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2020 | OriginalPaper | Chapter

6. Structuring Securitized Bonds

Author : Laurent Gauthier

Published in: Securitization Economics

Publisher: Springer International Publishing

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Abstract

This chapter concentrates on the study of cash flow structuring, an essential aspect of securitization. The cash flows from the assets in a securitization are allocated to various bonds, following particular rules. These rules allow for the creation of bonds that have better, or worse characteristics than the underlying collateral. We first discuss the underlying logic of structuring and the broad tools of the trade. Then, we offer a simplified taxonomy of structure types, and in the subsequent sections go through these various methods. These include subordination, over-collateralization, sequential payments, and many others. We also address how different types of structuring approaches are usually combined in a securitization, and cover a few examples. We explain the logic with which various layers of structures are applied. We provide simple algorithmic descriptions of most of the structuring techniques we discuss, and we measure their efficiency across a large range of simulated scenarios.

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previous chapter Problems with Securitization

next chapter The Economics of Securitization Structuring

From a legal standpoint it is not trivial to use interest to pay principal, or principal to pay interest. In addition, both interest and principal may have a specific tax treatment. Hence, the generalized use of techniques that commingle interest and principal evolved later than other structuring techniques and dates back to the mid-1990s.

We are not implying here that this is exactly the way structured bonds risk can be represented, this is just a simple way of presenting the concept. The metric used here could also be the yield, but it is more cumbersome to define in a concise fashion.

That is, if the ratings are consistent across broad sectors, which may not be the case.

Pronounced “Vadim”.

From the Latin prorata or prorata parte, meaning “per the proportion under consideration”.

Latin, in the ablative case, meaning “based on an equal footing”.

That is, 5 years times 2% a year, very approximately.

We use \(f\) for “front” and \(l\) for “last, just like in the case of senior/subordination we used \(a\) for “attachment” and \(d\) for “detachment”.

Moving a subordinated bond into a principal priority position is known as a turbo feature; this not very common and typically only happens in certain conditions in a deal’s life.

Although this is not very common, because such time tranching of junior cash flows may significantly affect their credit risk and hence their likely rating.

Pronounced “pack”.

The basics of prepayment optionality valuation have been addressed in Chap. 2.

Note that we neglect scheduled amortization in these examples, so that the cash flows are not coupon-dependent.

Maybe with further structuring as we will discuss in the section on stripping.

More precisely it is getting 100% times the ratio of all bonds’ balance over its own balance. Also note that this is subject to the implicit condition that once a bond’s balance reaches zero the remainder goes to the other bond.

Pronounced “naz”.

Note that in spite of the name this is not just applicable to sequential deals stricto sensu, but to all aspects of principal allocation.

In this case the senior structure is not a sequential but a PAC, but the term “stay-sequential” is still applicable.

See the discussion in Chap. 5.

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Title: Structuring Securitized Bonds
Author: Laurent Gauthier
Publisher: Springer International Publishing
Book: Securitization Economics
Print ISBN: 978-3-030-50325-3

Electronic ISBN: 978-3-030-50326-0

Copyright Year: 2020
DOI: https://doi.org/10.1007/978-3-030-50326-0_6