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Case
study
Orion
Designing a Synthetic Asset-Backed Security
Prof. Ian Giddy, New
York University
The Proposal
In
early 2006 the Structured Finance group at Calyon in London sought to
arrange a synthetic, partially unfunded collateralized debt obligation
(CDO) to transfer the risk of a $1.3 billion portfolio of residential
and commercial mortgage backed securities, CDOs and other asset-backed
securities. The portfolio would consist primarily of investment grade
securities, with a portfolio average rating of BBB+. The
composition of the portfolio is illustrated in the figure below, and in
the tables that follow. Based on these features, the Calyon team wished
to structure a synthetic asset-backed security with a substantial
super-senior tranche in the form of a credit default swap. After
discussions with two of the major rating agencies, the team had
concluded that the funded part could be in the form of four rated
tranches with the following percentages of credit enhancement: AAA,
20% paying Libor+0.45%; AA, 14% paying Libor+0.70%; A, 8% paying
Libor+1.10%, and BBB, 5% paying Libor+1.40%.
The Assignment
Now
they needed to work on the
super-senior tranche, for which 28%CE would be needed. This would cost
an estimated 5 basis points per annum. Next they could show the
balance sheet of the SPV. Eligible investments for Orion would be
AA+ rated floating rate assets (paying approximately Libor flat). They
also wished
to draw a diagram of the overall structure, identifying payment flows
between Calyon and Orion, and to itemize credit
events and settlement terms.
Table 1.
Proposed Deal Characteristics
Issuer: Orion, a special-purpose entity
Lead Manager: CALYON
Collateral Manager: NIBC Credit Management, Inc.
Trustee: Wells Fargo Bank, NA
Senior Swap Counterparty: CALYON
Assets: $1300 million
Approximately 93.5% RMBS, 3.5% CRE CDO, and 3.0% ABS
Expected Closing Date: May 2006
Stated Maturity Date: May 2046
Ramp-Up Period: 90 days
Interest Payments: Monthly
First Payment Date: September 2006
Initial Number of Portfolio Assets: 138
Reinvestment Period: 4.5 years
CRE – Commercial real estate. CDO – Collateralized debt obligation.
RMBS – Residential mortgage-backed securities. ABS – Asset-backed
securities. |
Table 2. Portfolio Characteristics and
Limitations
Weighted Average Life (WAL, Initial Portfolio): 4.32 years
Maximum WAL at Close/End of Reinvestment: 6.00/3.00 years
Weighted Average Rating Factor (Initial Portfolio): 5.61
Maximum Weighted Average Rating Factor: 6.00
Portfolio Limitations
Maximum Single Issue 1.875
Maximum ABS CDO 5.00
Maximum CDO Manager Concentration 2.50
Maximum NIBC CMI Managed Concentration 0.00
Maximum REIT 5.00
Maximum Fitch Weighted Average Rating Factor 6.00
Minimum Rating ‘BBB–’
Minimum Obligors 125.00
Minimum CDS Spread 1.85
Minimum Weighted Average Floating Spread 1.85
Maximum RMBS 95.00
Maximum CMBS 20.00
Maximum Other Than RMBS and CMBS 10.00
Maximum Credits by Non-U.S. Issuers 5.00
Maximum PIK Bonds 10.00
Maximum Single Servicer 20.00
Maximum Average Life (Years) 6.00
Reinvestment Period (Years) 4.50
ABS – Asset-backed securities. CDO – Collateralized debt
obligation. NIBC CMI – NIBC Credit Management, Inc. REIT – Real
estate investment trust. CDS – Credit default swaps.
RMBS – Residential mortgage-backed securities. CMBS – Commercial
mortgage-backed securities. PIK – Payment in kind. |
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