71391-4 (hardback) ISBN 978-0-470-66212-0 (ebook) ISBN 978-0-470-66206-9 (ebook) ISBN 978-1-119-97793-3 (ebook) A catalogue record for this book is available from the British Library Project management by OPS Ltd, Gt Yarmouth, Norfolk Typeset in 10/12pt Times Printed in Great Britain by CPI Antony Rowe, Chippenham, Wiltshire 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