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E-raamat: Cash CDO Modelling in Excel: A Step by Step Approach

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  • Formaat: EPUB+DRM
  • Sari: The Wiley Finance Series
  • Ilmumisaeg: 07-Dec-2011
  • Kirjastus: John Wiley & Sons Inc
  • Keel: eng
  • ISBN-13: 9780470971673
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Cash CDO Modelling in Excel: A Step by Step ApproachSuurem pilt
  • Formaat: EPUB+DRM
  • Sari: The Wiley Finance Series
  • Ilmumisaeg: 07-Dec-2011
  • Kirjastus: John Wiley & Sons Inc
  • Keel: eng
  • ISBN-13: 9780470971673
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An introduction to the modelling of cash collateralised debt obligations (CDOs).

This book is an introduction to the modelling of cash collateralised debt obligations (“CDOs”).  It is intended that the reader have a basic understanding of CDOs and a basic working knowledge of Microsoft Office Excel.  There will be written explanations of concepts along with understandable mathematical explanations and examples provided in Excel.  A CD-ROM containing these Excel examples will accompany the book.
Foreword xv
Acknowledgments xvii
1 Introduction
1(4)
1.1 To Excel or Not to Excel?
1(1)
1.2 Existing Tools and Software
2(3)
2 What are Cash CDOs?
5(12)
2.1 Types of CDOs
5(4)
2.1.1 Cash, synthetic or hybrid CDOs
5(2)
2.1.2 Managed or static CDOs
7(1)
2.1.3 Full capital structures versus single tranches
8(1)
2.2 Description of a Cash Flow CDO
9(3)
2.3 Life Cycle of a Cash CDO
12(2)
2.4 Contribution to the "Credit Crunch"
14(3)
2.4.1 The role of CDOs and credit derivatives
14(1)
2.4.2 The credit crunch
14(1)
2.4.3 Root causes
15(1)
2.4.4 The role of fair value accounting
15(2)
3 Introduction to Modelling
17(6)
3.1 Goals in Modelling
17(1)
3.2 Modelling Philosophies and Trade-Offs
17(1)
3.2.1 Speed
17(1)
3.3 Flexibility
18(2)
3.3.1 Visibility/audit-ability/verification
18(1)
3.3.2 Degree of automation
19(1)
3.3.3 Ease of change
20(1)
3.4 Organization and Layout of a Model
20(1)
3.4.1 Organization of a model
20(1)
3.4.2 Layout of the model worksheets
21(1)
3.5 Life-Cycle Issues: Building an Adaptable Model
21(2)
4 Prerequisites to Cash Flow Modelling
23(24)
4.1 Modelling Dates
23(8)
4.1.1 Description of the curve and dates model
24(2)
4.1.2 VBA date calculation
26(5)
4.2 Interest Rate Curve Modelling
31(8)
4.2.1 Creating a discount curve
31(8)
4.3 Present Value Modelling
39(8)
4.3.1 Present value
40(1)
4.3.2 Internal rate of return
41(2)
4.3.3 Future value
43(1)
4.3.4 Weighted average life
43(1)
4.3.5 Duration
44(3)
5 Getting Started
47(12)
5.1 Create the Input Sheet
47(10)
5.1.1 Model inputs
47(1)
5.1.2 CDO tranche inputs
47(3)
5.1.3 Fees and expenses
50(2)
5.1.4 Collateral inputs
52(3)
5.1.5 Date inputs
55(1)
5.1.6 Model Notes
56(1)
5.2 The Value of Labelling
57(2)
6 Modelling Assets
59(26)
6.1 Initial Asset Pool: Rep Line Modelling vs. Actual Assets
59(1)
6.2 The Collateral Sheet in the Cash Flow Model
59(4)
6.2.1 Collateral Summary
60(3)
6.2.2 Original Collateral Pools
63(1)
6.3 Modelling Defaults and Recoveries
63(4)
