US & EUROPEAN ASSET-BACKED SECURITIES Evaluation Methodology

Transcription

1 US & EUROPEAN ASSET-BACKED SECURITIES Evaluation Methodology ICE Data Services offers daily and historical evaluations, factors and related data for U.S. and European asset-backed securities (ABS). Coverage Asset-Backed Securities We cover most fixed- and floating-rate ABS including: Auto Receivables, RV Loans, Motorcycle Loans, Dealer Floor Plan Credit Card Receivables Equipment Lease Future Flow (European offering only) Project Finance (European offering only) SME CLOs (European offering only) Student Loans (excluding Auction Rates ) Other Loan- and Receivable-based Securities Evaluation Methodology Our teams of experienced fixed income evaluators and methodologists closely monitor the structured product markets, interest rate movements, new issue information, and other pertinent data. We obtain and apply available direct market color (including trades, covers, bids, offers and price talk) along with market color for similar bonds and ABS in general (including indices and market research). Evaluations of ABS tranches are based on our interpretation of accepted global market modeling, trading, and pricing conventions. As input to our model, we use market pricing conventions such as yield / spread / discount margin/price and other information solicited from market buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. To determine a tranche evaluation, we: 1. Generate cash flows for each tranche. 2. Determine applicable benchmark yield. 3. Incorporate deal collateral performance, tranche level attributes, and market color as available, to determine tranche-specific spreads to adjust the benchmark yield. 4. Apply market based tranche-specific spreads to determine yield Intercontinental Exchange, Inc. 1

2 All U.S. and European ABS securities are currently evaluated on a clean basis; i.e., without accrued interest. Generating a Tranche Cash Flow To generate a tranche cash flow, our evaluators use the following as model inputs: Deal files: Intex Solutions, an industry leader for securitized fixed income data and analytics modeling of global ABS deals and provides us with new deal files and updated trustee reports on a regular basis. These files enable us to use actual pool and loan level collateral information. Performance Assumptions: When applicable, projections are applied based on analysis of historical statistics of the underlying collateral as well as consensus projections. Prepayment, CDR, severity, and triggers data are used to develop and periodically update prepayment projections. These inputs are then used to generate daily cash flows that incorporate deal level data to determine principal and interest payments along with an average life. A single expected cash flow stream model is utilized. If call information is available our models compute both a yield to call and a yield to maturity then derive an evaluated price for the security, utilizing a global market consensus approach, to determine the appropriate assumption. Verifying Tranche Cash Flow When a cash flow deal file is received from our source, our evaluators perform checks to confirm that the cash flows appear appropriate for the deal structure. Our evaluators analyze features such as the pricing speed, spread, and yield, in order to confirm the deal structure. If any significant deviation between the source data and the evaluators review of the trustee report is noted, we perform additional research on that structure. After issuance, information becomes available in the form of the actual payment history (known as factors ). Determining Applicable Benchmark Yield Curves Benchmark treasury and swap curves are created daily using observed values from a market snapshot: U.S. snapshot taken at 15:00 or 16:00 Eastern Time European snapshot taken 16:15 UK Time / 17:15 CET are placed into the following cohorts: Applying Tranche Spread/Yield and Generating an Evaluation Tranche specific spreads/yields are determined based on relevant market pricing conventions and assessment of tranche characteristics including asset type, underlying collateral, issuer, tranche type, average life, collateral performance, ratings and prevailing market conditions. Our models determine tranche spread/yield and evaluations for fixed- and floating-rate issues based on techniques consistent with our interpretation of accepted local market trading conventions, including but not limited to: Market spread/yield concordance 2017 Intercontinental Exchange, Inc. 2

