example assurance on valuation and disclosures · 2020-04-13 · portfolio overview summary the...

Example

Assurance on Valuationand Disclosures

Example

Contents

Page

Executive summary

■ Portfolio overview 2

Portfolio Analysis

■ Bonds, Loans, Convertibles and Securitizations 3

■ Credit Default Swaps 5

■ Interest Rate Swaps 6

■ ASC 820 / IFRS 7 Classification 7■ ASC 820 / IFRS 7 Classification 7

Appendix

1. Details on CLO Cash-flow-modelling 8

1© 2012 KPMG AG Wirtschaftsprüfungsgesellschaft, a German Aktiengesellschaft and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved

Example

Executive SummaryPortfolio Overview

Summary

The Fund Manager has provided a Fund for valuation assurance purposes toKPMG This document outlines the results of our valuation on this portfolio This

iRADAR’s Peer Group Analysis

■ Peer Group Average Prices determined for 213 securitiesKPMG. This document outlines the results of our valuation on this portfolio. Thisanalysis was performed as per 31st December XXXX.

Overall iRADAR could process 665 out of 687 investments (97%). Investmentswhich could not be processed comprise of distressed debt and CDS withreference to emerging market entities.

■ On average, iRADAR compares each security with 9.7 prices within its database

■ Average standard deviation: 0.90%

■ Volume weighted average price deviation: -0.24

In addition to the fair value testing iRADAR performed the following analysis forwhich the outcome is outlined in this document:

■ Additional analysis of all CDS based on the CDS spreads provided by the Fund Manager

■ Cash-flow-modelling of two European CLO deals including scenario analysis

1 Standard Deviation

95,4 95,7 96,0 96,3 96,6

ClientAverage

IndustryAverage

Instrument Type# Instruments

provided

# Instruments with sufficient

data# Instruments

tested Coverage %

Deviation to iRADAR

Benchmark (USD) % 1)Deviations within expected ranges

■ Cash flow modelling of two European CLO deals including scenario analysis AveragePrice96,03

AveragePrice95,70

yp p g ( ) p g

Bonds, ABS, Loans and Convertibles 430 430 421 98% 2,722,868 0.14%

Credit Default Swaps 232 232 220 95% 150,811 0.01%

Interest Rate Swaps 25 25 24 97% 60,041 0.01%

Sum 687 687 665 97% 2,933,720 0.20%


1 Percentages for derivatives are calculated based on their notional amount Exa

mple

Portfolio AnalysisBonds, Loans, Convertibles and Securitizations 1/2

200

Portfolio AllocationSpotlight - Convertible Price DeviationA-TEC INDUSTRIES 8.75% 27-OCT-2014

120

160

200

Inst

rum

ents

Government Bonds

Securitizations

■ Defaulted Convertible

■ Notional 9.2 Mio USD

■ Deviation Market Value 1.1 Mio USD

Cli t P i 39 50 %

0

40

80

Num

ber o

f

Loans

Corporate Bonds

Preferred Debt

Convertibles

■ Client Price 39.50 %

■ KPMG Reference Price 27.50 %(Based on 5 observed third party prices in range of 25% to 38%)

■ Industry Average Price 30.87 %(Std. Dev 4.77%, 6 Contributions)

Inv Grade Non-Inv Grade Defaulted Not Rated

iRADAR Price and Peer Group Analysis1

Instrument Number

Market Value Market Value Absolute

Market Value Tested Coverage

Deviation Market Value

Deviation Man Average

Industry Average

Standard Type Number Mio USD Absolute

Mio USDTestedMio USD

Coverage Market Value Mio USD

% Average Price

Average Price

Deviation

Government Bonds 14 -74 92 92 100.0% 0.0 0.00% 99.85 99.62 0.35

Corporate Bonds 187 521 674 668 98.4% 1.0 0.14% 88.59 88.39 0.94

Convertibles 154 764 993 985 98.1% 1.5 0.15% 104.27 104.05 0.54

Preferred Debt 6 28 28 25 83.3% 0.0 0.15%

Securitizations 10 31 31 31 100.0% 0.0 -0.07% 63.64 60.80 4.53

Loans 59 173 173 166 94.9% 0.3 0.15%

Total 430 1,443 1,991 1,967 97.7% 2.7 0.14% 96.03 95.70 0.90


1 Shows the average prices observed for these particular instruments based on iRADAR’s database: asset management peer group only

Total 430 1,443 1,991 1,967 97.7% 2.7 0.14% 96.03 95.70 0.90

Example

Portfolio Analysis Bonds, Loans, Convertibles and Securitizations 2/2

Summary

For the analysis of the CLOs, iRADAR applied a fundamental valuation in which the performance of the underlying loan pool was simulated and the resulting cash

Results CLO Modelling – 60% Recovery Rate

65%the performance of the underlying loan pool was simulated and the resulting cash flows were applied according to the waterfall structure. The expected cash flows per tranche were discounted at an corresponding market rate. Within such an analysis the most relevant input parameters are default, recovery and prepayment rates as well as the discount margin.

