Optimizing the Rating of Your Securitisation Yaron Ernst
- Slides: 31
Optimizing the Rating of Your Securitisation Yaron Ernst SVP - Head of Business Development Structured Finance Group yaron. ernst@moodys. com
Agenda n Overview: Russian Securitisations n Moody’s Rating Methodology n Issues in New Markets n Outlook for Russian market 2
Overview: Russian Securitisations 3
Russian/CIS Growth 4
Russian Securitisations by Asset Class (2006) 5
Growth of Housing Loans 6
Moody’s Rating Methodology 7
Moody’s Global Rating Scale Gilt edged Aaa Very high Aa 1 Aa 2 Aa 3 Upper-medium A 1 A 2 A 3 Medium grade Baa 1 Baa 2 Baa 3 Questionable Ba 1 Ba 2 Ba 3 Poor quality B 1 B 2 B 3 Very poor Caa 1 Caa 2 Caa 3 Ca C short term Prime-1 Prime-2 Prime-3 Not Prime Investment Grade long term Speculative Grade Quality of credit 8
Moody’s Rating – Expected Loss n n n Ratings measure credit risk: n Probability of a default n Severity of a loss Expected loss = Probability of default x Severity Example: – Prob. Def. = 5% – Severity of Loss = 20% (recovery rate = 80%) – EL = 5% x 20% = 1% 9
Moody’s Idealised Expected Loss Table 10
Expected Loss Curve Expected Loss Standard Deviation Aaa expected loss over WAL 11
Rating Process: Qualitative and Quantitative 12
Mortgage Backed Securities (RMBS) - 1 RMBS Asset analysis n Moody’s Individual Loan Analysis – “MILAN” n Is a Scoring Model, – Each single loan compared to a benchmark loan – Adjustments for deviations from benchmark – The total portfolio to a benchmark portfolio n Result of in depth analysis and comparison of major European RMBS markets n Standardised, but addresses country specific features n Able to analyse multi-seller/country pools 13
Mortgage Backed Securities (RMBS) - 2 RMBS Asset Analysis Default Definition Benchmark Frequency Benchmark Loan (Step 1) (Step 2) Adjust. Loss ments: Severity Benchmark single Benchmark CE loan Loan & (Step 3) (Step 4) portfolio MILAN Aaa CE (Step 11) Total Aaa CE (Step 12) Final Aaa CE (Step 13) Qualitative and quantitative CE adjustments CE adjustment due to replenishment, tranching, etc. MILAN Inputs and Outputs are subject to Rating Committee Decision 14
Mortgage Backed Securities (RMBS) - 3 “MILAN” Adjustments – Why? n Captures additional default, loss and volatility drivers (deviation from benchmark and “no data“) – For each single property – Account for certain loan aspects – Based on borrower characteristics – Addressing seasoning and performance aspects – For originator/servicer quality – Diversification issues of the portfolio n Adjusting for structural aspects – Revolving portfolio – future asset profile 15
Asset Backed Securities (ABS) - 1 Asset Analysis: Distribution Parameters n Mean & Standard Deviation n Based on historical originator data – Static/dynamic – Sub-Pools – Consistency – Extrapolation of short data series n Conservative view on Standard Deviation – Stress for Recession scenario 16
Asset Backed Securities (ABS) - 2 Asset Analysis: Static Performance Data 17
Asset Backed Securities (ABS) - 3 Asset Analysis: Extrapolated Performance Data 18
Asset Backed Securities (ABS) - 4 Asset Analysis: Adjustments to Distribution Parameters n Possible for both parameters – Trends impact Mean – Uncertainty impacts Standard Deviation n Pool dependent – Composition (asset criteria, limits) – Age of assets (“Seasoning“) n Originator/Servicer dependent – Performance trend – Change of credit policy (underwriting, servicing) 19
Asset Backed Securities (ABS) - 5 The Model: Links Assets and Liabilities n Standard model (“ABS ROM“) – technical frame – Models deal specific features n Reflection of cash flow structure (“Waterfall“) n Beside distribution, other inputs: – Timing of defaults/losses – Recovery rates and time of recovery – Amortisation profile, transaction expenses – Triggers (variety possible, specific impact ) 20
Issues in New Markets 21
