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Tranche ABX and BasisRisk in Subprime RMBS
Structured Portfolios
Kevin Kendra
February 20, 2007
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Introduction
What are structured subprime RMBS portfolios
What is !basis ris"#
Why is !basis ris"# bet$een these structures importantno$
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!hat are structured subprime RMBS portfolios"
% &ortfolio e'posure to subprime Residential Mort(a(e)Bac"ed Securities
*RMBS+ can be obtained usin( various structures
- Structured Finance .ollaterali/ed ebt 1bli(ations *SF .1s+
% .ash SF .1s
% Bespo"e SF .1s
% ybrid SF .1s
- 3B456 ndices
- 8ranche 3B456 *83B4+ ndices
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!hat is $basis risk%"
% Basis ris" describes the ris" that offsettin( investments in a hed(in( strate(y
$ill not e'perience cash flo$ or price (ains in the same manner5
% Basis ris" has the potential to create an e'cess (ain or loss and therefore is
not directional5 8he amount of basis ris" in a hed(in( strate(y describes theho$ much ris" is left behind due to imperfect correlation bet$een the t$o
investments5
% Basis ris" in subprime RMBS portfolios (enerally arises from
- &erformance differences in the underlyin( portfolio assets
- Structural differences in portfolio instruments
- 9i:uidity differences in the different secondary mar"ets
- 8imin( of e'pected cash flo$s from the portfolio instruments
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!h' is $basis% between these structures important
now"
% Standard tranches of the 3B456 nde' commenced tradin( on Feb5 ;<, 2007
% nde' tranches promise to provide
- 9i:uidity
- 8ransparency
- Standardi/ation
- Mar"et .onsensus
% Motivations for 83B4 participation
- ed(in( - Relative =alue 8radin(
- Benchmar"in(
- 9evera(ed Mar"et &ositions
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)ramework for *nderstandin+ Basis Risk in
Subprime RMBS Portfolios
% Subprime RMBS ;0;
% .redit efault S$aps on Subprime RMBS
- .redit efault S$aps ;0;
- S3 &ay)3s)>ou)?o 8emplate ;0;
- Subprime RMBS 3F. Ris"
% 8ypical Subprime RMBS &ortfolio Structures
- Structured Finance .1s ;0;
- 3B456 and 83B456 ndices ;0;% Basis Ris" bet$een 83B456 and 1ther Structures
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Subprime RMBS ,verview
Subprime RMBS ;0;
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Subprime RMBS /
% 8ypical Subprime Borro$er and 9oan .haracteristics
- F.1 credit score @A0 and belo$
- &rior mort(a(e delin:uencies are acceptable
- Ban"ruptcy filin( $ithin the last to A years are acceptable
- Foreclosure $ithin the last to A years are acceptable
- ebt)to)ncome *8+ ratios of <0C or hi(her
- 9oan)to)=alue *98=+ ratios (reater than D0C
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Subprime RMBS /
% 8ypical Subprime 9oan 8ypes
- ybrid 3dEustable)Rate Mort(a(es *3RMs+
% 22D Mort(a(e is fi'ed for the first t$o years and then s$itches to
adEustable rate for the remainin( 2D years
% 1ther common ybrid 3RMs 27 and A2A terms
- ybrid nterest 1nly *1+ 3RMs
- <0)>ear ybrid 3RMs
- &i((ybac" Second 9iens
- 9imited ocumentation 9oan &ro(rams
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Subprime RMBS /
22Dybrid 3RM
Mort(a(e&ool
Fi'ed RateMort(a(e
G333HRMBS
Mort+a+ePools
G33H
RMBS
G3HRMBS
GBBBHRMBS
GBBB)HRMBS
Residual
RMBSBonds
Special&urpose=ehicle*RMBS8rust+
R1MI2Trust
Individual Mort+a+es
M; M2 M M< MA M@ M7 MD MI M;0
M;; M;2 M; M;< M;A M;@ M;7 M;D M;I M20
M2; M22 M2 M2< M2A M2@ M27 M2D M2I M0
M; M2 M M< MA M@ M7 MD MI M<0
M<; M<2 M< M<< M<A M<@ M<7 M<D M<I MA0
MA; MA2 MA MA< MAA MA@ MA7 MAD MAI M@0
M@; M@2 M@ M@< M@A M@@ M@7 M@D M@I M70
M7; M72 M7 M7< M7A M7@ M77 M7D . . .M
2000
M; M2 M M< MA M@ M7 MD MI M;0
M;; M;2 M; M;< M;A M;@ M;7 M;D M;I M20
M2; M22 M2 M2< M2A M2@ M27 M2D M2I M0
M; M2 M M< MA M@ M7 MD . . .
