Reverse engineering is the process of decomposing existing work so that underlying assumptions, mechanics and functionality are understood. While primarily an engineering and software concept, reverse engineering is applicable to finance when one wants to understand a pre-existing deal. Reverse engineering financial transactions is used by investors to understand the deal they are committing money to, by banks and other entities trying to understand their competition, by third party data providers and in many specialty cases – such as model validation.

This course shows participants how to translate Wall Street deal documents into a dynamic model by breaking down complex legal wording and constructing formulas that translate the meaning of the words. Strategies for efficiently working through lengthy documents are shown, while intricately worded legal statements and definitions are explained in a simple manner and demonstrated in working models. Participants will work with actual deal documents and a completely reversed deal, to understand all aspects from creation to validation and eventually to interpretation.

Day One - Morning
  • Introduction to Reverse Engineering
  • Defining Reverse Engineering
  • Types of Information: Prospectus, Indenture, Terms Sheet, Public Data, Third Party Data
  • Reverse Engineering Process Exercise: Planning Out the Process
  • Navigating a Prospectus and Prospectus Supplement
  • The Connection between Summary Information, Term Definitions, and Payment Instructions Exercise: Following the Flow of Information in Transaction Documentation
Day One - Afternoon
  • Dates: Interpreting Documentation to Determine Important Aspects of Dates and Timing
  • Differences in Dates: Deal Closing, First Payment Dates, Day-Count Convention Exercise: Date Interpretation and Implementation
  • Cash Flow Assumptions: How to Understand Cash Flowing into a Transaction
  • Asset Terminology: Terms Related to Assets and their Meaning for Cash Flow Generation
  • The Modeling Assumptions Section: Differences between Read Data and Assumed Data Exercise: Tools to Create Cash Flow from Prospectus Data
  • Asset Amortization in Detail: How Deals Summarize Assets and How to Transform that into a Model
  • Connecting Assets to Liabilities
Day Two - Morning
  • Basic Liability Reversing: Fees and Interest
  • Liability Terminology: Terms Related to Basic Liabilities and their Meaning for Payment Priority Exercise: Key Word Reversal – “Excess Over”, “Pro-Rata”, “Sequentially”, “Concurrently”, etc.
  • Time Dependency of Wording: How Some Sections of a Prospectus Occur Simultaneously Exercise: Time Dependency Using Multiple Loan Groups and Cross Collateralization as an Example.
Day Two - Afternoon
  • Specialized Sections: An Example Using Credit Enhancement in Structured Transactions
  • Examples of Interpreting Advanced Concepts: Loss Allocation and Private Mortgage Insurance Exercise: Integrating Advanced Concepts – Interest Carry Forward, Net WAC Pass-Through, etc
  • Validating and Testing a Reverse Engineered Model: Using Documentation Data to Verify a Model Exercise: Setting up a System to Test a Model versus Deal Documentation
  • Risk Disclosure: How Risk is disclosed in Deal Documentation and the Connection to a Reverse Engineered Model Exercise: Testing Modeling Outputs for Specific Risk defined in the Documentation