6.3.1 Rep line modelling
64(1)
6.3.2 Recovery amount using simple delay
65(1)
6.3.3 Recovery amount using recovery vector
65(1)
6.3.4 Anticipated Recovery
66(1)
6.3.5 Timing of defaults and recoveries
66(1)
6.4 Amortization
67(2)
6.4.1 Prepay Amount
68(1)
6.4.2 Sold Amounts
68(1)
6.4.3 End of period balances
69(1)
6.5 Modelling Reinvestment
69(2)
6.5.1 Rep line reinvestment collateral pools
69(2)
6.6 Reinvestment Cohorts
71(1)
6.7 Accounts
72(4)
6.7.1 Principal Collection Account
73(1)
6.7.2 Interest Collection Account
73(1)
6.7.3 Expense Reimbursement Account
74(1)
6.7.4 Payment Account
75(1)
6.7.5 Unused Proceeds Account
75(1)
6.8 Timing Models vs. Actual Timing
76(2)
6.8.1 Interest calculation periods
76(1)
6.8.2 Payment dates
76(1)
6.8.3 Payment periods
77(1)
6.8.4 Timing for other calculations
78(1)
6.9 Simple Warehouse Modelling
78(7)
6.9.1 The Portfolio Sheet
79(1)
6.9.2 Summary Sheet
80(5)
7 Basic Waterfall Modelling
85(38)
7.1 Basic Waterfalls
85(5)
7.1.1 Priority of payments for interest proceeds (the interest waterfall)
85(2)
7.1.2 Priority of payments for principal proceeds or principal waterfall
87(2)
7.1.3 Post enforcement priority of payments
89(1)
7.1.4 Acceleration
89(1)
7.2 Layout and Design
90(3)
7.3 Avoiding Negative Values
93(1)
7.4 Timing Modelled vs. Actual Timing
93(1)
7.5 Liabilities Cash Flows
93(2)
7.6 Fees and Expenses Cash Flows
95(2)
7.7 Interest Waterfall
97(4)
7.7.1 Interest check
100(1)
7.7.2 Interest cures
101(1)
7.7.3 Interest due but not paid current (interest waterfall)
101(1)
7.8 Interest Waterfall (Available Funds after Payment)
101(1)
7.9 Interest Waterfall Calculations
101(2)
7.9.1 Summary of the principal outstanding of the notes
103(1)
7.10 Principal Waterfall
103(2)
7.10.1 Principal check
104(1)
7.10.2 Principal cures
105(1)
7.11 Principal Waterfall (Available Funds after Payment)
105(1)
7.12 Principal Waterfall Calculations
106(2)
7.12.1 Available for reinvestment
106(1)
7.12.2 Principal due
107(1)
7.12.3 A note on deferred interest
107(1)
7.12.4 Trustee/admin fees
107(1)
7.12.5 Incentive fee and equity due
108(1)
7.13 Adding Over-Collateralization Tests
108(8)
7.13.1 Using interest to cure breaches vs. using principal to cure breaches
108(3)
7.13.2 Class A/B OC coverage
111(3)
7.13.3 Class C OC test
114(1)
7.13.4 Class D OC and class E OC tests
115(1)
7.14 Adding Interest Coverage Tests
116(3)
7.14.1 Class A/B IC test
117(1)
7.14.2 Class C IC
118(1)
7.14.3 Class D and class E IC tests
119(1)
7.15 Technical Issues with Coverage Tests
119(4)
7.15.1 Notes on setting ratios
119(1)
7.15.2 Collateral par tests
120(1)
7.15.3 Curing OC breaches in the principal waterfall
120(3)
8 Outputs Sheet
123(10)
8.1 Purpose of the Outputs Sheet
123(1)
8.2 Collating Waterfall Outputs
123(3)
8.3 Present Value
126(1)
8.3.1 Par Spread and Discount Margin
126(1)
8.3.2 Net present value
127(1)
8.3.3 Loss
127(1)
8.3.4 Loss Percentage
127(1)
8.4 Duration
127(2)
8.4.1 Macaulay Duration
128(1)
8.4.2 Modified Duration
128(1)
8.4.3 Average Yield
128(1)
8.4.4 Swap Duration
128(1)
8.4.5 Dollar Duration
129(1)
8.4.6 Price
129(1)
8.5 Weighted Average Life and Internal Rate of Return