3 Derivation from benchmark curve. Specifically, o For fixed rate ABS, the model takes the average life or expected maturity for each tranche and matches it to the interpolated value on a relevant treasury, swap or Euro Dollar Synthetic Forward rates (EDSF) curve. It then uses that benchmark spread/yield as the base spread/yield. o For floating rate issues, the current value of the index over which the security resets is used as a discount basis. A tranche specific Discount Margin (DM) is applied to the relevant index value to derive the yield. The appropriate tranche spread/yield or DM is applied to the corresponding benchmark. This value is then used to discount the cash flows to generate an evaluated price. Evaluations of Distressed Sectors We also provide evaluations for issues that may require a more detailed level of research in addition to the process described above. Our evaluation process strives to incorporate techniques and procedures to capture the volatility in these sectors. Our evaluators start by grouping or sectoring the securities. Deals are grouped by how similar deals are reacting to prevailing market conditions, and are based on attributes such as the asset and collateral type, country of collateral, issuer, vintage and tranche. Evaluators then review pool collateral, specifically when available loan structure and statistics, to gain insight into the type of collateral backing the deal, and examine the delinquencies, bankruptcies, repossessions and losses among other pipeline indicators to review the health of the deal. After initial review of the above items for a given security, evaluators run different combinations of stress scenarios to obtain an indication of how the structure performs taking into consideration prepayments, delinquencies, defaults, severity, credit enhancements, over collateralization, and structural features including embedded options and performance triggers. The scenarios and the combination of variables used in the analysis vary on a dealby-deal basis. Evaluators run multiple scenarios to determine the sensitivity of the deal s payment waterfall to a change in a selected set of performance and pipeline variables. Taking this information into consideration, evaluators then review market observations to reflect a market-based evaluation. Evaluation spread/yield adjustments in the model can be made on a tranche level, and evaluators typically review all of the tranches in the deal to assess whether the resulting adjustments are consistent and appropriate. Additional spread/yield adjustments on a tranche level might also be made after this review based on market sentiment, reported trades, bid lists, offerings, etc. received through our network of contacts. We seek to initiate deal level reviews (as described above) if we learn of market events or changes in collateral performance from monthly trustee reports, when that information would be expected to impact evaluations and/or rating changes. During volatile market conditions, we may require a period of time to complete these reviews. In cases where market information is needed to evaluate a specific sector, evaluators work directly with broker/dealer contacts, which may be provided by the client, for market color Intercontinental Exchange, Inc. 3

4 Settlement We use T+0 settlement for U.S. ABS and T+2 settlement for European ABS. Evaluation Types ICE Data Services offers bid, mean, and ask evaluations. We apply a price, spread, or yield adjustment based on a security's average life, or set at the individual security level, to the bid-side evaluation to calculate an ask evaluation. The mean evaluation is the mid-point between the bid and ask evaluated price. If the bid/ask relationship is based on yield, the evaluated mid-price is derived from the mid-yield value. Bid to ask spread relationships are set up in our proprietary models by our evaluators and can incorporate security level information including price volatility, credit exposure and liquidity, which are factors typically taken into account in a two-sided market. Spread adjustments can vary from currency to currency or security to security based on credit standing, weighted average life and reported trade frequency. Creating the bid to ask spread involves the evaluator s judgment, based on his/her experience and on the available market and credit information. Bid to ask spread relationships typically remain constant once established, but can be adjusted as market conditions warrant. For U.S. broker-quoted issues, we apply a zero spread relationship to the bid-side valuation, resulting in the same values for the mean and ask. Quality Processes & Controls The following are some of the quality controls performed when we generate our evaluations: System requirements to enter an explanation for all adjustments made to the evaluation Daily review of market information and data changes (including ratings) that may have an impact on evaluations Review of unchanged evaluations and other applicable data Daily reviews by managers of tolerance reports to confirm processes are being followed Monthly management reviews of evaluator work samples (tolerance reports, client challenges, and other evaluation-related matters) Our Evaluations Our bid-side evaluations are market-based measurements that represent our good faith opinion as to what the holder would receive in an orderly transaction (for an institutional round lot position typically 1MM or greater current value USD or local currency equivalent) under current market conditions. Trades and bids are reviewed to determine that the lot size is representative of an institutional round lot, though smaller or retail sized lots may be considered especially if this is the only or primary trading information available. We use valuation techniques that reflect market participants assumptions and maximize the use of relevant observable inputs including quoted prices for similar assets, benchmark yield curves and market corroborated inputs. Our evaluators regularly review the evaluation inputs for securities covered, including executed trades, bids, covers, offers, broker quotes, credit information and collateral attributes and/or cash flow waterfall as applicable. If we determine we do not have sufficient objectively verifiable information about a security's valuation, we will discontinue evaluating the security until we can obtain such information Intercontinental Exchange, Inc. 4

