SECURITIZED DEBT TRADING - MACQUARIE · SECURITIZED DEBT TRADING - MACQUARIE David Méneret, Head of Securitized Debt Trading at Macquarie, MS FE ’02, Ecole Centrale Paris ‘ 02

SECURITIZED DEBT TRADING - MACQUARIE

David Méneret, Head of Securitized Debt Trading at Macquarie, MS FE ’02, Ecole Centrale Paris ‘ 02

November 2009

1. An introduction to securitization and its role in the credit crisis (2007-2009)

a) Securitization participants

b) From a house to a CDO, securitized products in between

c) Fannie Mae, AIG, Ambac, the banks and the rating agencies

2. How to trade securitized products?

a) ABS

b) CLO

c) MBS/CDO

d) Indices and correlated hedges

3. How to use what you learned in MSFE?

a) Monte Carlo Simulation

b) Stochastic Processes

c) Correlation Models

d) Volatility Models

Securitized Debt Trading

2

Broker

Securitization participants

Structuration/ Origination

Hedge Funds/ Prop Desks

Rating Agencies

Insurance Co/ Pension Funds

New ABS

Secondarymarket

Secondarymarket

Primary Market

Broker

ABS CDO/ SIV

Primary Market

Liquidation

Primary Market

Company XYZ

pledges assets

Sales and syndication

Monolines/ Liquidity Providers Hedges

Equity

3






a) ABS

b) CLO

c) MBS/CDO








4

Assets

Debt

Equity

Profit / Loss on A

sset

Priority of R

e-Paym

ent

Leverage Factor = Assets / Equity

A Basic Balance Sheet with Leverage

5

Return on Equity = 25%

[(Return on Assets - Interest Expense) / Equity] = 25%

[($9.00 - $4.00) / $20] = 25%

House

$100

Gain on House =

9%

Mortgage Debt

$80

Interest Rate =

5%

Equity

$20

Mortgage Gives Homeowners 5x’s Leveraged Returns

6

Pool of Mortgage Debts

Equity

D

D

D

D

D

D

D

D

D

D

D

Super Senior

AAA MBS

BB MBS

B MBS

BBB MBS

AA MBS

A MBS

Loss Position

Cre

ditR

isk

Yiel

d

FirstLoss

HighRisk

HighYield

LastLoss

LowRisk

LowYield

HOME

OWNERS

AAA MBS

Mortgage Securitization Creates “MBS” and Leverage

7

Pool of AA, A, BBB MBS

Equity

MBS

Super-Senior

AAA CDO

BB CDO

B CDO

BBB CDO

AA CDO

A CDO

Loss Position

Cre

dit R

isk

Yie

ld

FirstLoss

HighRisk

HighYield

LastLoss

LowRisk

LowYield

WALL

ST

BANKS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

AAA CDO

Pooling subordinated tranches to create ABS CDOs

8

Does not usually own reference asset

Going “long”

Benefits when reference asset price INCREASES

Tends to own reference asset

Hedging or going “short”

Benefits when reference asset price DECREASE

Protection SellerProtection Buyer

Payment upon Default of Reference Asset

Premium Payments

Reference Asset can be a MBS, CDO, Bond, or Loan

Like an insurance contract that pays in the event of default.

FASB requires mark-to-market valuation.

Collateral Call - Protection Buyers can call for partial payment if default event is likely.

Determined by mark-to-market value.

Credit Default Swaps

9

House

$100

Mortgage Debt

$95

Equity $5

Homeowner 20X’s

Increasing Leverage

Sub-prime Mortgage 20X’s Lev

10

House

$100

Mortgage Debt

$95

Equity $5

Mortgage Debt

$95

MBS

$91.8

Equity $3.2Homeowner 20X’s

Increasing Leverage

Mort. Securitiz 30X’s

Pooled into MBS – 30X’s Lev

11

House

$100

Mortgage Debt

$95

Equity $5

MBS

$91.8

CDO

$90.0

Equity $1.8

Mortgage Debt

$95

MBS

$91.8


Increasing Leverage


CDO Structure 50X’s

Pooled into CDO – 50X’s Lev

12

CDS on CDO – Infinite Lev

House

$100

Mortgage Debt

$95

Equity $5

MBS

$91.8

CDO

$90.0

Equity $1.8

CDO

$90.0

CDS on CDO

$90.0

Equity $0

Mortgage Debt

$95

MBS

$91.8


Increasing Leverage


CDO Structure 50X’s

Credit Default Swap ∞

13

Investment grade debt investors (BBB to AAA) do not expect to take a principal loss.

