Fulvio Graziotto’s Post

All about Asset backed securities👇 Asset-backed securities (ABS) are financial instruments that represent a claim on the cash flows from a pool of underlying assets. These assets can include a diverse range of financial assets such as mortgages, auto loans, credit card receivables, and more. Here's a breakdown: 1. Structure: - Securitization Process: Originators (like banks) pool together a group of similar financial assets. - Special Purpose Vehicle (SPV): The pooled assets are transferred to an SPV, a separate legal entity that issues the ABS. - Tranches: ABS are often divided into tranches with different levels of risk and return. Senior tranches are paid first from the cash flows, while subordinate tranches bear higher risk but may offer higher returns. 2. Types of Asset-backed Securities: - Mortgage-backed Securities (MBS): Backed by a pool of mortgages. - Collateralized Debt Obligations (CDO):Backed by a mix of debt instruments. - Auto Loan ABS, Credit Card ABS, etc.:Tailored to specific types of assets. 3. Credit Enhancement: - Subordination: Lower tranches are subordinated to higher ones, absorbing losses first. - Overcollateralization: The value of assets exceeds the value of the ABS issued. -Guarantees and Insurance: Some ABS may be insured or guaranteed, reducing credit risk. 4. Cash Flow Mechanism: - Principal and Interest Payments: ABS investors receive periodic payments, consisting of both principal and interest, from the underlying assets. -Prepayment Risk: In the case of mortgages, borrowers may repay their loans early, affecting cash flow. 5. Risks Associated: - Credit Risk: Default risk of the underlying assets. -Interest Rate Risk: Fluctuations in interest rates can impact cash flows. - Liquidity Risk:Trading liquidity can be limited for certain ABS. 6. Regulation: - ABS markets are subject to regulatory frameworks to ensure transparency and investor protection. 7. Market Significance: - ABS markets facilitate liquidity and capital flow by transforming illiquid assets into tradable securities. - They play a crucial role in financing, especially for consumer loans. Understanding ABS involves grasping the specific characteristics of the underlying assets and the structure of the securitization process, making it a complex but essential aspect of modern financial markets. #Finance #ABS #financialmarkets #investments #financialinstruments

Investors new to collateralized loan obligations (CLOs) wary of whether the asset class is “too good to be true” may choose to constrain themselves to AAAs, but we believe this is misguided. Although downgrade risk and spread volatility increase as you move down in quality, and liquidity can decrease, the yield and return potential offered in lower rated tranches is far greater. Consider that: 1.      The aggregate CLO market, which represents the entire capital structure and is approximately 67% AAA CLOs, outperformed the AAA only subset by +117 basis points (bps) per year over the past five years. 2.      Single A CLOs outperformed AAA CLOs by 130 bps per year over the past decade, with volatility that was lower than IG corporate bonds. 3.      BBB CLOs provide a yield pickup over AAA CLOs of +219 bps, and provide a yield pickup over high yield bonds, with higher credit quality. 4.      AA rated CLOs provided a yield pickup over investment grade corporates of 120 bps, and 171 bps over an aggregate exposure, underscoring the case for an allocation to CLOs within a core bond portfolio. Our #chartoftheweek shows that lower rated CLO tranches have higher yields.

While most of the focus on distressed debt is concentrated in CRE (and rightfully so), Moody's expects corporate distressed loans to a post-pandemic high this year as well. While the article measures corporate defaults, high rates and economic uncertainly and disruption will certainly impact middle-market and small business C&I loans as well (if not more so). Given the financial information delay (smaller businesses report less frequently, if at all), the distress within middle market businesses will be harder for banks and financial institutions to realize (especially if not structured as ABL / borrowing base). All the more important reason for banks to maintain strong monitoring procedures and act on early warning signs before C&I loans go into default and / or stop paying, resulting in large (and often unexpected charge offs). There are ways to identify and mitigate these risks before they materialize as well as generate recoveries if / when the C&I loans default besides liquidating the company. Happy to discuss or chat through issues such as these! #distresseddebt https://lnkd.in/eM-f3KKS