M;000
Sample Subprime RMBS Structure
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Subprime RMBS /
nterest
Scheduled&rincipal
J&repayments
G333H9 C or Let W3.
Accounts
G33H
9 C or Let W3.
G3H9 C or Let W3.
GBBBH9 C or Let W3.
GBBB)H9 C or Let W3.
Residual6'cess nterest
Servicer
R1MI2Trust
Monthl' Mort+a+ePa'ments
M; M2 M M< MA M@ M7 MD MI M;0
M;; M;2 M; M;< M;A M;@ M;7 M;D M;I M20
M2; M22 M2 M2< M2A M2@ M27 M2D M2I M0
M; M2 M M< MA M@ M7 MD MI M<0
M<; M<2 M< M<< M<A M<@ M<7 M<D M<I MA0
MA; MA2 MA MA< MAA MA@ MA7 MAD MAI M@0
M@; M@2 M@ M@< M@A M@@ M@7 M@D M@I M70
M7; M72 M7 M7< M7A M7@ M77 M7D . . .M
2000
M; M2 M M< MA M@ M7 MD MI M;0
M;; M;2 M; M;< M;A M;@ M;7 M;D M;I M20
M2; M22 M2 M2< M2A M2@ M27 M2D M2I M0
M; M2 M M< MA M@ M7 MD . . .
M;000
3
3
3 P
3 I
InterestPa'ments
PrincipalPa'ments
G333H
G33H
G3H
GBBBH
GBBB)H
Residual
3 I
3 P
Scheduled&rincipal
J&repayments
Sample Subprime RMBS &ayments
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Subprime RMBS /
% Standard Structural Features of Subprime RMBS
- Subordination serves as credit enhancement to account for credit ris"
- nterest rate instruments to hed(e interest rate ris"
- &erformance test at three year mar"
% f test fails then the priority of payments remains unchan(ed $ith the
senior notes receivin( all principal proceeds
% f test passes then principal proceeds repays subordinated notes until
tar(eted subordination is met5
- efaulted loans $or"ed out by servicers
% 6ach Subprime RMBS $ill have some$hat uni:ue performance profiles
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Subprime RMBS /
&rincipal Waterfalls
- Se:uential pay
% 3ll scheduled principal and prepayments (o to repay the senior bond holders
first until paid)in)full, then to the ne't senior note holder, etc5
% Subprime RBMS are initially se:uential pay for the first three years and $ill
remain se:uential pay if the performance tests fail
- .redit 6nhancement *.6+ !Step o$ns#, if performance tests pass
% f overcollaterali/ation *1.+ tar(ets have been met, the .6 is stepped do$n by
repayin( subordinate bond holders5
% 1. tar(ets are set to double the ori(inal subordination, ie5 f the ori(inal G333Hbond subordination is 75AC then the tar(et is ;AC
% 8est senior note tar(et for compliance first and if passin( then chec" the ne't
senior bond and so on5
% 1ver periods of rapid prepayments all bonds may be meetin( the 1. tar(ets,
then principal prepayments become inverse se:uential pay5
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Sample Principal !aterfalls
Scheduled&rincipal
J&repayments
AccountsPrincipalPa'ments
G333H
G33H
G3H
GBBBH
GBBB)H
Residual
3 P
&aymentsBefore Step o$n
Scenario ; Se:uential &rincipal Repayment
Scheduled&rincipalJ
&repayments
AccountsPrincipalPa'ments
G333H
G33H
G3H
GBBBH
GBBB)H
Residual
3 P
Scenario 2 &erformance 8est &asses the .redit6nhancement !Steps o$n# by &ayin( &rincipal
to Subordinated Lotes
3fter Step o$n
&aymentsBefore Step o$n
3fter Step o$n
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Subprime RMBS /
nterest Waterfalls
- Re(ular interest
% &aid se:uentially to bonds, capped at $ei(hted avera(e mort(a(e
rate net of e'penses *Let W3.+ or available funds cap *3F.+ - 6'cess nterest
% 6'cess interest is the remainin( interest proceeds in the interest
collection account after payin( bondholders re(ular interest above
% First, e'cess interest is used to recover reali/ed collateral losses
% Second, e'cess interest is used to recover any interest shortfalls
created $here Let W3. is lo$er than the stated bond coupon
% Finally, the remainin( e'cess interest (oes to the residual bond holder
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Sample RMBS Interest !aterfall
nterest
G333H9 C or Let W3.
