This workshop teaches participants how to analyze and evaluate distressed securities. Whether from a defensive point of view where one currently owns a distressed security or from an offensive point of view where one is trying to capitalize on dislocated prices, the skills and techniques taught in this course are invaluable. Given the vast amount of distressed asset backed securities, the course uses those assets as a primary theme. Other distressed analyses include single name corporate exposure, pooled corporate exposure and distressed asset pools.

Day One

Introduction

  • Structured transactions: ABS & CDOs
  • Overview of the course
  • How the course is organized

Overview of ABS/RMBS

  • Issuance trends and market size
  • Types of ABS assets
  • Which issuers and servicers are still standing
  • Opportunities to exploit mispricing due to market dislocation

Changed Landscape in the US Mortgage Market

  • Non-Agency RMBS sectors: Prime, Alt-A and Subprime
    • Scope of opportunities
    • Vintage and rating performance
    • Prepayments, default and severities
    • Outlook for the future
  • Framework to evaluate opportunities in these sectors based on
    • Credit collateral attributes
    • Structural features
    • Market technicals
  • Key variable in analyzing a deal performance: Loan servicing
    • Overview of servicing operations
    • Key loss mitigation initiatives: Loan modifications and rate reset strategies
    • Exit strategies for loans in foreclosure and REO
  • Bringing it all together: Building assumptions set to analyze a security

Deteriorating Fundamentals in Other Consumer ABS Sectors

  • Understanding credit risk in non-housing ABS sectors (cards, auto, student loans)
  • Performance of the sector in different economic cycles
  • Evaluating differences and robustness of deal structures

Distressed Valuation and Trading Strategy

  • Breakeven and sensitivity analysis
  • Understanding cliff risk
  • Using the appropriate discount rates to price IO streams/PO value
  • Financing: levered v/s unlevered trades

Benchmarking/Hedging via Credit Indices

Day Two

Introduction to Structured Securities Modeling

  • Differences between corporate finance and structured finance models
  • Asset analysis and calibration techniques
  • Liabilities and understanding debt characteristics and the cash flow waterfall

Understanding a Portfolio of Assets

  • Creating data stratification reports for collateral characteristics Exercise: Using a Data Stratification Tool
  • Interpreting data stratification reports for distressed pools

Distressed Asset Analysis: Transitions

  • Determining the possible payment states of an asset Exercise: Payment status determination
  • Creating static loss curves Exercise: Historical default analysis
  • Transition matrices creation and interpretation Exercise: Building and calibrating a transition matrix

Recovery and It’s Importance for Distressed Assets

  • A timeline of the recovery process
  • Determining recovery rates and lags Exercise: recovery rate and lag calculations
  • Integrating recovery based on geographic location into a model
  • Assessing pools of non-performing loans

Liability Modeling and the Cash Flow Waterfall

  • Properly calculating what is due and what can be paid.
  • Senior tranches vs. mezzanine tranches
  • Payment priorities within and between classes of debt Exercise: Sequential and pro rata payment
  • Distressed debt and triggers Exercise: Modeling a step down trigger
  • Determining distressed yield and breakeven analysis

Using a Model for Strategic Plays in Distressed Debt

  • Trigger Bets
  • Intrinsic valuation versus market pricing
  • Recovery assessment versus distressed pool pricing