Loan covenants, which are conditions within a loan agreement, are essential for protecting both lenders and borrowers. They play a key role in maintaining financial stability and ensuring long-term success. These covenants require borrowers to either take specific actions (positive covenants) or refrain from certain activities that increase risk (negative covenants). They are tailored to the borrower’s risk profile, financial position, and the terms of the loan. Types of Covenants: 1. Positive Covenants: These include obligations such as maintaining facilities in good condition, providing audited financial statements, and ensuring regular maintenance of capital assets. 2. Negative Covenants: These prevent borrowers from taking actions like changing business ownership, issuing debt that is more senior than existing debt, or exceeding certain dividend limits. 3. Financial Covenants: Focused on the financial health of the borrower, these include maintaining specific financial ratios. 4. Non-Financial Covenants: These are more qualitative, focusing on business operations, maintaining key customers, or ensuring adequate insurance coverage. Why Are Covenants Important? For lenders, covenants provide a layer of protection by mitigating risk and ensuring that the borrower’s financial behavior remains within acceptable boundaries. For borrowers, covenants offer clarity on lender expectations, which can help in strategic planning and potentially reduce borrowing costs. Monitoring and Managing Covenants: It's essential to regularly monitor covenants to avoid breaches, which could lead to severe consequences such as loan default. In the event of a potential breach, the first step is to investigate the cause, followed by discussing possible amendments or extensions with the lender. Proper management of covenants ensures that they remain a tool for financial discipline rather than a source of stress. Key Financial covenant Ratios: - Debt Service Coverage Ratio (DSCR): Measures a company’s ability to service its debt with its operating income. A higher DSCR indicates a stronger ability to cover debt obligations. - Total Liabilities to Equity Ratio: With a higher ratio indicating more leverage and potentially higher risk. - Working Capital Ratio: A critical indicator of a company’s ability to meet short-term obligations, with higher ratios suggesting better financial health. Covenants are more than just legal clauses; they are strategic tools that, when managed effectively, can help maintain a company’s financial integrity. Source: Loan Covenants course from CFI and my material in Banking. #CorporateFinance #LoanCovenants #FinancialStrategy #RiskManagement #BusinessFinance #Covenants #FinancialHealth #DebtManagement

"Current dynamics are providing lenders an opportunity to originate and acquire loans secured by higher-quality collateral, with stricter loan covenants, at lower loan-to-value ratios with a higher all-in return potential." https://lnkd.in/gGKWMATE

Collateralised loan obligations (CLOs) emerged as the best performing asset class in fixed income in 2023 and have maintained their strong performance in the first half of this year, with record issuance levels. CLO spreads are now at materially tighter (but still relatively cheap) levels, with this there is a danger of investors getting too greedy, and thus we prefer to be cautious. Aza Teeuwen, Partner, Portfolio Management, dissects the CLO market, sharing his outlook for the rest of the year and asks the question "do we still see value in CLOs here?". To find out, click here: https://okt.to/HRTOv8 #CLOs #value

The credit market is shifting, with direct lending strategies predicted to offer above-average returns. This is mainly due to higher interest rates benefiting the floating-rate direct lending asset class, offering steady cash flows and consistent returns. In this environment, direct lending funds provide first-lien senior-secured loans to middle-market companies, typically with floating rates, which currently yield low double-digit asset yields.  This dynamic shift is driving companies to seek Credit Risk Solutions to effectively manage these new forms of credit exposure. Signup for our Credit Risk Rating Platform Tools: info@risk-enterprise.com #creditrisk #riskanalysis #lending #investing #credit #creditriskmanagement https://lnkd.in/exi-ft74

Assessing the credit risk of NAV loans "requires a strong understanding of the quality of a fund's portfolio and the key structural provisions, like loan-to-value ratios, and its use of distributions and exit proceeds”

Collateralised loan obligations (CLOs) emerged as the best performing asset class in fixed income in 2023 and have maintained their strong performance in the first half of this year, with record issuance levels. CLO spreads are now at materially tighter (but still relatively cheap) levels, with this there is a danger of investors getting too greedy, and thus we prefer to be cautious. Aza Teeuwen, Partner, Portfolio Management, dissects the CLO market, sharing his outlook for the rest of the year and asks the question "do we still see value in CLOs here?". To find out, click here: https://okt.to/4Zozf9 #CLOs #value