Three ways to iterate on structures and collaborate with deal participants seamlessly on T-REX

Introduction

Learn how to seamlessly factor in the impacts of recent market headwinds to ABS structures with T-REX’s cloud-based capital markets tools. Pitch more deals and reduce the cost of issuance while satisfying a range of buy-side risk and return appetites. In this article, T-REX’s structured finance experts demonstrate how structuring in a modern, collaborative platform can produce meaningful results for issuers and investment banks in this crisis market.

Table of Contents

  • State of the Market
  • Adapting Your Structuring & Syndication Strategy to the Crisis Market
  • Explaining the Sample Deal Structure
  • Three Structuring Tactics on T-REX

State of the Market

The market has changed drastically in the last few months, with the 10-year Treasury dropping 65% from the same time last year.

10-Year Treasury

As a result of the pandemic, public issuance is also down by more than 70% year-over-year (source: Finsight). However, based on anecdotal evidence, private placements have ticked up in an effort to maintain momentum in the current market scenario.

According to T-REX’s buy-side network, investors are still looking to deploy capital but exhibiting less confidence. Among their considerations:

  • Capital allocations: Some institutional asset managers are changing their asset allocations to weight towards higher-rated securities.
  • Search for yield: Some fundamentally-driven investors believe there’s an opportunity to find undervalued securities which could yield higher returns.
  • Liquidity concerns: With greater economic uncertainty, some market participants are concerned about the liquidity of their alternative portfolios.

 

So, what does this all mean?

 

Public issuance trends (Finsight)

Going to market with the same structures that were used in December 2019 will no longer achieve optimal results. Some of the reasons for this include:

  • Decreasing access to credit as lenders’ risk appetites fluctuate.
  • Disruption in the issuances and originations as a result of those credit profile changes.
  • Institutional buyers may change their asset allocations.

 

Adapting Your Structuring & Syndication Strategy to the Crisis Market

Address the above buy-side challenges while keeping in mind three critical structuring objectives:

  • Optimize the cost of issuance
  • Balance the risk and reward appetite of your investors
  • Price for future expected market performance

 

Today, the workflow to achieve objectives like these relies largely on Excel and emails. Given the complexity of structuring, this manual approach can be costly and extremely time-intensive.

T-REX, a cloud-based capital markets platform, enhances iterative ABS workflow, eliminating reliance on Excel. By digitizing and moving all data and underlying models to the cloud, T-REX creates a single source of truth to run analytics on, driving transparency and making it easier to evaluate risk and communicate about investments.

Instead of emailing a spreadsheet, T-REX users share models — including all underlying deal data — via the cloud. The result: efficient collaboration and apples-to-apples communication with all deal participants via a purpose-built technology platform (see Spotlight on T-REX’s Collaboration Platform for more information).

 

This article uses a sample deal structure to showcase three example structuring tactics that achieve one or more of the above objectives on T-REX.

Explaining the Sample Deal Structure

Before diving into the structuring workflow in T-REX, first, a little background on the sample deal structure used for this article.

This sample structure uses a generic, asset class-agnostic securitization to remain as relevant as possible for a broad sell-side audience. This sample ABS contains 100 rep lines which are divided into nominal performing assets and relatively distressed assets — called prime and subprime respectively, with prime being 70% of the pool and subprime 30%.

Underlying loans divided into prime and subprime scenario groups.

 

The capital structure for the sample ABS consists of six tranches with Class A1, A2, and A3 being the senior notes and Class B, C, and D being the junior notes.

Tranches displayed.

 

T-REX’s Digital Waterfall outlines the payment structure, including pro rata interest payment for the Class A notes followed by sequential interest payment for the junior notes. Similarly, the waterfall screen depicts pro rata principal payments for the senior notes, followed by sequential principal payment for the junior notes.

View the payment structure in T-REX’s Digital Waterfall, a flexible tool for creating unique structures and digitizing any waterfall priority of payments.

 

In the Scenario Editor, users can build and run a variety of scenarios for a capital structure.  For this example, in addition to a Base Case scenario are two others: a 2008 Recession-like scenario and a COVID-19 stress scenario. The latter scenario assumes that while the credit risk profile would be as distressed as it was in 2008, the recovery timelines would be extended and the recovery rate would be lower. (Note: In addition to modifying recoveries, T-REX also enables users to perform the same actions across other metrics, e.g., prepayments, delinquencies, and net losses.)

Building a COVID-19 Stress Scenario in T-REX’s Scenario Editor.

 

Within the Reports Module, users can run a Bond Price/Yield Table to see how the capital structure performs under the three scenarios: Base Case, 2008 Recession, and COVID. As seen here, the weighted-average life (WAL) between the Base Case and the 2008 Recession scenarios is reduced while the WAL between the 2008 Recession and COVID scenario is extended. Note that Class D, the bottommost tranche of a capital structure, gets a writedown in the COVID-19 stress scenario while there are no losses to any tranche across any other scenario.

Run a Bond Price/Yield Table to see how the capital structure performs under different scenarios.

 

With that context, here are three ways users can iterate efficiently on a structure like this in T-REX’s collaborative platform.

 

Three Structuring Tactics on T-REX

1. Satisfy multiple investor profiles by dividing the same pool of collateral into different cash flow groups.

 

Structuring objectives achieved:

  • Balance the risk and reward appetite of your investors
  • Price for future expected market performance

Say you are talking to a group of investors, and a subset of those investors are looking to invest in nominal performing asset classes, while another pool of investors is interested in investing in high-return assets. Satisfy both of these investor profiles by dividing the same pool of collateral into different cash flow groups.

In this example, we have divided the cash flow coming from the prime part of the collateral and collected that in a Cash flow Group 1, and we have divided the subprime part of the collateral proceeds and collected it into Cash flow Group 2 such that Cash flow Group 1 supports the payment of senior notes A1-A3, and Cash flow Group 2 supports the payment for junior notes B, C, and D.