Accounts
G33H9 C or Let W3.
G3H9 C or Let W3.
GBBBH9 C or Let W3.
GBBB)H9 C or Let W3.
Residual6'cess nterest
InterestPa'ments
PrincipalPa'ments
G333H
G33H
G3H
GBBBH
GBBB)H
Residual
3 I
Scheduled
&rincipalJ
&repayments
9osses
InterestShortfalls
9 C ) Let W3.
Step ; - nterest&aid Se:uentiallyto Bonds, .apped
at 3F.
9 C ) Let W3.
Step 2 - 6'cessnterest to
.over .ollateral9osses
Step - Remainin(6'cess nterest to&ay 3F. Shortfalls
Step < - Remainin(6'cess nterest to
Residual older
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Subprime RMBS /
3F. nterest Shortfall
- 3F. Shortfall is the difference bet$een the stated bond coupon and the
Let W3.
- 3F. Shortfalls accrue over time and may be recoverable - 3F. Shortfalls manifest themselves in times of risin( interest rates
% 8ypical subprime RMBS deals have 7AC hybrid 3RM mort(a(es
% RMBS bonds are (enerally floatin( rate bonds based on the 9ondon
nterBan" 1fferin( Rate *9B1R+
% f short)term 9B1R interest rates rise durin( the 2) or )year fi'ed rate
period then the interest coupon from the mort(a(es is insufficient to
pay the RMBS bond holders 9B1R plus the stated spread
- 3F. shortfalls may be unrecoverable if e'cess interest is eroded5
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2redit 6efault Swaps on SubprimeRMBS
.redit efault S$aps *.S+ ;0;
S3 &ay)3s)>ou)?o *&3?+ 8emplate ;0;
Subprime RMBS 3F. Ris"
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2redit 6efault Swaps /
&rotection Seller
- Receives .S premium payment and reimbursement payments in
e'chan(e for providin( protection payments if a credit event occurs5
- .1 note holders are protection sellers in a synthetic .15&rotection Buyer
- &ays .S premium in e'chan(e for protection payments if a credit event
occurs5
- .S S$ap .ounterparty is the protection buyer in a synthetic .15
.alculation 3(ent
- etermines the amount of the protection payment upon a credit event per
the terms of the credit default s$ap
- sually the &rotection Buyer serves this role
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2redit 6efault Swaps /
.ollateral or 6li(ible nvestment
- i(hly rated, hi(hly li:uid financial instruments purchased from the sales
proceeds of the initial .1 notes5
- &rovides the inde' portion of the note coupon - &rovides protection payments or the return of principal to note holders
Reference 6ntity and Reference 1bli(ation
- Reference entities are security issuers li"e a corporation or soverei(n
- Reference obli(ations are securities $ith specific debt seniority levels
% Reference obli(ations in a corporate .S is usually informational to
establish the seniority of debt to be valued if a credit event occurs
% Reference obli(ations in .S of structured finance assets or
levera(ed loans or in total return s$ap structures
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2redit 6efault Swaps /
.redit)9in"edLote 8rust
.S &remium*bps+
2redit 6efaultSwap
&rotectionSeller
.S S$ap.ounterparty
&rotection&ayments *N+
Lote .oupon*9 bps+
ProtectionBu'er
ProtectionSeller
.9L &roceeds*N+
.ollateral or 6li(ible
nvestments
Reference6ntity or
1bli(ation
.9L&roceeds
*N+
9B1R*9+
Sample .redit)9in"ed Lote *.9L+ usin( a .S
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2redit 6efault Swaps /
.redit 6vents
- 3pplicable credit events $ill vary by .S
- 8ypical credit events may include
% Ban"ruptcy
% Failure to &ay *F8&+
% Restructurin(
% RepudiationMoratorium, usually emer(in( mar"ets and soverei(ns only
% 1bli(ation 3cceleration, usually emer(in( mar"ets soverei(ns only - 1nce a credit event has been called and settled then the credit default s$ap
is terminated
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2redit 6efault Swaps /
Settlement and =aluation &rocedures
- &rotection Buyer calls a credit event by sendin( notice to the &rotection
Seller $hat credit event has occurred
- Settlement method is determined by the .S contract% &hysical settlement means the &rotection Buyer (ives the Seller the
reference obli(ation, or e:uivalent, in return for cash par amount