Super Senior was sold to Bank Conduits and SIVs that issued ABCP

The money market funds stopped buying ABCP and Banks had to back-stop.


Equity

D

D

D

D

D

D

D

D

D

D

D

Super Senior

Aaa / AAA

Ba2 / BB

B2 / B

Baa2 / BBB

Aa2 / AA

A2 / A

HOME

OWNERS

Aaa / AAA

Money Market Fund

Bank Conduits/SIVs

Foreign Banks

Insurance Co.’s

CDO’s

Hedge Funds

Originating Banks

Dispatching the risk

14

For the first time in 70 years, housing prices went down after more than 15 years of exuberance.

Behavior of subprime borrowers was “rational” : many stopped paying their mortgages or even walked

away from houses they could not afford.

Rating agencies, monoline insurance companies, I-Banks, and investors did not anticipate this level of

default.Subprime Delinquencies

10

11

12

13

14

15

16

17

18

19

20

Mar

-98

Sep

-98

Mar

-99

Sep

-99

Mar

-00

Sep

-00

Mar

-01

Sep

-01

Mar

-02

Sep

-02

Mar

-03

Sep

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

% o

f Tot

al L

oans

Housing prices and delinquencies

15

Delinquent sub-prime homeowners are forced into foreclosure

Case Shiller Home Price Index - All Metro Areas

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

YOY

Perc

enta

ge C

hang

e

Foreclosures

16

The difference between overnight rates and 3 month rates sky-rockets to 3.50% (normally 0.15%). Fed Funds vs. LIBOR.

No borrowing / lending in the short term markets

This is precisely what Sect of Treasury was reacting to with bail-out

Counterparty risk / liquidity risk

17

0.0815

3.542

0.10838

0

0.5

1

1.5

2

2.5

3

3.5

4

Corporations could not borrow in the long term institutional bond markets

Hedge funds that bought bonds on leverage were forced to unwind

Investment Grade Yields

18

MBS/CDO Research: Case-Schiller Index (1/6)