The chart on the right shows the sensitivity of the tranche’s value for each of the 40%

45%

50%

55%

60%

f the

Cla

ss in

%

Duchess IV Class D

Jubilee IThe chart on the right, shows the sensitivity of the tranche s value for each of the selected transaction towards the expected default rate. As the scope of the analysis includes mezzanine tranches only, the effect of changes in parameters may only be material if rather extreme scenarios are considered.

There are no deviations out of our expected range for the analyzed CLOs stated below The total deviation amounts to USD 34K

20%

25%

30%

35%

40%

1 2 3 4 5 6 7 8 9 10

Valu

e of Jubilee I

Class E

below. The total deviation amounts to USD 34K.

Independent iRADAR Price Analysis iRADAR’s Peer Group Analysis1

Valuation Results for CLOs

1 2 3 4 5 6 7 8 9 10Default Rate in % p.a

Independent iRADAR Price Analysis iRADAR s Peer Group Analysis

ISIN Name S&P Category

Original/ Current Rating

S&P Notional EURMarket Value

Deviation USDClient Price

iRADARReference

Price

Industry Average

PriceStandard Deviation

Number of Contributions

XS0159688935 Duchess IV CLO, Class D

Cash Flow Corporate Loan CLO BBB-/B 800,000 1,765 54.80 54.63 50.33 7.6 3

XS0292634267 Jubilee CDO I-R, Class E

Cash Flow Corporate Loan CLO BB-/CCC- 1,500,000 32,479 49.00 47.38 42.25 0 2


1 Shows the average prices observed for these particular instruments based on iRADAR’s database: asset management peer group onlyExa

mple

Portfolio Analysis Credit Default Swaps

Summary

iRADAR processed 220 of the 232 CDS contracts based on independent model an market parameters The total deviation sums up to netted USD 151 K of which

Market Value deviations

Number of Swaps Notional USD MV Client USD

Total MV Deviations USD

an market parameters. The total deviation sums up to netted USD 151 K of which USD -879 K can be reconciled to the inherent pricing uncertainties arising from intraday fluctuation of the input parameters. The remaining USD 1 M are resulting from 9 contracts, 2 of which contribute to 99% of the unexplained variance.

The 12 CDS for which no benchmark value could be derived are referencing predominantly on emerging market debt (India Thailand)

Total 220 1,879,360,350 1,742,770 150,811

Within Range 211 1,858,996,800 -30,179 -878,788

Out of range 9 20,363,550 1,772,949 1,029,599predominantly on emerging market debt (India, Thailand).

In addition to the testing performed on independent parameters, iRADARmodelled all 232 deals applying the spreads and recovery rates as provided by the Fund Manager. The table on the lower right corner illustrates the two observations where the derived market value varies from the one stated by The Fund Manager as of 12/31/XXXX

Thereof under consideration 2 20,049,000 1,314,647 1,017,897

Remaining 7 314,550 458,302 11,701

Fund Manager as of 12/31/XXXX.Top 2 variances based on independent CDS spreads

NameMV Client

USDDeviation

USD ShiftClient

Spread

ALLIED IRISH BANKS PLC 5(20-JUN-2011) ) – USD -3,341,500 -649,806 -164,832 1,298 5,2731,000

1,200

1,400 KPMG Shift Man shiftClient Shift

) ) , ,

ERC IRELAND FINANCE 5(20-SEP-2012) – USD 3,341,500 1,260,779 159,516 669 3,863

Top 2 variances based on Man CDS spreads400

600

800

bps

shift

NameMV Client delivered

MV Client reconciled Deal Spread

Client Spread

CDS FORTIS (B) 1(20-DEC-2014)– USD 13,366,000 1,011,925 574,237 100 218

CDS FORTIS BANK SA-NV 3(20-MAR-2018) – USD 6 683 000 302,721 92,187 300 325

(200)

-

200

- 50,000,000 100,000,000 150,000,000

Notional USD


2018) USD 6,683,000Notional USD

Example

Portfolio Analysis Interest Rate Swaps

Summary

iRADAR processed 24 out of the 25 IRS based on independent market parameters The total netted deviation sums up to USD 60K

CurrencyNumber of

Swaps Notional USDMV Client

USDTotal MV

Deviations USDBasis Point

shift

parameters. The total netted deviation sums up to USD 60K.

