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Modern Techniques for Analyzing CLOs A Workshop
June 2013
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Agenda » Introduction
» Basic Fundamental and Market Valuation Techniques
» Data-driven Valuation Enhancements » Comparables » Manager Style » Single Name Analysis
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About Us Moody’s Analytics is a subsidiary of Moody’s Corporation and a separate legal entity from Moody’s Investors Service, Inc. (which is a global provider of credit ratings and research covering debt instruments and securities). Moody’s Investors Service does not share non-public information received from issuers as part of the ratings process with Moody’s Analytics. Further, Moody’s Corporation prohibits any ratings personnel from providing consulting services on behalf of Moody’s Analytics.
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Basic Fundamental and Market Valuation Techniques
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Static Analysis
Defaults: 2 CDR is a common baseline, use stresses too
Recovery Rate: 70% for senior loans, 30% for second liens
Prepayments: 20 – 40 CPR
Make assumptions about reinvestment spreads, interest rates, calls, etc.
CDOnet Yield Table:
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Sample Static Results
CDR 2 4 7 10 15 2 4 7 10 15CPR 15 15 15 15 15 20 20 20 20 20Severity 35 35 35 35 35 35 35 35 35 35
Present Value @ Tranche Issuance Spread:A3 100 100 100 100 100 100 100 100 100 100B 100 100 100 100 100 100 100 100 100 100C 100 100 100 100 85.12 100 100 100 100 99.08D 100 100 100 85.99 0.66 100 100 100 98.43 4.51
Equity 63.02 37.53 8.14 0 0 62.38 38.25 10.13 0 0
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Aggregate Market Spread Data
Market sources, such as the banks, distribute market summary statistics
Sources: JP Morgan, Morgan Stanley, BofA
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Differentiating Factors
Running analysis based on original rating is not always enough
Other factors can affect the assumptions used in the analysis: – Manager reputation in the market
– Overall collateral quality statistics versus cohorts
– OC cushions
– PIK status
– Turbo
– Reinvestment period timing / post-reinvestment reinvestment ability
– Likelihood of a call
– Rating transitions
– Voting rights
Judgment and/or a model must be used to adjust the aggregate DM data
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Comparing to Peers
Performance statistics like WARF, WAS, etc., can be compared to the deal’s cohorts
Moody’s Analytics Performance Data Services, and others, deliver monthly trustee data as well as historical information
Test PercentileSenior OC 45%Mezz OC 51%Sub OC 60%Sub IC 16%
WAS 42%SSL 89%SEC_LIEN 22%CAA/CCC 62%STRUCTSEC 39%
Weighted Avg 51%
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Benchmarking Users can pick from hundreds of data points to rank the comparing tranche against its peers
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Comparables
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Enhanced Market Valuations
Model-driven market pricing has its benefits – Aggregate spread levels for CLOs are freely available
– Adjusting DM on a tranche basis allows you to express qualitative judgment about the tranche, the deal, and the manager
However, we should not ignore other data points – Several vendors provide market color for Structured tranches, generally derived from BWICs
If our tranche hasn’t traded, how does market color help?
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Finding Comparable Bonds
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Associated Market Color
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Market Color History
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Manager Style
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Understanding the Manager With model-driven market valuations and comparables, we can understand what other
market participants seem to think about a given tranche, deal, and manager
How do we refine our own opinion?
One way is to understand the manager’s style
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Data-based Manager Analysis
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Data-based Manager Analysis
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Single Name Analysis
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Single Name Analysis
Besides analyzing the manager and looking at market valuations, we should also understand what’s going on with the individual underlying credits
Especially important for junior tranches
This applies both to fundamental valuations as well as portfolio management
Mapping individual loans enables metrics like MVOC, especially important with so many calls happening
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Stochastic Analysis
Need loan-level default probabilities and recovery rates to power the Monte Carlo simulation
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Stochastic Analysis
Loan-level default probabilities from CreditEdge power the Monte Carlo simulation
CreditEdge is not necessary, however; ratings-based or any other loan-level corporate credit risk model can be incorporated
Loan Name 1 Year P.D. 2 Year P.D. 3 Year P.D. 4 Year P.D. 5 Year P.D.Allison Transmission, Inc. Term Loan B 5.05% 5.05% 4.95% 4.74% 4.53%American Homepatient 1st Lien Term Loan 6.08% 6.15% 5.93% 5.59% 5.27%Ameristar Casinos, Inc. Term Loan B 9.82% 13.58% 12.79% 12.48% 11.71%Aramark Corporation Extended Term Loan B 4.91% 4.78% 4.56% 4.32% 4.11%Avaya, Inc. Extended Term Loan B3 6.91% 6.83% 6.53% 6.17% 5.82%AWAS Finance Luxembourg S.A.R.L. Term Loan B 2.14% 2.21% 2.20% 2.17% 2.13%Bausch and Lomb, Inc. Term Loan 7.66% 7.60% 7.30% 6.86% 6.45%Biomet Inc. Term Loan B 6.08% 6.15% 5.93% 5.59% 5.27%And so on….
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Stochastic Analysis
Monte Carlo simulation across typically 10,000 stochastic paths
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Stochastic Analysis
Monte Carlo simulation across typically 10,000 stochastic paths
Easier to understand the credit risk to each tranche
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Portfolio Analysis If you own a portfolio of CLO tranches and you want to want to do your own analysis on
some of the credits the managers have picked, how do you prioritize?
Many different methods
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Issuer Watch List
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