Date Phoe

nix

- AZ

Los

Ang

eles

San

Die

go

San

Fran

cisc

o

Den

ver

Was

hing

ton

Mia

mi

Tam

pa -

FL

Atla

nta

- GA

Chi

cago

Bos

ton

Det

roit

- MI

Min

neap

olis

- M

N

Cha

rlott

e - N

C

Las

Vega

s

New

Yor

k

Cle

vela

nd -

OH

Port

land

- O

R

Dal

las

- TX

Seat

tle -

WA

Com

posi

te-2

0

September 1987 65.38 58 51 50 72 71 79 59 74 66 66 83 57 42October 1987 66.20 59 51 50 73 71 79 59 75 67 66 84 57 42November 1987 66.94 59 52 50 73 72 79 59 75 67 67 84 57 42December 1987 67.91 59 52 50 73 71 79 60 75 67 67 84 56 42January 1988 68.66 60 52 49 74 72 79 61 74 68 67 84 56 42February 1988 69.36 60 53 49 75 72 79 63 74 67 66 84 56 41March 1988 70.14 61 53 49 76 72 79 64 73 68 66 83 57 42April 1988 70.83 61 54 49 77 72 79 65 74 68 67 84 58 42May 1988 72.03 62 56 48 78 73 80 66 74 68 68 84 58 43June 1988 74.35 62 58 48 80 74 80 67 75 68 67 85 59 43July 1988 77.22 65 59 48 81 74 81 67 76 69 67 85 60 43August 1988 79.27 66 59 49 82 75 81 69 75 70 68 85 60 44September 1988 81.23 66 60 48 84 76 81 69 75 70 69 86 61 44September 1993 69 80 75 68 60 89 82 84 74 78 67 64 71 76 83 77 77 69 69September 1998 91 91 88 85 86 93 93 93 91 93 87 90 87 95 95 89 94 97 91September 1999 98 99 98 96 98 100 98 98 98 98 98 98 98 100 99 98 99 101 99September 2000 105 109 114 121 111 110 105 106 105 107 113 105 109 103 105 110 103 103 106 106 109September 2001 111 120 128 129 122 125 120 118 111 117 130 112 124 105 113 123 108 109 111 112 120September 2002 116 139 150 142 126 142 137 129 115 124 146 115 135 108 119 140 110 113 115 116 132September 2003 124 165 175 150 127 161 157 142 119 134 156 119 147 109 134 157 116 120 115 122 146September 2004 142 215 231 178 132 198 191 166 123 146 172 123 159 113 205 180 120 132 117 135 171September 2005 211 256 249 215 138 244 251 213 129 159 182 126 168 120 227 205 123 158 122 159 197September 2006 225 274 247 216 140 245 277 236 135 169 176 123 171 129 235 214 122 182 125 183 206September 2007 205 255 223 206 138 229 250 210 136 164 171 111 164 135 213 206 117 186 125 192 196September 2008 140 185 164 146 131 190 179 171 123 148 161 90 141 130 147 191 110 170 122 173 162October 2008 135 180 159 139 129 185 173 165 120 145 159 86 136 128 143 190 109 166 121 170 158November 2008 131 176 155 135 128 180 170 161 116 141 155 83 133 126 138 187 107 163 118 166 155December 2008 124 171 152 130 126 176 165 156 113 137 153 81 126 122 131 183 105 159 116 160 151January 2009 117 167 148 124 122 172 159 149 109 131 151 78 120 121 126 181 103 154 113 154 146February 2009 112 163 147 120 120 168 154 145 107 126 149 75 116 119 121 178 98 151 112 152 143March 2009 107 161 145 118 120 166 149 141 105 122 146 71 109 119 116 174 97 148 112 149 140April 2009 104 159 144 118 122 167 146 140 105 122 146 70 109 119 112 171 98 147 114 149 139May 2009 104 159 145 120 124 169 145 140 106 124 149 70 110 120 109 171 102 147 117 149 140June 2009 105 161 147 125 127 173 145 141 108 125 153 69 113 121 107 172 106 148 120 150 142July 2009 107 164 151 129 129 176 147 143 110 128 155 70 119 121 106 174 108 150 121 149 144August 2009 108 167 153 132 130 179 149 143 111 131 156 72 123 121 106 175 107 150 121 150 146Peak 227 274 250 218 140 251 281 238 136 169 182 127 171 136 235 216 123 187 126 192 207Last 12 months -14% -9% -6% -7% -1% -6% -13% -12% -5% -7% -3% -8% -7% -4% -17% -7% -1% -8% -1% -10% -7%YtD -13% -3% 1% 2% 3% 2% -10% -8% -2% -5% 2% -12% -3% -1% -19% -5% 2% -5% 5% -7% -3%Current Peak-to-Trough -54% -56% -49% -46% -14% -50% -57% -50% -23% -31% -29% -45% -37% -23% -55% -43% -22% -42% -12% -42% -42%

19

MBS/CDO Research: ABX trading (2/6)

20

MBS/CDO Research (3/6)

21

Source: Credit Suisse, Oct 27, 2009 [Severity first-lien]


22

Source: Bloomberg Runs, Nov 16, 2009


Source: JP Morgan, Chris Flanagan, Nov 13, 2009

Source: Citigroup, Rahul Parulekar, Nov 2008

Source: JP Morgan, Chris Flanagan, Nov 13, 2009

23


24

Liquidity in Securitized products from 2006 to 2008

25






a) ABS

b) CLO

c) MBS/CDO








26


Equity

D

D

D

D

D

D

D

D

D

D

D

Super Senior

Aaa / AAA

Ba2 / BB

B2 / B

Baa2 / BBB

Aa2 / AA

A2 / A

HOME

OWNERS

Aaa / AAA

FNMA

Guarantees Principal

and Interest Payments

FANNIE MAE (1/2)

27

Assets = $883bn

Equity = $44bn

Leverage = 20.1X’s

Guarantees = $2.9tn

Total Leverage = 85.7X’s

Write-downs in 2007

Inability to raise capital

Fed injects $100bn

Stock falls to near $0

CDS volatile as mkt not sure about Gov’t gty

FNMA’s Total Leverage is 85.7X’s

FNMA Stock and CDS

0

10

20

30

40

50

60

70

80

10/30/2006 3/13/2007 7/20/2007 11/27/2007 4/8/2008 8/14/2008

Stoc

k P

rice

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

1.00%

CDS

Annu

al P

rem

ium

Stock CDS

FNMA Balance Sheet Leverage

On B/S

Off B/S

$44,011$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

Assets & Liabs Equiity

USD

in M

illio

nsFANNIE MAE (2/2)