As shown in the table on the right, the resulting variances are relatively small and would not be material from an audit perspective. Additionally, all deviations appear reasonable with regard to the particular interest rate sensitivity of the swaps (DV01).

CNY 4 -46,052,960 66,241 -66,305 2.04

HUF 1 41,452,320 67,766 -34,845 -6.21

KRW 2 38,510,550 30,661 -5,713 0.09

MXN 2 156,785,902 -161,478 1,484 0.10The dashboards below illustrate the sensitivity analysis for the swaps denominated in HUF and ZAR.

The IRS swap which was not tested by iRADAR is an overnight index swap denominated in CLP.

PLN 6 67,173,406 501,296 17,750 0.13

SGD 5 26,472,779 126,245 -10,921 -0.53

ZAR 4 170,278,145 -25,056 158,591 4.92

Total 24 454,620,143 605,676 60,041 0.84

(400 000)200 000

HUF Sensitivity Analysis ZAR Sensitivity Analysis

Tolerance Range

Tolerance Range

(400,000)

(300,000)

ue R

ange

MV KPMG MV Man

102,612

150,000

200,000

lue

Ran

ge

MV KPMG MV ManMV Client MV Client

(183,647)

(25,056)

(200,000)

(100,000)

rket

Val

u102,612

67,766

50,000

100,000

Mar

ket V

a


--Exa

mple

ASC 820 Classification of financial instrumentsIndependent Level Classification

ApproachThe independent verification of the fair value hierarchy in accordance with ASC 820 has been conducted for the sample Hereby each asset is independently analysed and

Asset type

Client classification in market value

Reference classification in market value

Total difference in market value

S t i t tbeen conducted for the sample. Hereby, each asset is independently analysed and classified based on the standards in correspondence with market information available for each asset. For all investments a reference classification could be derived.

For the spot instruments, the level 1 classification deviates by EUR 675M. 64% of this variance can be attributed to three government bills which are listed in the table below. While the client classifies them as level1 we cannot observe any traded volume around the

Spot instruments

Level I 38,376,121,387 37,701,297,983 674,823,404

Level II 2,192,166,940 2,812,819,972 - 620,653,032

Level III 87,193,552 141,363,924 - 54,170,372

While the client classifies them as level1 we cannot observe any traded volume around the valuation date and thus would classified them as level 2. Regarding the derivatives the main part of the deviations results from the 15 CDS bespoke tranches of which one is listed in the table below. The fair value approach deducted by iRADAR for these assets required input parameters which could not directly be derived as market implied parameters and we would classified them as level 3. Furthermore the table includes one

Derivatives

Level I -10,781,524,048 -10,771,858,540 - 9,665,508

Level II -38,101,959 138,041,369 - 176,143,329

Level III 0 -185,808,837 185,808,837

option for which we can observe traded volume while the client classifies it as level 2. Sum 29,835,855,871 29,835,855,871

Identifier Asset type Name Nominal Client market value

Client classification

Reference classification Reasoning for reference classification

Five selected securities with differences in level classification

value classification classification

MX0MGO0000J5 Fixed income Mexiko MN-Bonos 2009(38) 143,189,035 155,728,528 Level 1 Level 2 Observable broker indications but no observable traded volume. Classification depends on market insight.

HK0000085768 Fixed income HKTB 0 02/01/12 182 154,395,445 154,453,344 Level 1 Level 2 Observable broker indications but no observable traded volume. Classification depends on market insight.

HK0000093341 Fixed income HKTB 0 05/16/12 182 123,516,356 123,610,229 Level 1 Level 2 Observable broker indications but no observable traded volume. Classification depends on market insight.

5000082 CDS bespoke tranche HAMILTDEC14_0_3 20,000,000 -14,053,228 Level 2 Level 3 Unobservable market parameters/ judgment required

Option EURO$ 1YR MID-CRV MAR 12 99 25 C 40,000 7,250,000 Level 2 Level 1 Observable traded volume on exchange.