Dividing the same pool of collateral into different Cash flow Groups in T-REX.

 

Importantly, if there is not enough cash in Cash flow Group 1 in a stress scenario, it is always possible to use the cash flow proceeds from Group 2 to pay the senior notes, giving them more support.

Digital Waterfall with new Cash flow Groups created.

 

Now, review how the modified capital structure performs under stress scenarios. With the new Cash flow Groups in place, the WAL across the capital structure increased in the Base Case scenario compared to the original structure (noted in the previous section) while the WAL under both distressed case scenarios (2008 Recession and COVID-19) decreased.

Run the Bond Price/Yield Table again to see how the new capital structure performs under different scenarios.

 

Interestingly, note the significant decrease in the writedown for Class D, which decreased from more than 14% of the original balance to just 1% of the original balance.

Now, share the new structure with buy-side clients to see if it meets their investment objectives.

Permission buy-side clients to access the new structure in T-REX (complimentary access for investors).

 

Recap: Breaking the collateral pool into different cash flow groups is one option when working with multiple investor profiles that have different objectives they want to achieve while investing in this same pool. With this example, T-REX shows how to seamlessly build a scenario to match investors’ projections of market performance. The user has structured and remodeled the original deal to optimize outcomes for this issuer’s investor clients and prospects.

 

2. Consider selling bonds with a two-year redemption option and pay by a coupon step-up clause.

 

Structuring objectives achieved:

  • Optimize the cost of issuance
  • Price for future expected market performance

Some issuers’ main objectives will be optimizing cost of issuance. In this current market environment, an issuer may be getting a wider spread now than they expected to six months prior. That said, they expect that two years down the line, spreads would return to normal. In this case, the issuer can consider selling bonds with a two-year redemption option and pay for this by a coupon step-up clause.

Set this up in T-REX with a few simple inputs. In the example ABS structure, users can build the step-up for Class A1 to A3 to reflect the payment for this redemption option (as depicted in the vector, after two years, the coupon for Class A1 doubles in value).

Coupon Vector in T-REX. After two years, the coupon for Class A1 doubles in value.

 

Next step is going to the Digital Waterfall and modifying it to put the Class A redemption event as the two-year redemption call option.

Modify the Digital Waterfall to reflect the redemption event.

 

Then, run the sample’s new capital structure under the same three scenarios discussed earlier.

Run the Bond Price/Yield Table again to see how the new capital structure performs under different scenarios.

 

As seen above, the WAL for Class A decreased across all the scenarios, but the performance of the junior notes remained relatively similar to the original use case.

Now, share the new structure with buy-side clients to see if it meets their investment objectives.

Permission buy-side clients to access the new structure in T-REX (complimentary access for investors).

 

Recap: Adding a redemption option and coupon step-up clause is one option when working with issuers wanting to reduce the cost of issuance while also taking into consideration future market performance.

 

3. Break a payment structure from pro rata to sequential payment to build up the credit enhancement in the structure.

 

Structuring objectives achieved:

  • Balance the risk and reward appetite of your investors

Some institutional clients will be looking to invest in higher-rated securities. Easily satisfy that demand by breaking a payment structure from pro rata to sequential payment, thereby building up the credit enhancement in the structure.

For this example, break down the Class A1 to A3 pro rata payment into sequential (done easily in T-REX by changing the semicolons to commas under the ‘Uses’ column).

In the Digital Waterfall, semicolons signify pro rata payment.

 

In the Digital Waterfall, commas signify sequential payment.

 

With that complete, run the same three scenarios for these bonds. The Bond Price/Yield Table shows that the WAL for Class A1 to A3 has changed meaningfully. As depicted in the screens below, the WAL for Class A1 has decreased to less than six months while the WAL for Class A3 increased across all three scenarios.

Running the Bond Price/Yield Table shows that the WAL for Class A1 to A3 has changed meaningfully.

 

Running the Bond Price/Yield Table shows that the WAL for Class A3 increased across all three scenarios.

 

Again, share the new structure with buy-side clients to see if it meets their investment objectives.

Seamlessly permission buy-side clients to access the new structure in T-REX (complimentary access for investors).

 

Recap: Satisfy investor demand for higher-rated securities by breaking a payment structure from pro rata to sequential payment. In this example, the user has built up credit enhancement in the structure by swapping out semicolons for commas in two fields on the waterfall screen.

 

Summary

These sample workflows show how T-REX users can curate different structures to suit the requirements of the current market environment. The features/functionality used in these example sell-side workflows include:

  • Deal modeling: Analytical insights down to granular loan-level terms and conditions to enable transparent structuring
  • Digital Waterfall: Maximum flexibility to create unique structures and digitize any waterfall priority of payments
  • Scenario editor: Complex stress scenarios and breakeven analysis
  • Reporting: Custom reports (e.g., Bond Price/Yield Table) to evaluate tranches and scenarios on the fly
  • Collaboration: Cloud-based platform supports seamless, efficient iteration on structures

Contact Us

The above content first appeared in T-REX’s June 2020 Sell Side Webinar: “Structuring & Syndicating ABS Deals in the COVID-19 Era.” To request the recording of the webinar and book a demo of T-REX, please contact us at sales@trexgroup.com | +1 646 609 8888.

About T-REX

T-REX digitizes data and analytics workflow for the world’s most complex fixed income asset classes. A cloud-based fintech solution, T-REX redefines how Sell- and Buy-Side institutions approach alternative markets with a powerful platform to ideate and collaborate on. Learn how T-REX’s asset class-agnostic products improve transparency and investment decision-making: Performance Data Service | SaaS Analytics Platform

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