28

Pool of AA, A, BBB MBS

Equity

MBS

Super-Senior

AAA CDO

BB CDO

B CDO

BBB CDO

AA CDO

A CDO

WALL

ST

BANKS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

AAA CDO

AIG Sells Protection Referenced to Super

Senior CDO

AIG (1/3)

29

AIGBanks

Holding Super Senior CDO

Protection SellerProtection Buyer

Payment upon Default of Reference Asset

Premium Payments

Reference Asset is Super Senior CDO

AIG gets premium of 0.15% on $527 billion or $790 mil per year

As mortgage losses mount and as investors stop buying MBS and CDO…

Mark-to-market of Super Senior CDO goes down

AIG is forced to post additional Collateral.

AIG (2/3)

30

Assets = $1.06tn

Equity = $95.8bn

Leverage = 11.1X’s

CDS on Super Senior = $527bn

Total Leverage = 16.6X’s

Write-downs of $12bn in 2007

MTM and Collateral Calls

Fed Loan of $85bn

Stock falls to near $0

CDS skyrockets to 25%

AIG Stock and CDS

0

10

20

30

40

50

60

70

80

10/30/2006 3/13/2007 7/20/2007 11/27/2007 4/8/2008 8/14/2008

Sto

ck P

rice

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

CDS

Annu

al P

rem

ium

Stock CDS

AIG Balance Sheet Leverage

On B/S

Off B/S

$95,801

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000


USD

in M

illio

nsAIG (3/3)

31

Pool of MBS

Equity

MBS

Ba2 / BB

B2 / B

Baa2 / BBB

Aa2 / AA

A2 / A

WALL

ST

BANKS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

MBS

Ambac

“Wraps”AA to Create AAA

Ambac (1/2)

32

Assets = $23.6bnEquity = $2.3bnLeverage = 10.4X’s

Wraps of CDO = $524bnTotal Leverage = 240X’s

Write-downs in 2007Downgrades and inability to do more business.Some MTM and Collateral CallsNY Insurance Commish InvolvedStock falls to near $0CDS skyrockets to 78.5 pts upfront

Ambac Balance Sheet Leverage

On B/S

Off B/S

$2,280$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000


US

D in

Mill

ions

Ambac Stock and CDS

0

20

40

60

80

100

120

10/30/2006 3/13/2007 7/20/2007 11/27/2007 4/8/2008 8/14/2008

Sto

ck P

rice

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

CDS

Ann

ual P

rem

ium

Stock CDS

Ambac (2/2)

33

Create risk positions without investing

Create risk positions that are “short” positions

Value goes up when prices go down

Like trading insurance contracts without the need to show evidence of an “insurable loss”.

Credit Default Swap Market

0

10,000

20,000

30,000

40,000

50,000

60,000

Dec 2004 June 2005 Dec 2005 June 2006 Dec 2006 June 2007 Dec 2007

USD

in B

illio

ns

Credit Default Swap Market

34






a) ABS

b) CLO

c) MBS/CDO








35

Aircraft ABS / CLO

AIRCRAFT ABS: Securitisation of 30 Aircraft Leases

Aircraft Lease #1Aircraft Lease #2Aircraft Lease #3 Senior………… Sub…Aircraft Lease #28Aircraft Lease #29 EquityAircraft Lease #30

CLO: Securitisation of 150 Leveraged Loans

Loan #1Loan #2Loan #3 Senior… AAA………… Jr AAALoan #148 AA & ALoan #149 BBB & BBLoan #150 Equity

Securitisation

fee

fee

Securitisation

36

RMBS/CMBS/CDO

RMBS/CMBS: Securitisation of 3000 Mortgages

Mortgage #1Mortgage #2Mortgage #3 1st AAA……… 2nd AAA… Pen AAA… Last AAAMortgage #2998 AA & AMortgage #2999 BBB & BBMortgage #3000 Equity

CDO of ABS: Securitisation of 80 Asset-Backed Securities

ABS #1: RMBSABS #2: RMBSABS #3: RMBS Senior … AAA……… Jr AAA… AAABS #78: CLO AABS #79: CMBS BBBABS #80: Aircraft ABS Equity