12 99.25 C

Example

Appendix CLO Analysis – Duchess IV Class D

Summary of the transaction and results

The transaction is a EUR 513 million European leveraged loan CLO issued in 2005 with a final legal maturity in 2020 The underlying portfolio mainly holds

Class D1 – Stress Case: Recovery and Default Rate64%

2005 with a final legal maturity in 2020.The underlying portfolio mainly holds senior secured loans with additional exposure to mezzanine loans. As per the valuation date, defaults are amounting to a nominal value of EUR 6 million on portfolio level. The annualized default rate since inception amounts to 2.7 %. There has been a trigger breach on the E-Class overcollateralization tests (O/C-Test) as per the reporting date. During 2010 the D and E O/C test have been 56%

58%

60%

62%

of th

e C

lass

in % 70% Rec.

Rate60% Rec. Rate50% Rec. Rate

repeatedly breached so that cash diversion has set in.

We calculated a value of 54.6 % compared to 54.8 % (Client price) for Class D with a discount margin (DM) of 10.5 %. The right graph shows the sensitivity to changes in the default and recovery rate.

Overall we assess the resulting deviations to be within the expected range for this

50%

52%

54%

1 2 3 4 5 6 7 8 9 10

Valu

e o

Overall we assess the resulting deviations to be within the expected range for this asset class.

Input Parameters

The Input Parameters applied to the transaction have been derived on the basis of external market information from rating agencies, investment banks and market

5- Year Forecast Default Vector

8%

e

Default Rate in % p.a.

external market information from rating agencies, investment banks and market insights. The following input parameters have been applied:

Assumptions Recovery RateRecovery

Lag

Prepayment Rate

Default Rate

Discount Margin in bp

5%

6%

7%

d Ye

arly

Def

ault

Rate

Base Case •65% (Senior Secured)

•25% (Mezzanine )

12 Months

10% p.a.

5-year forecast default vector

1050

BBB range: 800-1050

Stress Case +/- 10% of the Recovery Rate

12 Months

10% p.a.

1-10% p.a. 10502%

3%

4%

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61

Fore

cast

ed


y pMonths

Example

Appendix CLO Analysis – Jubilee I Class E

Summary of the transaction and results

The transaction is a EUR 875 million European leveraged loan CLO issued in 2007 with a final legal maturity in 2024 The underlying portfolio mainly holds

Class E– Stress Case: Recovery and Default Rate

50%2007 with a final legal maturity in 2024.The underlying portfolio mainly holds senior secured loans with additional exposure to mezzanine loans. As of the valuation date, there are no defaults in the portfolio. Furthermore, there have been no trigger breaches during the lifetime of the deal.

We derived a value of 47.38 % compared to 49 % (Client price) for Class E with a discount margin (DM) of 13 % The graph on the right illustrates the sensitivity of 20%

25%30%35%40%45%

f the

Cla

ss in

% 70% Rec. Rate60% Rec. Rate50% Rec. Ratediscount margin (DM) of 13 %. The graph on the right illustrates the sensitivity of

the value of the tranche towards changes in default and recovery rates. In certain scenarios a cash diversion sets in which leads to actual losses on the outstanding principal of the tranche. However, such scenarios appear rather extreme considering current market expectations.

Overall we assess the resulting deviations to be within the expected range for this0%5%

10%15%20%

1 2 3 4 5 6 7 8 9 10

Valu

e of

Overall we assess the resulting deviations to be within the expected range for this asset class.

Input Parameters

The Input Parameters applied to the transaction have been derived on the basis of external market information from rating agencies, investment banks and market

5- Year Forecast Default Vector

8%

e

Default Rate in % p.a.

external market information from rating agencies, investment banks and market insights. The following input parameters have been applied:

Assumptions Recovery RateRecovery

Lag

Prepayment Rate

Default Rate

Discount Margin in bp

5%

6%

7%

d Ye

arly

Def

ault

Rate

Base Case •65% (Senior Secured)

•25% (Mezzanine )

12 Months

10% p.a.

5-year forecast default vector

1300

BB range: 1300-1500

Stress Case +/- 10% of the Recovery Rate

12 Months

10% p.a.

1-10% p.a. 13002%

3%

4%

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61

Fore

cast

ed


y pMonths

Example

This report has been produced for illustration purpose only.

© 2012 KPMG AG Wirtschaftsprüfungsgesellschaft, a German© 2012 KPMG AG Wirtschaftsprüfungsgesellschaft, a German Aktiengesellschaft and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG p (International).

Example

example assurance on valuation and disclosures · 2020-04-13 · portfolio overview summary the...

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