Evaluating the Change of Performance Metrics for Key ABS

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April Fiorese
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Evaluating the Change of Performance Metrics for Key ABS
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\documentclass{beamer} %
\usetheme{CambridgeUS}
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\usepackage{tikz}
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\usetikzlibrary{arrows,shapes}

\author{Elena Piper, Amina Shahid, April Fiorese}
\title{Evaluating the Change of Performance Metrics for Key ABS}

\begin{document}
\maketitle

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% For every picture that defines or uses external nodes, you'll have to
% apply the 'remember picture' style. To avoid some typing, we'll apply
% the style to all pictures.
\tikzstyle{every picture}+=[remember picture]

% By default all math in TikZ nodes are set in inline mode. Change this to
% displaystyle so that we don't get small fractions.
\everymath{\displaystyle}

\begin{frame}
\frametitle{Table of Contents}

\begin{itemize}
    \item Research Question
    \item Literature Review
    \item Overview of Data
    \item Research Model
    \item Expected Results
    \item Next Steps
    \item Challenges and Risks
\end{itemize}
\end{frame}

\begin{frame}
\frametitle{Research Question}

\begin{itemize}
	\item Overall, assess how the ABS market evolved since the financial crisis.
    \item How have structures altered the credit tranching and subordination for CMBS and CLOs since the financial crisis and are any of these changes evident in ABS quality evaluation metrics?
\end{itemize}  
\end{frame}

\begin{frame}
\frametitle{Literature Review: Financial Crisis and the ABS Market}
\begin{itemize}
	\item \textbf{\textit{Agarwal (2009), ``Rescuing Asset-Backed Securities Market''}}
	\item In August 2007, the ABS market began shrinking in stages 
    \item The fall of Lehman Brothers caused yields on ABS to skyrocket
    \item On November 25, 2008, the Federal Reserve unveiled a loan facility to revive the market for ABS, which had essentially stopped functioning due to the global financial crisis
\end{itemize}
\end{frame}

\begin{frame}
\frametitle{Literature Review: Term Asset-Backed Securities Loan Facility (TALF)}
\begin{itemize}
	\item \textbf{\textit{Agarwal (2009), ``Rescuing Asset-Backed Securities Market''}}	
	\item ABS interest rate spreads have narrowed 
    \item Credit availability has improved
    \item Issuance for consumer ABS market has increased
\end{itemize}
\end{frame}

\begin{frame}
\frametitle{Literature Review: Structure of an ABS}
\begin{itemize}
	\item \textbf{\textit{Sabarwal (2006), ``Common Structures of Asset-Backed Securities and their Risks''}}
	\item The structure of an asset-backed security determines how cash flows are allocated
    \item ABS structures have the following general features:
    \begin{itemize}
    	\item Pooling and transferring receivables
        \item Structuring and issuing securities 
        \item Allocating payments and monitoring
    \end{itemize}
    \item Asset-backed structures vary significantly in how these general features are implemented
    \item \textbf{Further research:} How were the general features implemented pre and post crisis?
\end{itemize}
\end{frame}

\begin{frame}
\frametitle{Literature Review: \textbf{\textit{Sabarwal (2006), ``Common Structures of Asset-Backed Securities and their Risks''}}}
\begin{itemize}
	\item Use of special purpose entities to move risk off balance sheet is a major area of concern over the past decade for corporate governance
    \item Corporations can use the ABS market for accounting arbitrage while depository institutions can use it for regulatory capital requirements arbitrage
    \item Trading ABS: 
    	\begin{itemize}
        \item Mostly done OTC, there appears to be no publicly available measures of trading volume
        \item Compared to government treasuries, ABS (excluding MBS) are largely less liquid
        \item Large fixed costs associated with developing analytical pricing models
        \item Price is mostly quoted as a spread to a corresponding swap rate
        \end{itemize}
\end{itemize}
\end{frame}

\begin{frame}
\frametitle{Literature Review:\textbf{\textit{ Nakamura (2001), ``Valuation of Mortgage-Backed Securities Based upon a Structural Approach''}}}
\begin{itemize}
	\item Proposed Models:
    	\begin{itemize}
        \item Kariya and Kobayashi (1999) model using a Monte-Carlo Simulation 
        \item Alternative Model (more efficient): Semi-analytic valuation methodology similar to solving an integral with respect to the first hitting time density for a curved/flat boundary
        \item Prepayment models based on interest rates captured by two-dimensional Markov process 
        \item Joint probability density calculation (alternative to Copula)
        \end{itemize}
\end{itemize}
\end{frame}