Securitisation

fee

Securitisation

fee

37

ABS

Asset-Backed Securities:• Aircraft ABS: secured by aircraft lease rates or by actual planes• Auto ABS: secured by auto loans• Credit Card ABS: secured by credit card loans• Container ABS• Railcar ABS• Esoteric ABS (wrapped and unwrapped): film rights, tobacco settlements, insurance fees

Indices and correlated hedges• HY Index• CDS on Leasing Companies/Airlines• CDS on Monolines

38

CLO

Collateralized Loan Obligations:• CLO Tranches: AAA, jr AAA, AA, A, BBB, Equity• Cash, CDS on CLO

Indices and correlated hedges• LCDX• LCDX Tranches• CDS on CLO

39

MBS/CDO

RMBS/CMBS, Subprime and Home Equity:• Current pay RMBS• Second pay RMBS• Third pay RMBS• Credit IOs (remote likelihood of paying principal)

Collateralized Debt Obligations:• Senior Tranches • Trading various tranches of CDOs issued between 2000 and early 2005• Running an ABX-calibrated fundamental model to price underlying RMBS/CMBS bonds

Indices and correlated hedges• ABX• TABX• CDS on RMBS• CDS on ABS CDO• CMBX

40






a) ABS

b) CLO

c) MBS/CDO








41

Monte Carlo Simulation

Step One: INPUT• CPR, CDR, Leases, Default Probability, Correlation, Remarketing/Repossession costs• Calibration of Input to Market data: ABX, interest rates, HPA, implied correlation

Step Two: SCENARIO GENERATION• 1000 to 100000 portfolio cash flow scenarios are generated by applying a default

probability to underlying loans/leases and calculating remaining cash flows based on the probability distribution and correlation of the input factors

• Tools: Matlab, VBA/VB.net, Intex• N x M matrix of cash flows (N scenarios, M months)

Step Three: EXPECTED VALUE AND DISTRIBUTION• Portfolio Cash Flows: expected cash flows and their distribution on a monthly basis• Present value of Portfolio Cash Flows (discount rate = marginal cost of funding)• Portfolio market Value: distribution on a monthly basis (= recovery value of portfolio)

Step Four: RISK/REWARD PROFILE• Distribution of expected loss vs bond yield before hedges• Distribution of expected loss vs bond yield after hedges (assuming various correlation

assumptions)

42

Stochastic Processes

RMBS/CMBS/CLO:• Main variables: prepayment rate (CPR), default rate (CDR), severity (loss given default)• d (Log X (t+1)) = K x ( m(t) – Log X (t) ) dt + σ d W(t)• d (Log X (t+1)) = K x ( m(t) – Log X (t) ) dt + σ (t) d W(t)• Correlation between CPR, CDR, severity.• Hull-White, Ho-Lee, HJM

Aircraft ABS, Railcar ABS, Container ABS:• Very high correlation • Modeling future lease rates• Modeling defaults of lessees• Modeling remarketing/repossession costs

43

Correlation Models

Gaussian Copula Model

• Li's paper "On Default Correlation: A Copula Function Approach" (2000)

• The Gaussian Copula model quickly became a tool for financial institutions: correlation desks, CDO structuring, bespoke, etc.

• According to Nassim Nicholas Taleb, "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked. Co-association between securities is not measurable using correlation“

…How to use a proper correlation model? • Run wide range of sensitivities to assumptions• Know limits of the model

44

Volatility Models

Black-Scholes Model:• Distressed Debt tends to behave like equity: large swings and sensitivities to many

macroeconomic factors, uncertain payments, timing of default, recovery value• Some bonds may trade above 50% even though their recovery value is 10% and the

cumulative probability of default is 90% (IO Value)• Some bonds may trade below their recovery value (cost of funding)

Limits of the model:• Limited upside (par)• Not exactly like Equity

Stress tests and volatility around the median (example: Aircraft ABS)Modelling future cash flows based on current lease rates:Stress Cases Good Quality Aircraft Medium Quality Aircraft Bad Quality Aircraft

Bear Case Lease rates cut immediately to 80%, then 50% then 30%.

Lease rates cut immediately to 80%, then 30% then 0%.

Lease rates cut immediately to 60%, then 0%.

Base Case Lease rates cut immediately to 90% then 70% then 50%.