% .ash settlement means the parties loo" to the mar"et value of the
reference obli(ation to determine the net protection payment
- FitchHs preferred valuation process includes
% ealer poll of at least A dealers, not includin( the &rotection Buyer
% &olls typically held 0 to @0 days after credit event notification
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IS6A Pa'7As78ou79o :PA*9; Template /
% S3 &3? template is desi(ned to replicate the cash flo$ profile of the cash
bond $ith a credit default s$ap *.S+ contract
% .S contracts for corporate and soverei(n issuers are insufficient to replicate
the payment profile of a structured finance bond
% S3 &3? template $as introduced in the 5S5 in 4444 200A for RMBS and
.MBS securities for .1 securities in Oune 200@
% ntroduces the concept of !floatin( payments#
- Floatin( payments are paid by the &rotection Seller in the event of an 3F.
nterest Shortfall - Floatin( payments may be reimbursed by the &rotection Buyer if the 3F.
nterest Shortfall is ultimately recovered
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IS6A Pa'7As78ou79o :PA*9; Template /
.redit)9in"edLote 8rust
.S &remium*bps+
2redit 6efaultSwap
&rotectionSeller
.S S$ap.ounterparty
&rotection&ayments *N+
Lote .oupon*9 bps+
ProtectionBu'er
ProtectionSeller
.9L &roceeds*N+
.ollateral or 6li(ible
nvestments
Reference1bli(ation
.9L
&roceeds*N+
9B1R*9+
Sample .9L usin( a &3? .S
Floatin(&ayments
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IS6A Pa'7As78ou79o :PA*9; Template /
&3? .redit 6vents
- Failure to &ay *F8&+ &rincipal
- Writedo$n
- istressed Ratin( o$n(rade *G...H or belo$+
- F8& nterest for .1 reference obli(ations only
&3? Floatin( 3mount 6vents
- nterest Shortfalls
- &rincipal Shortfalls
- Writedo$n 3mounts
% &rotection Buyers typically have an option $hether to call a credit event or a
floatin( amount event
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IS6A Pa'7As78ou79o :PA*9; Template /
&3? Settlement
- 8he secondary mar"et for structured finance securities is not li:uid and
therefore valuation procedures are not applicable
- Floatin( payments are desi(ned to replicate the actual loss amounts - f a credit event occurs then the &rotection Buyer has the option to physically
deliver all or part of the notional amount to the Seller
% f the entire notional is physically settled then the .S is terminated
% f a portion of the notional is settled then the .S continues on the
remainin( amount
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IS6A Pa'7As78ou79o :PA*9; Template /
nterest Shortfalls
- RMBS reference obli(ations are called 3F. shortfalls
- .MBS reference obli(ations are called W3. shortfalls
- .1 reference obli(ations are called &K)in( shortfalls
nterest Shortfall .ap 1ptions
- Fi'ed .ap Floatin( payments are limited to the amount of the .S premium
- =ariable .ap Floatin( payment are limited to 9B1R premium
- Lo .ap Lo limit to the floatin( rate payments
% .ompletely replicates the payments of the cash bond or total return s$ap
% May re:uire principal to be li:uidated to pay interest shortfall
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Subprime RMBS A)2 Risk
% 3vailable Funds .ap *3F.+ Ris"
- R6M. la$ limits a floatin( rate RMBS bond pass)throu(h rate to the
lesser of
% Bond spread plus some inde' *typically ; month 9B1R+, or % nderlyin( mort(a(e collateral poolHs $ei(hted avera(e coupon, net
of e'penses *Let W3.+5
- 3F. Ris" varies by RMBS transaction based on
% 3ctual prepayment speeds of underlyin( mort(a(es
% 6ffectiveness of interest rate hed(es in the RMBS structure
% Short)term interest rate increases before ybrid 3RM mort(a(es
s$itch to floatin( interest rate payments
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Subprime RMBS A)2 Risk
% nrecovered 3F. nterest Shortfalls can be prevalent by vinta(e
% nrecovered 3F. nterest Shortfalls can be present across all ratin( cate(ories
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<e' Risks = A)2 Risk
