Remerciez-le!

Remerciez @Admin pour avoir partagé cet document gratuitement, de la manière la plus simple, en partageant sur les réseaux sociaux.

UNIVERSITE PARIS 1 PANTHEON-SORBONNE MASTER 2 MAEF - Spécialité Recherche : MMM

UNIVERSITE PARIS 1 PANTHEON-SORBONNE MASTER 2 MAEF - Spécialité Recherche : MMMEF CASH FLOW MODEL Varsha JAIN Résumé : La modélisation des flux dans le cadre des produits de titrisation cash est fondamentale pour appréhender les risques inhérents aux différentes structures. Pour évaluer les financements structurés de type CDO ou ABS, le département CQS (Credit Quant Studies) de Natixis, Paris, a développé un modèle de cash-flow basé sur la modélisation des flux selon un waterfall spécifié. Cette méthodologie repose sur le concept d’Expected Loss : chaque tranche de titrisation se voit attribuer une notation relative à la perte attendue. L’objectif de ce rapport est d’étudier et de développer une méthodologie quantitative de notation des tranches d’ABS et de CDO, fondée sur les mécanismes d’allocation des cash- flows des actifs titrisés Rapport de stage présenté le 15 Septembre 2008. Jury : Philippe BICH Michaël TORDJMAN Laetitia LE DAIN Professeur à Paris 1 Directeur de Stage Directrice de Stage Université Paris 1 NATIXIS NATIXIS 106-112 Bd de l’Hôpital 75013 PARIS Lieu de stage : 26,28 Rue Neuve Tolbiac, 75013 PARIS TABLE OF CONTENTS 1. ABSTRACT 2 2. ACKNOWLEDGEMENTS 3 3. TERMINOLOGY 4 4. CHAPTER 1 INTRODUCTION 9 5. CHAPTER 2 WATERFALL 14 2.1 Waterfall 14 2.2 Accounts 15 2.3 Actions 17 2.4 Principal Payment 17 2.5 Tests Implemented 18 6. CHAPTER 3 DISTRIBUTION OF CUMULATIVE DEFAULT 21 RATE AND PREPAYMENT 3.1 Distribution Type 22 3.2 Specific Input Parameters 29 3.3 Prepayment 29 3.4 Seasoning and Prepayment 31 3.5 Common Input Parameters 31 3.6 Rate Curve 6. CHAPTER 4 FORMULAE 35 7. PROBLEM BEING WORKED ON 38 8. BIBLIOGRAPHY 40 2 ABSTRACT Securitization is more than just a financial tool. It is an important element in risk management for banks, allowing them to not only remove substantial concentrations and values at risk, but also permits them to acquire securitized assets with potential diversification benefits. When assets are removed from a bank’s balance sheet with a defined recourse or first loss risk, the bank limits its loss exposure to the amount of recourse or first loss protection provided by it. Credit and interest rate risks are the key uncertainties that concern domestic lenders. By passing on these to investors, or to third parties when credit enhancements are involved, financial firms are better able to manage their risk exposure. The market of securitization has grown dramatically since its onset about three decades ago, with the total outstanding issuance of securitized assets soon expected to reach US$9 trillion. Cash flow modelling is crucial to securitization and is a fundamental part of the credit-rating process. Proper cash flow models have a structure’s priority of payment waterfall imbedded in them and, therefore, are able to allocate all anticipated cash receipts in accordance with the transaction’s legal documents .It is the only way to dissect accurately the protections provided by a structure. To evaluate securitization structures, the CQS (Credit Quantitative Study) department of Natixis, Paris, has developed a waterfall tool to rate tranches of cash CDO and ABS transactions. The ratings assigned to each class of the transaction reflect the assessment of the risk given the transaction’s structure, credit enhancement and legal structure. So, here in this paper, we first give a brief explanation of what securitization is actually and some of the important terms related to it. Then we deal with cash flow modelling. The model allows that the cumulative default rate can follow Lognormal distribution, Binomial Expansion Technique (BET), Vasicek distribution or Monte Carlo distribution. We take well into account the effect of recovery delays, delinquencies, seasoning and prepayment risk on the cash flow. Also we perform many trigger tests like Over-collaterization test, Interest Coverage test, margin test, cash test, etc to keep the cash flow close to reality. 3 ACKNOWLEDGEMENTS I am very grateful to Monsieur Michaël TORDJMAN and Mademoiselle Laetitia LE DAIN, my supervisors of the internship, for their insight and expertise in developing this paper. They had been a great support and inspiration. I also thank Monsieur Olivier GUIGNE, the responsible of the department of CQS (Credit Quantitative Study) at Natixis, Paris for his genial reception and support at work. Last, but not the least, I thank all my colleagues for their inspiration and creating a great working environment. 