A container lease ABS pool may include dozens of container shipping lines as lessees. A credit card ABS master trust may include receivables from thousands of individual card holders. An aircraft lease ABS may include leases that are obligations of many different airlines. By design, ABS debt investors do not require every underlying payer to perform in order for the ABS debt to receive all principal and interest payments. This diversification may help protect against a loss. Tranching of Risk and Amortization: Generally, securitizations issue multiple tranches, or classes of debt, that customize risk, rating, timing of repayment, and relative lien on collateral.
This tranching allows debt with different risk characteristics to be created from a homogenous pool of assets. The shorter maturity, more senior tranches enjoy higher ratings, and more cushion against loss, while the longer-dated, more junior tranches expect higher returns but lower ratings. In this way, tranching serves to create debt that will suit different investor preferences. While tranching represents a major benefit of securitization, excessive customization may impact liquidity.
The capitalization table and amortization graph below belong to a hypothetical CLO. The capitalization table clearly shows the tranching, with the AAA class sitting at the top entitled to repayment before other classes, resulting in the shortest weighted average life WAL.
This is illustrated graphically in the amortization timeline below. The AAA class amortizes first before any of the junior classes, which only begin to amortize once the AAA class is paid off. The same principle applies down the capital stack with the junior classes having longer WALs because they amortize only once more senior classes have been paid off. Closely tied to the concept of cash flow tranching, most securitizations provide for significant principal amortization, or return of capital, ahead of the expected maturity, which may mitigate risk of loss without any investor action or hedging.
In fact, the contractual terms of the underlying assets should fully amortize the debt in most securitizations. Compare this to corporate or municipal debt which, while it may provide for some limited amortization, generally requires a large principal payment by the borrower at maturity usually from refinancing proceeds. Please see Disclosures for a more complete discussion of risks of investing in ABS.
Return of stated principal is highly variable.
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Professional Servicing and Active Management: The servicer, also referred to as the collateral manager, seeks to maximize the certainty and quantity of cash flows from the underlying pool of assets. Responsibilities of the servicer may include evaluating credit quality of payers and assets prior to inclusion in the pool, negotiating pricing and terms of loans and leases, remarketing equipment for lease, negotiating with nonperforming lessees or borrowers, obtaining appraisals, and selling hard assets.
In many transactions, the servicer or an affiliate owns the equity or residual interest in the securitization, which generally creates a favorable alignment of interest with the debt investors.
A major distinction exists between static pools and actively managed pools. In static pools, cash flows from the collateral may not be reinvested in new collateral. In actively managed, or reinvesting, securitizations, the manager may purchase new assets with proceeds received from existing assets, subject to strict eligibility criteria. Investment Grade Ratings : Securitizations represent a bankruptcy remote lien on diverse, contractually cash flowing assets, and consequently rating agencies generally assign investment-grade ratings to many of the issued debt tranches.
However, the repayment of debt relies on contractual cash flows and does not generally benefit from recourse to the sponsor or asset originator. As a result, securitized debt ratings rely solely on those cash flows and do not give significant credit for potential active management of the collateral or refinancing. Professional Reporting: Each securitization employs a third-party trustee that, among other responsibilities, distributes periodic performance reports to investors. While the content of the reports varies by securitization type, in each case these reports meaningfully contribute to liquidity and facilitate risk management, as they allow existing and prospective investors to evaluate the performance and outlook of the securitization.
Securitizations provide debt capital to two types of borrowers: They may fund the loans or leases originated by lenders, lessors, or other specialty finance companies. Alternatively, securitizations may provide debt capital to traditional corporate borrowers who have contracts or own assets that are of higher financial quality than their own full faith and credit. For all borrowers, a benefit of securitization is that the term of ABS borrowing matches the term of the underlying assets, insulating them from mark-to-market or refinancing risks.
The following case study illustrates the benefits of securitization to a traditional corporate borrower. In contrast to multi-tranche ABS structures, this securitization is characterized by a single-term tranche of debt and a pari-passu equal rank to the term tranche revolver backed by the same assets. Since , average same-store sales have increased 7 percent annually.
Below we describe in summary the steps the company took to achieve its goals:. Notes issued under an ABS transaction are wholly backed by the assets owned by the SPV, but what happens if the cash flows generated by those assets diminish? As noted earlier, ABS transactions often carry several structural protections to help protect the bondholders from losses.
A prospective ABS investor must answer two questions: First, despite the previously mentioned risk-mitigating attributes of securitization, why has structured credit continued to offer additional yield when compared to similarly rated corporate, municipal, or Agency debt? Second, within structured credit, which factors help investors understand the relative pricing of different ABS? For the answer to the second question , investors will need to consider a number of key variables when negotiating pricing. Source: Barclays, Bloomberg, Guggenheim Investments.
Index data as of When analyzing a poorly performing securitization, in hindsight, we find that debt investors failed to rationally assess one or more of the below risks. A disciplined, thorough investment process and common sense will help guard against these common missteps.
To confidently enter the structured credit market, an investor needs to have the necessary resources, including human capital, technology, and data. At Guggenheim, we believe we not only have the resources for rigorous security analysis, including a deep credit research team and legal team, but we also have built a disciplined investment process. The diagram below illustrates the process we employ to source, evaluate, and select investment ideas.