\begin{frame}
\frametitle{Literature Review: \textbf{\textit{Baruch (2012), ``The Impact of Distressed Real Estate Loans on CMBS Performance''}}}
\begin{itemize}
	\item Three Columbus Circle
    	\begin{itemize}
        \item Risk to investors portrayed by an actual loan
        \item Analyze current net operating income (NOI) and estimate refinancing proceeds 
        \item The CMBS loan on Three Columbus Circle, originated in 2006, was structured with a 4 yr  interest-only period and a scheduled amortization period starting in February 2010. This amortization increased debt service by 20\%, from \textbf{\$14.4 million} to \textbf{\$17.4 million}
        \end{itemize}
\end{itemize}
\end{frame}

\begin{frame}
\includegraphics[width=\textwidth]{seniord.png}
\end{frame}

\begin{frame}
\frametitle{Data Overview}
\begin{itemize}
	\item \textbf{\textit{SLM Student Loan Trust}}
    \item 1,924 data points (Number of Issuances)
    \item Description of loan type
    	\begin{itemize}
        \item Stafford
        \item Plus
        \end{itemize}
    \item Maturity 
\end{itemize}
\end{frame}

\begin{frame}
\frametitle{Data Overview}
\begin{itemize}
	\item \textbf{\textit{CLO: High Yield Loans}}
    \item 405 data points (Number of Issuances)
    \item Asset name
    	\begin{itemize}
        \item Name of issuing company
        \end{itemize}
    \item Industry
    \item Maturity 
\end{itemize}
\end{frame}

\begin{frame}
\frametitle{Data Overview}
\begin{itemize}
	\item \textit{\textbf{Bear Sterns Commercial Mortgage Securities Trust Prospectus}}
    \item Mortgage-backed securities issued by the trust fund
    \item Geographic overview of mortgage pool
    \item Ratings
    	\begin{itemize}
        \item Moody's
        \item Fitch 
        \end{itemize}
    \item Relevant Parties
    	\begin{itemize}
        \item Issuing entity: Bear Sterns Trust
        \item Depositor: Bear Sterns Commercial Mortgage Securities Inc.
        \item Servicers: Wells Fargo (222 pooled loans) and Prudential (39 pooled loans)
        \end{itemize}
\end{itemize}
\end{frame}

\begin{frame}
\frametitle{Proposed Models}
\begin{itemize}
	\item Copula function
    	\begin{itemize}
        \item \includegraphics[width=6cm,keepaspectratio]{cop.png}
        \end{itemize}
    \item Joint probability density
    	\begin{itemize}
        \item Alternative to Copula function
        \item \includegraphics[width=6cm,keepaspectratio]{306424_2364466825982_247846421_n_-_Copy.jpg}
        \end{itemize}
\end{itemize}
\end{frame}
    
\begin{frame}
\frametitle{Expected Results}
\begin{itemize}
	\item ABS Market has not made drastic changes since the financial crisis
    \item Another mass default could occur in a different asset class
    \item Market may improperly represent the risk of securities
    \item Expect minimal structural changes and larger changes to the performance metrics 
    \item Riskiness of CMBS and/or CLOs is understated
\end{itemize}
\end{frame}

\begin{frame}
\frametitle{Looking Forward}
\begin{itemize}
	\item Speak to industry officials about the structure of a single CMBS and CLO 
   \begin{itemize}
   \item Has the financial crisis impacted the structure?
   \end{itemize}
   \item Create a model
   \item Find the correct set of data
   \begin{itemize}
   \item Credit tranching of CMBS pre and post crisis
   \item Quality metrics of ABS pre and post crisis
   \end{itemize}
\end{itemize}
\end{frame}

\begin{frame}
\frametitle{Challenges and Risks}
\begin{itemize}
	\item Our main challenge is finding the \textit{correct} data and analyzing it
    \begin{itemize}
    \item Performance metrics data is hard to find for post crisis securities 
    \end{itemize}
    \item Getting enough background on the structure of a CMBS pre and post crisis
\end{itemize}
\end{frame}
\end{document}