Lease rates cut immediately to 90% then 50 % then 30%.

Lease rates cut immediately to 80% then 30% then 0%.

Bull Case Lease rates kept as is, then cut to 90% then 70%.

Lease rates kept as is, then cut to 70% then 50%.

Lease rates kept as is, then cut to 50% then 30%.

45

HPA-Based Models for RMBS and ABX

Loan-Based Cash Flow Model calibrated with ABX (indicative levels)

ABX AAA 07-2 Prices in 25 different scenarios

CDR CDR CDR CDR CDR15 22.5 45 60 75

CPR 0 50.75 44.55 36.03 32.66 29.93CPR 2.5 57.42 46.28 37.19 33.68 30.70CPR 5 63.74 48.08 38.55 34.60 31.47CPR 15 78.25 69.06 43.12 38.32 34.32CPR 20 82.15 77.70 45.49 40.15 35.76

ABX-Implied Peak-to-Trough Housing Price Depreciation

CDR CDR CDR CDR CDR15 22.5 45 60 75

CPR 0 -49.00 -51.70 -59.80 -65.20 -70.60CPR 2.5 -40.50 -43.65 -53.10 -59.40 -65.70CPR 5 -32.00 -35.60 -46.40 -53.60 -60.80CPR 15 -23.50 -27.55 -39.70 -47.80 -55.90CPR 20 -15.00 -19.50 -33.00 -42.00 -51.00

ABX 07-2 AAA

-$$10$20$30$40$50$60$70$80$90

-80 -60 -40 -20 0HPA (Peak-to-trough)

Price

46

Decision Process for CLO and RMBS trading

Experts Meneret Meneret Meneret Meneret MeneretRMBS Trader RMBS Trader Head of Trading RMBS trader Credit Trading Team

Loan-by-Loan Structural Loan Servicer Valuation Decision NOPortfolio Analysis Analysis Review Process Process

TRADESensitivity Housing Prices (HPA) Triggers Loan Modifications Credit Risk: CDR Counterparty RiskAnalysis (Case-Shiller Index) Enhancement Foreclosures ABX Microeconomic factors

Commercial Real Estate Event of Default Collections CMBX Macroeconomic factors(CPPI, external research) Liquidation Volatility Inflation/DeflationFuture Values of Assets Acceleration Correlation Capital MarketsHome-by-Home Prepayment Risk: CPR Bailout RiskState-by-State Loss Severity Liquidity RiskMSA-by-MSA Rating Agency Action Technical PressuresLoan Type Interest RatesMortgage Type Currency Risk

SELL

BUY

Process

Experts HY Trader Meneret Head of Trading Meneret MeneretCLO Trader CLO Trader Meneret CLO Trader Credit Trading team

Loan-by-Loan Structural Portfolio Manager Valuation Decision NOPortfolio Analysis Analysis Review Process Process

TRADESensitivity Outlook per industry Triggers Manager Risk Credit Risk: CDR Counterparty RiskAnalysis Outlook per company Enhancement Reinvestment Risk LCDX Microeconomic factors

Loan Market Prices Event of Default LCDX Tranches Macroeconomic factorsLoan Fundamental Prices Liquidation Volatility Inflation/DeflationRecovery per company Acceleration Correlation Capital Markets

Prepayment Risk: CPR Bailout RiskRecovery Risk Liquidity RiskRating Agency Action Technical PressuresInterest RatesCurrency Risk

Process

BUY

SELL

47

But also:

Risk Management:• Managing a trading book requires precise understanding and monitoring of credit risk and

market risk• Liquidity risk• Interest rate risk• Basis risk• Currency risk• Greeks: delta/gamma/vega/theta/rho• Carry: positive/negative• Servicer• Government intervention

Legal Analysis (indenture/prospectus/reports)• Event of default/liquidation• Priority of payments• Running an ABX-calibrated fundamental model to price underlying RMBS/CMBS bonds

48

SECURITIZED DEBT TRADING - MACQUARIE

David Méneret, Head of Securitized Debt Trading at Macquarie, MS FE ’02, Ecole Centrale Paris ‘ 02

November 2009

Documents

SECURITIZED DEBT TRADING - MACQUARIE · SECURITIZED DEBT TRADING - MACQUARIE David Méneret, Head of Securitized Debt Trading at Macquarie, MS FE ’02, Ecole Centrale Paris ‘ 02