5 We seek to obtain market color, including bid information received by our clients, as part of our evaluation methodologies. To that end, we request that clients forward market information to the evaluation team (market information should be sent to: Verified information is reflected in our evaluations to the extent that we deem it formative of our good faith opinion. We do not advise clients as to what securities they should buy or sell. Note: For certain U.S. ABS, we provide a broker quote when sufficient information, such as cash flows or other security structure or market information, is not available to produce an evaluation. Broker-quoted securities are adjusted based solely on our receipt of updated quotes from market makers or broker-dealers recognized as market participants. A list of such issues is compiled daily as of market close and is available via 360View SM. (Please contact your ICE Data Services representative for more information.) 2017 Intercontinental Exchange, Inc. 5

6 About ICE Data Services Today, ICE Data Services offers a range of proprietary data, valuations, analytics and tools for global markets across asset classes, including: proprietary data from ICE and NYSE s 11 global exchanges; continuous and end-of-day evaluated pricing for 2.7 million securities, including hard-to-value and thinly-traded securities, complex derivatives, and reference data on over 10 million instruments; desktop and trading tools designed to match the workflow requirements of a broad range of customers; and connectivity solutions that include the low-latency, resilient Secure Financial Transaction Infrastructure (SFTI) network. By combining our broad range of proprietary data services and analytics, we are able to offer clients a more complete, consolidated view of the markets. This integrated approach is consistent with our focus on providing neutral, efficient workflow solutions across markets in a dynamic market environment. The depth of solutions that power ICE Data Services combine industry-leading fixed income evaluations and reference data with data from ICE and NYSE s global exchanges, as well as technology-driven data tools. We ll continue to expand to serve the needs of our customers for comprehensive, mission-critical data for the front, middle and back office requirements. ICE Data Services customers include global financial institutions, asset managers, commercial hedging firms, risk managers, corporate issuers and individual investors. Interactive Data Pricing and Reference Data LLC provides global securities pricing, evaluations, and reference data designed to support financial institutions and investment funds' pricing activities, securities operations, research, and portfolio management. Interactive Data collects, edits, maintains, and delivers data on more than 10 million securities, including daily evaluations for approximately 2.7 million fixed income and international equity issues. Interactive Data specializes in hard-to-get information and evaluates many hard-to value instruments. In the U.S., Interactive Data Pricing and Reference Data LLC's advisory services include evaluated pricing (including fixed income evaluations), continuous evaluated pricing, end-of-day evaluations, and Fair Value Information Services related to securities. Internationally, this information is made available through, Interactive Data (Europe) Ltd. and Interactive Data (Australia) Pty Ltd. Interactive Data Pricing and Reference Data LLC 32 Crosby Drive Bedford, MA Tel: Fax: info@interactivedata.com 100 William Street, 17 th Floor New York, NY Tel: Fax: West Fulton, 7th Floor Chicago, IL Tel: Fax: Limitations Use of this documentation is limited to authorized clients of Interactive Data Pricing and Reference Data services. This material contains information that is confidential and proprietary property and/or trade secrets of Interactive Data Pricing and Reference Data LLC and/or its affiliates, and is not to be published, reproduced, copied, disclosed, or used without the express written consent of Interactive Data Pricing and Reference Data LLC. This document is provided for informational purposes only. The information contained in this document is subject to change without notice and does not constitute any form of warranty, representation, or undertaking. Nothing herein should in any way be deemed to alter the legal rights and obligations contained in agreements between Interactive Data Pricing and Reference Data LLC and/or affiliates and their clients relating to any of the products or services described herein. Interactive Data Pricing and Reference Data LLC does not provide legal, tax, accounting, or other professional advice. Clients should consult with an attorney, tax, or accounting professional regarding any specific legal, tax, or accounting situation. Interactive Data Pricing and Reference Data LLC makes no warranties whatsoever, either express or implied, as to merchantability, fitness for a particular purpose, or any other matter. Without limiting the foregoing, Interactive Data Pricing and Reference Data LLC makes no representation or warranty that any data or information (including but not limited to evaluations) supplied to or by it are complete or free from errors, omissions, or defects. Interactive Data SM and the Interactive Data logo are registered service marks or service marks of Interactive Data Corporation in the United States or other countries. 360View SM is a service mark of Interactive Pricing and Reference Data LLC. Other products, services, or company names mentioned herein are the property of, and may be the service mark or trademark of, their respective owners Interactive Data Pricing and Reference Data LLC 5573 (0517) 2017 Intercontinental Exchange, Inc. 6