% nrecovered 3F. nterest Shortfall amounts have been small
% ifference in .S premium re:uired for Lo .ap protection may e'ceed the
actual unrecovered 3F. interest shortfalls e'perience in the cash bond mar"et
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Subprime RMBS PortfolioStructures
Structured Finance .1s ;0;
3B456 and 83B456 ;0;
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Structured )inance 26,s /
% ?eneric 8ypes of SF .1s
- .ash SF .1s
- Bespo"e SF .1s
- ybrid SF .1s
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Structured )inance 26,s /
G333H.1
G33H
.1G3H
.1
GBBBH.1
&referred Sharesor 6:uity
26,Bonds
Special&urpose=ehicle*.18rust+
26,Trust
26, Portfolio
.1Bond ;
Sample .ash SF .1 Structure
.1Bond
.1Bond <
.1Bond A
.1Bond 2
RMBSBond ;
RMBSBond
RMBSBond <
RMBSBond A
RMBSBond 2
RMBSBond @
RMBSBond D
RMBSBond I
RMBSBond ;0
RMBSBond 7
RMBSBond ;;
RMBSBond ;
RMBSBond ;<
RMBSBond ;A
RMBSBond ;2
RMBSBond ;@
RMBSBond ;D
RMBSBond ;I
RMBSBond 20
RMBSBond ;7
RMBSBond 2;
RMBSBond 2
RMBSBond 2<
RMBSBond 2A
RMBSBond 22
RMBSBond 2@
RMBSBond 2D
RMBSBond 2I
RMBSBond 0
RMBSBond 27
RMBSBond ;
RMBSBond
RMBSBond <
RMBSBond A
RMBSBond 2
RMBSBond @
RMBSBond D
RMBSBond D0
RMBSBond 7
. . .
.1Bond @
.1Bond D
.1Bond I
.1Bond ;0
.1Bond 7
Lote .oupon*9 bps+
&roceeds*N+
Bond .oupons*9 bps+
&roceeds*N+
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Structured )inance 26,s /
% .ash SF .1 3sset &ortfolio i(hli(hts
- &ortfolios contain bet$een @0 and ;<0 bonds
- 3ssets may be diversified by mar"et sector, ho$ever recent vinta(e SF
.1s have been concentrated in subprime RMBS - 3ssets may be diversified by ris" profile *intial ratin(s+
- 3ssets may be diversified by vinta(e
- 3sset ac:uisition and selection
% 3sset mana(er $arehouses bonds prior to issuin( .1 notes
% .1 notes typically issued $hen asset mana(er has accumulated
appro'imately @0)D0C of the tar(et portfolio
% nitial portfolio is typically fully ramped $ithin @ months of .1 note
issuance
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Structured )inance 26,s /
% Mana(ed vs Static &ortfolios
- Static portfolios are typically fully ramped at closin( and principal proceeds
are used to amorti/e the senior notes
- Mana(ed portfolios are typically partially ramped at closin( and principalproceeds are typically reinvested for a finite period bet$een and @ years
% f the portfolio e'periences ne(ative credit mi(ration then discretionary
tradin( is limited to !maintain or improve# credit :uality
% f the portfolio si(nificantly under performs then the transactions may
shift to a static portfolio
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Structured )inance 26,s /
% .ash SF .1 Lote i(hli(hts
- .redit enhancement comes from subordination and e'cess spread
- nterest is paid se:uentially to note holders
- 1vercollaterali/ation *1.+ and nterest .overa(e *.+ performance testsare chec"ed prior to distributions to subordinate notes
- 6'cess interest may be used to
% f tests are passin( then distributed to &referred Shares or 6:uity
% 3 portion may be used to repay me//anine notes
% f tests are failin( then distributions may be used to cure the tests
- &urchase ne$ assets
- &ay do$n senior notes
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Structured )inance 26,s /
nfundedSuper)Senior
Revolver
First 9oss
26,Structure
Special&urpose=ehicle*.18rust+
26,Trust
Reference Portfolio
Sample Bespo"e SF .1 Structure
.S&remium
&rotection&ayments
G333H
Lote&roceeds*N+ nfunded
.S
nfunded.S
Lote.oupon*9 bps+
.ollateral or 6li(ible
nvestments
&roceeds*N+
9B1R*9+
RMBSBond ;
RMBSBond
RMBSBond <
RMBSBond A
RMBSBond 2
RMBSBond @
RMBSBond D
RMBSBond I
RMBSBond ;0
RMBSBond 7
RMBSBond ;;
RMBSBond ;
RMBSBond ;<
RMBSBond ;A
RMBSBond ;2
RMBSBond ;@
RMBSBond ;D
RMBSBond ;I
RMBSBond 20
RMBSBond ;7
RMBSBond 2;
RMBSBond 2
RMBSBond 2<
RMBSBond 2A
RMBSBond 22
RMBSBond 2@
RMBSBond 2D
RMBSBond 2I
RMBSBond 0
RMBSBond 27
RMBSBond ;
RMBSBond
RMBSBond <
RMBSBond A
RMBSBond 2
RMBSBond @
RMBSBond D
RMBSBond D0
RMBSBond 7
. . .
