CaseMark Analyzing Structured Products
When To Use
- Evaluating a new ABS, MBS, CLO, or CDO offering for investment suitability
- Assessing tranche risk and credit enhancement adequacy on an existing position
- Modeling cash flow waterfalls under base, stress, and default scenarios
- Comparing subordination levels, excess spread, and overcollateralization across deals
- Reviewing deal documents (indenture, offering circular, trustee reports) for structural features
- Monitoring portfolio holdings for collateral deterioration or trigger breaches
Inputs To Gather
- Deal documents: Offering circular/prospectus supplement, indenture, servicing agreement
- Collateral data: Loan-level tape or pool stratification (WAC, WAM, WALA, FICO distribution, geographic concentration, LTV distribution for MBS; industry/rating distribution for CLO/CDO)
- Tranche structure: Par amounts, coupon types (fixed/floating), spread, legal final maturity, expected maturity, payment priority
- Credit enhancement details: Subordination percentages, overcollateralization (OC) targets and triggers, excess spread, reserve accounts, insurance wraps if applicable
- Performance data: Monthly trustee/remittance reports — delinquency buckets (30/60/90+), CDR, CPR, loss severity, cumulative losses vs. trigger levels
- Rating agency presale reports or surveillance commentary (Moody's, S&P, Fitch, KBRA, DBRS)
- Pricing/spread context: Comparable deal spreads, secondary trading levels, index benchmarks (e.g., CMBX, ABX, Markit CLO indices)
Workflow
Classify the structure
- Identify product type: RMBS (agency/non-agency), CMBS, auto ABS, credit card ABS, student loan ABS, CLO, CDO (cash/synthetic), or bespoke
- Note static vs. revolving/managed pool; amortizing vs. bullet tranches
- Identify waterfall type: sequential pay, pro rata, modified pro rata with trigger-based switches
Map the cash flow waterfall
- Trace payment priority from senior through mezzanine to equity/residual
- Identify interest waterfall vs. principal waterfall (many deals separate these)
- Document trigger events: OC tests, IC (interest coverage) tests, delinquency triggers, cumulative loss triggers
- Note what happens on trigger breach (e.g., diversion of excess spread, turbo amortization of seniors, trapping of equity distributions)
Assess credit enhancement
- Calculate current subordination for each tranche: (total par below tranche) / (total deal par)
- Compare initial vs. current subordination — has it grown (sequential pay building credit enhancement) or eroded (losses eating into junior tranches)?
- Quantify OC cushion: (collateral par − tranche par) / tranche par for each OC test
- Evaluate excess spread: gross WAC − senior coupon − servicing fee − expected losses
- For CLOs: check reinvestment period remaining, WARF, WAL, diversity score, CCC bucket limits [VERIFY: specific threshold levels vary by deal and manager]
Run scenario analysis
- Base case: Forward curves, current prepayment/default/severity assumptions
- Stress case: Elevate CDR by 2–3x, increase loss severity 10–20 pp, slow prepayments (extend duration) or spike prepayments (reduce excess spread capture)
- Tail risk: Model what default rate/severity combination breaks each tranche — solve for breakeven loss multiple
- For CMBS: model individual large-loan default scenarios and balloon extension risk
- For CLOs: model par erosion from downgrades/defaults reducing the OC cushion
Evaluate collateral quality
- Review pool stratification for concentration risk (single obligor, industry, geography)
- Assess vintage performance: compare deal's cumulative loss curve to similar-vintage benchmark curves
- For MBS: analyze LTV distribution, documentation type, occupancy status, loan purpose
- For CLOs: review collateral manager track record, portfolio turnover, CCC-rated bucket size, weighted average rating factor (WARF) trajectory
- Flag any deteriorating collateral metrics vs. prior reporting periods
Determine relative value
- Compare tranche spread to similarly rated tranches from comparable deals
- Assess spread per unit of credit enhancement (compensation for risk)
- Factor in liquidity premium — off-the-run or esoteric deals trade wider
- Consider rating trajectory: is the tranche on watch or trending toward upgrade/downgrade?
Output
- Structure summary: Deal name, collateral type, closing date, pool balance, number of tranches, reinvestment period (if applicable)
- Waterfall diagram: Simplified schematic showing payment priority, trigger levels, and current OC/IC cushions
- Tranche-level analysis table: For each tranche — rating, coupon, current par, subordination %, OC cushion, WAL, spread, breakeven loss multiple
- Scenario results: Cash flow projections under base/stress/tail showing principal losses, WAL extension, and yield impact per tranche
- Collateral health scorecard: Key pool metrics with trend arrows (improving/stable/deteriorating) vs. prior periods
- Risk flags: Trigger proximity, concentration risks, servicer concerns, rating watch items
- Recommendation: Buy/hold/sell with spread target and key monitoring triggers
Quality Checks
- Verify that waterfall mapping matches the indenture — payment priority errors cascade through all downstream analysis
- Confirm subordination math: tranche sizes must sum to total deal par; percentages should cross-check against trustee reports
- Validate scenario assumptions against historical analogs (e.g., 2007–2009 loss curves for stress cases) [VERIFY: appropriate stress benchmarks depend on asset class and vintage]
- Ensure collateral data vintage matches the most recent trustee report date — stale data understates risk
- Cross-check ratings against all agencies covering the deal; note any split ratings
- Flag any structural features that could impair analysis accuracy: clean-up calls, optional redemption provisions, servicer advancing mechanics [VERIFY: advancing conventions differ by asset class and servicer]
- Confirm that breakeven calculations account for timing of losses, not just cumulative magnitude