Issues to Watch: Securitisations In New markets n Legal and regulatory environment n Organisation of financial sector n Interest and currency exchange rate risk n Sovereign rating n Systemic risks - Local Currency Guidelines (LCG) n Objectives of issuers and investors n Extent of government support
Importance of Legal Environment n Bankruptcy laws – true sale, claw back, commingling, set-off n Security interest and claim priorities n Enforceability n For future flow deals – isolation of cashflows abroad n Consumer protection laws/policy – notification to borrowers – data disclosure – usury n Tax issues: corporate, transfer, withholding or other n Specific securitisation law 23
Two Main Elements That Could Reduce the Rating n Systemic risks – Include financial stability, legal, regulatory, quality of data, risk of fraud – Affect ALL debt issued in the country, whether LC or FX n Transferability and Convertibility risk – Address the potential impossibility of paying FX to offshore investors in the event of moratorium coupled with FX restrictions by the government – Affect only FX debt 24
Risk Layers and Rating Scales Political risk Systemic risks Legal Structure Assets Origination Serivicng History Currency swap IR swap Liquidity Back-up servicing ------- Transferability Convertibility Expropriation ---------- Enforcement FXFraud risk Global Scale Payment systems Quality of data/IT LCNational Overall stability ------Scale LC(NSR) Global Scale 25
Piercing the Sovereign “Ceiling” – How? Aaa A rating can exceed the LCG only by an external guarantee or insurance “wrap” Sovereign ceiling may be pierced based on: (1) highly rated local currency obligation combined with (2) liquidity facility or political risk insurance S Y S Credit T Enhancement: E subordination, M reserve, excess I spread C Assets Credit Quality R I S K S L E G A L R I S K S Country’s local currency Guidelines (LCG) A 1 for Russia Country’s foreign currency ceiling A 2 for Russia 26
Sovereign Ceilings and Local Currency Guidelines 27
Final Thoughts 28
Russia – Outlook for Securitisations n n n Tremendous growth of consumer and mortgage lending will continue to generate future MBS/ABS Improvements of laws/regulations to facilitate securitisations should relieve existing uncertainties Deal flow is expected to expand to other asset classes – CDOs, leases, SMEs, infra-structure n Local securitisations are expected shortly (MBS) n Multi originators structures 29
Ten Commandments – Preparation For a Transaction 1. Discuss legal issues EARLY with lawyers & rating agency 2. Decide (and discuss with us) rating target 3. Evaluate what enhancement/structure may be needed 4. Prepare portfolio data, including data format 5. Organise historical performance data 6. Consider back-up servicer 7. Determine structure 8. Assess external support (PRI, wrap, guarantee) 9. Plan deal timetable reasonably 10. Prepare strategy for future transactions 30
© Copyright 2006, Moody’s Investors Service, Inc. and/or its licensors including Moody’s Assurance Company, Inc. (together, “MOODY’S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. www. moodys. com Contact: yaron. ernst@moodys. com 31
- Yaron ernst
- Yaron shohat
- Securitisation warehouse
- Securitization and reconstruction of financial assets
- Cersai expansion
- Riset rating dan non rating
- How is economizing different from optimizing?
- Cuda parallel reduction
- Optimizing parallel reduction in cuda
- The fortran optimizing compiler
- Optimizing patient flow
- Give us your hungry your tired your poor
- Parasitism
- Ernst haeckel tree of life
- Whats a climax community
- Fuchskirche thal
- Max ernst forest and dove
- Frottage con monedas
- Pseudowetenschap beoefend door karl ernst krafft
- Ernst lofvers
- Ernst and young client portal
- Watch wayne cascio videos
- Ernst v conditt
- Max ernst horde
- Alison ernst
- Ernst jandl markierung einer wende
- Ernst krieck
- Ernst schweizer
- Ernst hotel supply
- Fritz zuber-buhler
- Ernst and young moldova
- Ernstyoung voice