.S S$ap.ounterparty
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Structured )inance 26,s /
% Bespo"e SF .1 3sset &ortfolio i(hli(hts
- &ortfolios reference bet$een @0 and ;00 securities
- 3ssets may be diversified by mar"et sector but typically have a
concentration in subprime RMBS - 3ssets may be diversified by ris" profile *initial ratin(s
- 3ssets may be diversified by vinta(e
- 3sset selection
% &ortfolio is ne(otiated bet$een the Bespo"e .1 note holder and the
.S S$ap counterparty
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Structured )inance 26,s /
% Bespo"e SF .1 Lote i(hli(hts
- 3ttachment points define the amount of portfolio losses the structure
needs to sustain before a protection payment $ould be made
- etachment point defines the ma'imum amount of protection paymentsthat the notes could be re:uired to ma"e
- .redit enhancement comes solely from subordination
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Structured )inance 26,s /
nfundedSuper)Senior
Revolver
G33H.1
G3H.1
GBBBH.1
&referred Sharesor 6:uity
26,Structure
Special&urpose=ehicle*.1
8rust+
26,Trust
26S Portfolio
.1.S ;
Sample ybrid SF .1 Structure
.1.S
.1.S <
.1.S A
.1.S 2
RMBS.S ;
RMBS.S
RMBS.S <
RMBS.S A
RMBS.S 2
RMBS.S @
RMBS.S D
RMBS.S I
RMBS.S ;0
RMBS.S 7
RMBS.S ;;
RMBS.S ;
RMBS.S ;<
RMBSBond ;A
RMBS.S ;2
RMBS.S ;@
RMBS.S ;D
RMBS.S 20
RMBS.S ;7
. . .
Bond Portfolio
.1Bond ;
.1Bond
.1Bond <
.1Bond A
.1Bond 2
RMBSBond ;
RMBSBond
RMBSBond <
RMBSBond A
RMBSBond 2
RMBSBond @
RMBSBond D
RMBSBond I
RMBSBond ;0
RMBSBond 7
RMBSBond ;;
RMBSBond ;
RMBSBond ;<
RMBSBond ;A
RMBSBond ;2
RMBSBond ;@
RMBSBond ;D
RMBSBond 20
RMBSBond ;7
. . .