129(1)
8.5.1 Internal Rate of Return
129(1)
8.5.2 Weighted average life
130(1)
8.6 Equity Analysis
130(1)
8.7 Basic Auditing
131(2)
8.7.1 Conditional formatting
131(2)
9 Moody's Rating Agency Methodology
133(38)
9.1 Introduction to Agency Methodologies
133(1)
9.1.1 Two-stage modelling process
133(1)
9.1.2 Moody's approach
133(1)
9.2 The Bet Approach
134(1)
9.3 Evaluating the Collateral
135(17)
9.3.1 The Portfolio Sheet
136(1)
9.3.2 The Reference Sheet
136(5)
9.3.3 The Summary Sheet
141(5)
9.3.4 Step 1: Calculating the diversity score
146(3)
9.3.5 Step 2: Assessing the weighted average rating factor
149(1)
9.3.6 Step 3: Determining the weighted average life
150(1)
9.3.7 Step 4: Calculating the default rate
150(1)
9.3.8 Step 5: Determining the binomial probabilities
151(1)
9.4 Creating the Moody's Sheet and Related References in the Cash Flow Model
152(7)
9.4.1 Moody's inputs
153(2)
9.4.2 Rated CDO Tranches
155(2)
9.4.3 Interest rate curves and default rate curves
157(1)
9.4.4 Moody's Results
157(2)
9.5 Default Profiles
159(1)
9.6 Interest Rate Profiles
160(1)
9.7 Running the Analysis
161(5)
9.7.1 Other assumptions
162(1)
9.7.2 Saving time using the CRITBINOM() function
162(1)
9.7.3 Saving time through VBA
163(3)
9.7.4 Achieving targeted ratings
166(1)
9.8 Variations on the BET
166(2)
9.8.1 Alternatives to BET analysis
168(1)
9.9 2009 Methodology Update
168(3)
10 Standard & Poor's Rating Methodology
171(38)
10.1 The S&P Approach
171(2)
10.2 Evaluating the Collateral
173(3)
10.2.1 The Portfolio Sheet
173(1)
10.2.2 Summary Sheet
174(1)
10.2.3 Asset Class (industry) Concentrations
175(1)
10.3 Modelling Recovery Rates
176(10)
10.3.1 General tiered asset-class recovery rates
177(2)
10.3.2 Asset-specific corporate recovery rates
179(5)
10.3.3 Covenant-lite loan recoveries
184(1)
10.3.4 Applying the recovery rates
185(1)
10.4 CDO Evaluator
186(2)
10.5 Default Rates
188(4)
10.5.1 Standard default patterns
188(1)
10.5.2 Saw tooth default patterns
188(1)
10.5.3 Potential additional default patterns
189(1)
10.5.4 Timing of defaults based on WAL
190(1)
10.5.5 Timing of defaults based on rating
190(1)
10.5.6 Smoothing of defaults patterns
190(2)
10.6 Interest Rate Stresses
192(1)
10.7 Amortization
193(1)
10.8 Additional S&P Modelling Criteria
194(2)
10.8.1 Fixed/floating rate asset mix
194(1)
10.8.2 Biased asset default
194(1)
10.8.3 Payment in kind assets
194(1)
10.8.4 Long-dated corporate assets
195(1)
10.8.5 Interest on assets
195(1)
10.8.6 Interest on interest
195(1)
10.8.7 Administration, trustee and collateral management fees
195(1)
10.9 Building the S&P Sheet and Related References
196(4)
10.9.1 S&P Inputs
196(2)
10.9.2 Rated CDO Tranches
198(1)
10.9.3 Interest curves
199(1)
10.9.4 Default Curves
199(1)
10.9.5 Scenario Default Rates
200(1)
10.9.6 Break-even Results
200(1)
10.10 Running the Stress Scenarios
200(9)
10.10.1 Break-even default rate percentiles
201(1)
10.10.2 Automating the stress scenario runs
201(5)
10.10.3 Achieving targeted ratings
206(1)
10.10.4 Recent changes in methodolgy
207(2)
11 Advanced Waterfall Modelling
209(26)
11.1 Hedge Agreements
209(10)
