Asset-backed securities field guide: Difference between revisions

Asset-backed securities field guide (view source)

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 ===Repackagings===
-This is a fairly insurmountable problem for widely-held, really publicly traded ABS transactions like [[securitisation]]s and [[CLO]]s. Here there really are lots of noteholders, they do not act en masse, so individual noteholders just have to take a view, that they have no realistic seat at the table should things go wrong. Theirs is the bet that those sponsoring the deal are good people, and will not take the proverbial. This trust was found to be misplaced in the [[global financial crisis]].
+This is a fairly insurmountable problem for widely-held, really publicly traded ABS transactions like [[securitisation]]s and [[CLO]]s. Here there really are lots of noteholders, they do not act ''en masse'', so individual noteholders just have to take a view, that they have no realistic seat at the table should things go wrong. Theirs is the bet that those sponsoring the deal are good people, and will not take the proverbial. This trust was found to be misplaced in the [[global financial crisis]].
 But in smaller scale repackaging deals, things are different. These tend to be tailored deals made to order for a specific investor. They are not usually listed or publicly quoted, the original investor takes down the whole deal and, for the most part, sits on it, perhaps [[securities financing|financing]] it in the market, but staying long the economic risk of the transaction.
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 These products are ''in concept'' tradable, the same caravans in a trailer park are mobile: they don’t really trade: no-one in their right might mind would buy one of these things in the [[secondary market]] without all the [[due dilly]], [[negotiation]] and documentation you’d expect for an OTC [[novation]].
-Remember the basic proposition of tradable public securities: they are homogenous, standardised, and their failure risk comes down to the ongoing business prospects of the issuer. There is a term, an interest basis, a coupon cycle. Aside from that, it's all about the issuer ’s financials.
+Remember the basic proposition of tradable public securities: they are homogenous, standardised, and their failure risk comes down to the ongoing business prospects of the issuer. There is a term, an interest basis, a coupon cycle. Aside from that, it’s all about the issuer’s financials.
-''None'' of that is true of an asset-backed security. The one thing that ''won’t'' happen — literally, can’t — is issuer insolvency. The rate will be generated from a raft of interacting assets, all of which has its own idiosyncrasies, credit exposures, volatilities, and liquidity profiles. And overlaying that will be the legal terms, which are guaranteed to be Byzantine. All of that needs careful examination by trained professional credit ninjas.
+''None'' of that is true of an asset-backed security. The one thing that ''won’t'' happen — literally, can’t — is issuer [[insolvency]]. This is a point which confuses even seasoned industry veterans. The rate will be generated from a raft of interacting assets, all of which has its own idiosyncrasies, credit exposures, volatilities, and liquidity profiles. And overlaying that will be the legal terms, which are guaranteed to be Byzantine. All of that needs careful examination by trained professional credit ninjas.
-To the purchaser is most likely stuck with the note.  But it ''expects'' to be. Generally, it has commissioned the note format not for the liquidity it offers — for a repack note, it doesn’t — but to ease troubled minds in its operations team  responsible for booking, risk managing, hedging and complying with accounting policies and so on.
+So, the original purchaser is most likely stuck with the note.  But it ''expects'' to be. Generally, it has commissioned the note format not for the liquidity it offers — for a repack note, it doesn’t — but to ease troubled minds in its operations team responsible for booking, risk managing, hedging and complying with accounting policies and so on.
 Really, this ''is'' a private, bilateral, over the counter contract, just dressed up, like a [[pantomime dromedary]], to look like something it is not.