Bond .oupons*9 bps+
&roceeds*N+
.S &remium
&rotection&ayments
G333H
.1
Lote .oupon*9 bps+
&roceeds*N+
FundedLotes
nfunded.S
.S &remium
Super)Senior &rotection&ayments
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Structured )inance 26,s /
% ybrid SF .1 3sset &ortfolio i(hli(hts
- &ortfolio assets may be in a cash or synthetic form
- &ortfolios contain bet$een @0 and ;<0 bonds or .S
- 3sset attributes similar to the cash SF .1 portfolios - &ortfolios are typically mana(ed
% 3sset mana(ers can find relative value on the same asset bet$een
cash and synthetic mar"ets
% 3sset mana(ers can use the synthetic mar"et to access collateral
from vinta(es that are not available in the secondary mar"et
% 3sset mana(ers can use the synthetic mar"et to (et full e'posure to
cash bonds $here they received a partial allocation
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ABX.>1 and TABX.>1 Indices /
G333HRMBS
G33HRMBS
G3H
RMBS
GBBBHRMBS
GBBB)HRMBS
Residual
RMBS;
G333HRMBS
G33HRMBS
G3H
RMBS
GBBBHRMBS
GBBB)HRMBS
Residual
RMBS2
G333HRMBS
G33HRMBS
G3H
RMBS
GBBBHRMBS
GBBB)HRMBS
Residual
RMBS
G333HRMBS
G33HRMBS
G3H
RMBS
GBBBHRMBS
GBBB)HRMBS
Residual
RMBS<
G333HRMBS
G33HRMBS
G3H
RMBS
GBBBHRMBS
GBBB)HRMBS
Residual
RMBSA
G333HRMBS
G33HRMBS
G3H
RMBS
GBBBHRMBS
GBBB)HRMBS
Residual
RMBS@
G333HRMBS
G33HRMBS
G3H
RMBS
GBBBHRMBS
GBBB)HRMBS
Residual
RMBS7
G333HRMBS
G33HRMBS
G3H
RMBS
GBBBHRMBS
GBBB)HRMBS
Residual
RMBSD
ABX.>1.AAAG333HRMBS
G33HRMBS
G3H
RMBS
GBBBHRMBS
GBBB)HRMBS
Residual
RMBSI
G333HRMBS
G33HRMBS
G3H
RMBS
GBBBHRMBS
GBBB)HRMBS
Residual
RMBS;0
G333HRMBS
G33HRMBS
G3H
RMBS
GBBBHRMBS
GBBB)HRMBS
Residual
RMBS20
G333HRMBS
G33HRMBS
G3H
RMBS
GBBBHRMBS
GBBB)HRMBS
Residual
RMBS;;
. . .
. . .
. . .
. . .
. . .
. . .
. . .
ABX.>1.AA
ABX.>1.A
ABX.>1.BBB
ABX.>1.BBB7
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ABX.>1 and TABX.>1 Indices /
% 3B456 3sset &ortfolio i(hli(hts
- &ortfolios reference 20 bonds
- 3ssets are all subprime RMBS
- 3ssets are homo(enous by ris" profile *intial ratin(s+ - 3ssets are ori(inated in a @ month time frame
- 3sset selection
% 3((re(ate a list of the lar(est volume subprime RMBS issuers
% Select t$o representative transactions from each issuer
% nde' participants vote on transactions to be included in each inde'
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ABX.>1 and TABX.>1 Indices /
GBBBHRMBS ;
GBBBHRMBS 20
TABX.>1.BBBReference ,bli+ations
GBBBHRMBS 2
GBBBHRMBS
GBBBHRMBS <
GBBBHRMBS A
GBBBH
RMBS @GBBBH
RMBS 7
GBBBHRMBS D
.
.
.
A - ;00C
20 - AC
;2 - 20C
7 - ;2C
- 7C
0 - C
TABX.>1.BBBTranches
3B4565BBB0@)2 &ortfolio
GBBBHRMBS ;
GBBBHRMBS 20
GBBBHRMBS 2
GBBBHRMBS
GBBBHRMBS <
GBBBHRMBS A
GBBBH
RMBS @GBBBH
RMBS 7
GBBBHRMBS D
.
.
.
3B4565BBB07); &ortfolio
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ABX.>1 and TABX.>1 Indices /
% 83B456 3sset &ortfolio i(hli(hts
- &ortfolios reference <0 bonds from t$o 3B456 indices
- 3ssets are all subprime RMBS
- 3ssets are homo(enous by ris" profile *intial ratin(s+ - 3ssets are ori(inated in a one year time frame
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2onclusions
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ABX.>1 and TABX.>1 2onclusions
% 8he 3B456 has proven to be effective in providin( mar"et transparency in an
other$ise opa:ue mar"et
- 3llo$s mar"et participant to e'press mar"et vie$s
% 8he 83B456 promises to provide similar benchmar"in( and relative valuevie$s for the Bespo"e SF .1 mar"et
% 83B456 $ill be less effective in benchmar"in( for cash and hybrid SF .1s
- &ortfolios have si(nificantly different portfolio characteristics
- &ortfolios are typically mana(ed in SF .1s
- 83B456 is e:ually $ei(hted by the lar(est issuers $hereby SF .1s
portfolios are typically selected by an asset mana(er
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