11.1.1 Why are interest rate swaps necessary?
209(1)
11.1.2 What is an interest rate swap?
210(1)
11.1.3 Modelling interest rate swaps
211(1)
11.1.4 Hedges Sheet
211(3)
11.1.5 Inputs Sheet
214(1)
11.1.6 Collateral Sheet
214(1)
11.1.7 Waterfall Sheet
215(1)
11.1.8 Payment under Hedge Agreements
216(1)
11.1.9 Uses and misuses of interest rate derivatives
216(3)
11.2 Fixed Notes
219(1)
11.3 Variable Funding Notes
219(2)
11.4 Liquidity Facilities
221(1)
11.5 Interest Reserve Accounts
221(1)
11.6 Other Structural Features
222(2)
11.6.1 Pro-rata payment of CDO liabilities
222(1)
11.6.2 Turbos
222(1)
11.6.3 Reverse turbos
223(1)
11.6.4 Revolver facilities
223(1)
11.6.5 Enforcement waterfalls
224(1)
11.7 Combination Notes
224(8)
11.7.1 Modelling combination notes
224(2)
11.7.2 Moody's approach to rating combo notes
226(5)
11.7.3 S&P approach to rating combo notes
231(1)
11.8 Collateral Manager Equity Analysis
232(3)
12 Maintaining the Cash Flow Model
235(12)
12.1 Adapting Your Model for Different Capital Structures
235(4)
12.1.1 Manually changing the model
235(1)
12.1.2 Manually removing tranches or steps
236(1)
12.1.3 Dynamic cell linking
237(1)
12.1.4 Dynamically linked structures
238(1)
12.2 Audit Sheet
239(4)
12.2.1 Audit summary
239(1)
12.2.2 Interest Waterfall
240(1)
12.2.3 Principal Waterfall
241(1)
12.2.4 Allocation
241(2)
12.3 Debugging
243(4)
12.3.1 Back of the envelope equity IRR calculations
243(1)
12.3.2 Excel errors
244(3)
13 Advanced Structuring Issues
247(6)
13.1 Projecting Accrued Interest
247(3)
13.1.1 Simple estimation of accrued interest
247(1)
13.1.2 Estimating accrued interest
248(2)
13.2 Collating Collateral Cash Flows
250(3)
14 Sourcing and Integrating Data From External Systems
253(4)
14.1 Data Requirements
253(1)
14.2 Trustee Reports
253(2)
14.3 Bloomberg
255(1)
14.4 Loan Level Information Sources
256(1)
15 Regulatory Applications of CDO Technology
257(20)
15.1 The Basel Accords
257(3)
15.1.1 Basel I
257(1)
15.1.2 Basel II
258(2)
15.2 Regulatory Capital Requirements for CDO Notes
260(3)
15.3 The Standardized Approach for CDOs
263(5)
15.3.1 Liquidity facilities
264(1)
15.3.2 Early amortization
265(2)
15.3.3 Credit risk mitigation
267(1)
15.4 The Internal Ratings-Based Approach for CDOs
268(1)
15.5 The Internal Ratings-Based Approach for CDOs: The Ratings-Based Approach
269(1)
15.6 The Internal Ratings-Based Approach for CDOs: The Supervisory Formula Approach
270(2)
15.7 The Internal Ratings-Based Approach: Liquidity Facilities, Overlapping Exposures, Credit Risk Mitigation and Early Amortization Features
272(2)
15.7.1 Liquidity facilities and overlapping exposures
272(1)
15.7.2 Credit risk mitigation
273(1)
15.7.3 Early amortization features
273(1)
15.8 Supervisory Provisions
274(1)
15.9 Updates to Basel II
274(3)
16 CDO Valuation
277(50)
16.1 Introduction
277(5)
16.1.1 Default risk
278(1)
16.1.2 Default correlation risk
278(1)
16.1.3 Loss given default/recovery risk
278(1)
16.1.4 Interest rate risk
279(1)
16.1.5 Basis risk
279(1)
16.1.6 Currency risk
279(1)