4 TERMINOLOGY SECURITIZATION: Securitization is a structured finance process, which involves pooling and repackaging of cash-flow producing financial assets into securities that are then sold to investors. Hence, the securities, which are the outcome of securitization processes, are termed asset-backed securities (ABS). Securitization often utilizes a special purpose vehicle (SPV) (alternatively known as a special purpose entity [SPE] or special purpose company [SPC]) in order to reduce the risk of bankruptcy and thereby obtain lower interest rates from potential lenders. A credit derivative is also generally used to change the credit quality of the underlying portfolio so that it will be acceptable to the final investors. STRUCTURE: Pooling and transfer : The originator initially owns the assets engaged in the deal. This is typically a company looking to raise capital, restructure debt or otherwise adjust its finances. Under traditional corporate finance concepts, such a company would have three options to raise new capital: a loan, bond issue, or issuance of stock. However, stock offerings dilute the ownership and control of the company, while loan or bond financing is often prohibitively expensive due to the credit rating of the company and the associated rise in interest rates. 5 The consistently revenue-generating part of the company may have a much higher credit rating than the company as a whole. For instance, a leasing company may have provided $10m nominal value of leases, and it will receive a cash flow over the next five years from these. It cannot demand early repayment on the leases and so cannot get its money back early if required. If it could sell the rights to the cash flows from the leases to someone else, it could transform that income stream into a lump sum today (in effect, receiving today the present value of a future cash flow). A suitably large portfolio of assets is "pooled" and sold to a special purpose vehicle (the issuer), a tax- exempt company or trust formed for the specific purpose of funding the assets. Once the assets are transferred to the issuer, there is normally no recourse to the originator. The issuer is "bankruptcy remote," meaning that if the originator goes into bankruptcy, the assets of the issuer will not be distributed to the creditors of the originator. Issuance To be able to buy the assets from the originator, the issuer SPV issues tradable securities to fund the purchase. Investors purchase the securities, either through a private offering (targeting institutional investors) or on the open market. The performance of the securities is then directly linked to the performance of the assets. Credit rating agencies rate the securities which are issued in order to provide an external perspective on the liabilities being created and help the investor make a more informed decision. The securities can be issued with either a fixed interest rate or a floating rate. Fixed rate ABS set the “coupon” (rate) at the time of issuance, in a fashion similar to corporate bonds. Floating rate securities may be backed by both amortizing and non-amortizing assets. In contrast to fixed rate securities, the rates on “floaters” will periodically adjust up or down according to a designated index such as a U.S. Treasury rate, or, more typically, the London Interbank Offered Rate (LIBOR). The floating rate usually reflects the movement in the index plus an additional fixed margin to cover the added risk Credit enhancement and tranching Unlike conventional corporate bonds which are unsecured, securities generated in a securitization deal are "credit enhanced," meaning their credit quality is increased above that of the originator's unsecured debt or underlying asset pool. This increases the likelihood that the investors will receive cash flows to which they are entitled, and thus causes the securities to have a higher credit rating than the originator. Some securitizations use external credit enhancement provided by third parties, such as surety bonds and parental guarantees. Individual securities are often split into tranches, or categorized into varying degrees of subordination. Each tranche has a different level of credit protection or risk exposure than another: there is generally a senior (“A”) class of securities and one or more junior subordinated (“B,” “C,” etc.) classes that function 6 as protective layers for the “A” class. The senior classes have first claim on the cash that the SPV receives, and the more junior classes only start receiving repayment after the more senior classes have repaid. Because of the cascading effect between classes, this arrangement is often referred to as a cash flow waterfall. In the event that the underlying asset pool becomes insufficient to make payments on the securities (e.g. when loans default within a portfolio of loan claims), the loss is absorbed first by the subordinated tranches, and the upper-level tranches remain unaffected until the losses exceed uploads/Finance/ 55-dissertation.pdf