CLOs present a unique challenge for asset managers. Strong capabilities in corporate credit analysis are an absolute necessity when evaluating CLOs, given that each is typically backed by approximately — individual bank loans. Asset managers without substantial corporate credit teams often rely entirely on market pricing to gauge the quality of a given portfolio of bank loans backing a CLO.
The legal documents associated with each distinct deal structure contains nuances, which may require collaboration with our team of 15 dedicated legal professionals. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. Past performance does not guarantee future returns.
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Please see Important Notices and Disclosures for definitions of indexes used. Structured product examples represent certain asset-backed securities issued in October, , used for illustrative purposes to show opportunities that may exist. Other structured products issued may vary from the characteristics of the examples included here.
The information provided here is intended to be general in nature and should not be construed as a recommendation of any specific security or strategy. Data is subject to change at any time, based on market and other conditions.
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Fixed income investments are subject to credit, liquidity, interest rate and, depending on the instrument, counterparty risk. These risks may be increased to the extent fixed income investments are concentrated in any one issuer, industry, region or country. The market value of fixed income investments generally will fluctuate with, among other things, the financial condition of the obligors on the underlying debt obligations, general economic conditions, the condition of certain financial markets, political events, developments or trends in any particular industry and changes in prevailing interest rates.
In general, any interest rate increases can cause the price of a debt security to decrease and vice versa. Asset-backed securities, including mortgage -backed securities, are legal entities that are sponsored by banks, broker-dealers or other financial firms specifically created for the purpose of issuing particular securities or instruments.
Investors will receive payments that are part interest and part return of principal. These payments may vary based on the rate at which borrowers pay off their loans. When a borrower, such as a homeowner with respect to mortgage-backed securities, makes a prepayment, an investor receives a larger portion of its principal investment back, which means that there will be a decrease in monthly interest payments.
An underlying pool of assets, principally automobile and credit card receivables, boat loans, computer leases, airplane leases, mobile home loans, recreational vehicle loans and hospital account receivables may back asset-backed securities. The pool provides the interest and principal payments to investors. Asset-backed securities may provide an investor with a less effective security interest in the related collateral than do mortgage-related securities, and thus it is possible that recovery on repossessed collateral might be unavailable or inadequate to support payments on these securities.
Some mortgage-backed securities may be leveraged or have structures that make their reaction to interest rates and other factors difficult to predict, making their prices very volatile. The underlying assets i. The value of these securities also may change because of actual or perceived changes in the creditworthiness of the originator, the servicing agent, the financial institution providing credit support, or swap counterparty.
These securities are subject to high degrees of credit, valuation and liquidity risks. An investment in CLO securities involves certain risks, including risks relating to the collateral securing the notes and risks relating to the structure of the notes and related arrangements. The collateral is subject to credit, liquidity and interest rate risk. Investing in bank loans involves particular risks.
Bank loans may become nonperforming or impaired for a variety of reasons. In addition, certain bank loans are highly customized and, thus, may not be purchased or sold as easily as publicly traded securities. Any secondary trading market also may be limited and there can be no assurance that an adequate degree of liquidity will be maintained.
The transferability of certain bank loans may be restricted. Risks associated with bank loans include the fact that prepayments may generally occur at any time without premium or penalty. This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. No representation or warranty is made by Guggenheim Investments or any of their related entities or affiliates as to the sufficiency, relevance, importance, appropriateness, completeness, or comprehensiveness of the market data, information or summaries contained herein for any specific purpose.
This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Such broker-dealers may have positions in financial instruments mentioned in the article, may have acquired such positions at prices no longer available, and may make recommendations different from or adverse to the interests of the recipient.
The value of any financial instruments or markets mentioned in the article can fall as well as rise. Securities mentioned are for illustrative purposes only and are neither a recommendation nor an endorsement. Indices are unmanaged and are not available for direct investment. Bloomberg Barclays U. Credit Index, which includes publicly issued U.
To qualify, bonds must be SEC-registered. The U. Credit Index is the same as the former U. Corporate Investment Grade Index, which has been renamed as the U. Credit Index. Corporate Investment Grade index. Corporate Investment Grade Index. Corporate High Yield Index covers the universe of fixed-rate, non-investment grade debt.
Corporate High Yield index. The Bloomberg Barclays U. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis.
After the recession starts, high-yield bond and bank loan issuers have at least a month runway before we experience a large wave of defaults. Portfolio Manager Steve Brown and Brian Smedley, Head of the Macroeconomic and Investment Research Group, explain that while the Federal Reserve's pause in policy has supported a rally in most credit sectors, investors should worry about excesses continuing to build this late in the cycle. Read a prospectus and summary prospectus if available carefully before investing.
It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus if available click here or call Investing involves risk, including the possible loss of principal. This is not an offer to sell nor a solicitation of an offer to buy the securities herein.
This material is authorized only when it is accompanied or preceded by a GCIF prospectus. Any representation to the contrary is a criminal offense.
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August 08, Summary Asset-backed securities ABS finance pools of familiar asset types, such as auto loans, aircraft leases, credit card receivables, mortgages, and business loans. Making The. I am sure you will like the. Making The Grade The. Then you certainly come right place to get the. New Home Customers at. Here's how to use ABC analysis when creating customer segments Rank your customers according to each category and place them on the.
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