16.1.7 Replacement/reinvestment risk
279(1)
16.1.8 Prepayment
280(1)
16.1.9 Termination: optional and event of default (EOD)
280(1)
16.1.10 CDO2 and structured finance issues
280(1)
16.1.11 Manager expertise and experience
281(1)
16.1.12 Prerequisites
281(1)
16.2 Basic Valuation Approaches
282(1)
16.2.1 Traditional underwriter viewpoint
282(1)
16.2.2 Fundamental cash flow analysis
282(1)
16.2.3 Market value
282(1)
16.2.4 Accounting value
282(1)
16.3 Traditional Underwriter Analysis
283(9)
16.3.1 Modelling requirements
284(8)
16.3.2 Extending the number scenarios
292(1)
16.4 Fundamental Cash Flow Analysis
292(5)
16.4.1 Cash flows
295(1)
16.4.2 Rates
295(1)
16.4.3 Default risk
295(1)
16.4.4 Cohorts/transition matrices
296(1)
16.5 Using Rating Agency Models
297(18)
16.5.1 Using CDOROM™
297(1)
16.5.2 Using S&P CDO Evaluator™
298(1)
16.5.3 Recovery rate
299(1)
16.5.4 Modelling
300(1)
16.5.5 CDO Evaluator™ Template
300(1)
16.5.6 CDOROM™ Template
301(1)
16.5.7 Detailed cash flow generation sheet
302(4)
16.5.8 Curve sheet
306(1)
16.5.9 Collation
306(3)
16.5.10 Agency Simulations Sheet
309(5)
16.5.11 Driver Sheet
314(1)
16.5.12 Modifications to the Cash Flow Model
315(1)
16.6 Transition Matrices
315(10)
16.6.1 Background
315(1)
16.6.2 Generating defaults
316(1)
16.6.3 Evaluation
317(1)
16.6.4 Importance
317(1)
16.6.5 Sources of transition matrices
318(1)
16.6.6 Scaling the transition matrix
319(2)
16.6.7 Inputs
321(4)
16.6.8 Outputs
325(1)
16.7 Conclusion
325(2)
17 In Conclusion
327(2)
Index 329
About the authors

DARREN SMITH, London, UK, currently heads the Credit Structuring team at WestLB. He has over 12 years' experience in the cash CDO market, and has executed numerous transactions in asset classes as diverse as loans, bonds, emerging market bonds, asset backed securities, CDOs and credit default swaps. Prior to WestLB Darren worked in CDOs at PaineWebber, UBS, and was co-head of CDOs at Dresdner Kleinwort. He has spoken at numerous conferences including the Global ABS Conference, Barcelona, and CDO Europe conferences sponsored by Opal. Darren holds a bachelor's degree in Electronic Engineering from the University of South Australia.

PAMELA WINCHIE, London, UK, is currently a Managing Director at Cross Point Capital, London. Prior to this Pamela held positions as a Director in the European CDO group at Barclays Capital, and a Director in the CDO group at Dresdner Kleinwort. She has over 10 years' experience both as a cash CDO structurer and as a lawyer involved in corporate, securities and securitization law. She has modelled and structured numerous CDOs in various currencies with a range of underlying assets and has spoken at a number of conferences including the CRE-CDO Summit, London, the European CDOs & Credit Derivatives Conference sponsored by IMN and the International Structured Product Conference. Pamela holds a bachelor's degree in Mathematics and Statistics from the University of Western Ontario and a Juris Doctor from Osgoode Hall Law School.
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