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GoldenTree Asset ManagementMIT Golub Center for Finance and Policy3rd Annual ConferenceJoseph Naggar, Partner & Senior Portfolio ManagerSeptember 20161
Securitized Products Overview and CLO Deep Dive2
Financial Innovation Acronym Alphabet SoupStructured Investment Vehicles (SIVs)Collateralized Bond Obligation (CBO)Collateralized Debt Obligation (CDO)Derivatives Product Company (DPC) or CreditDerivatives Product Company (CPDC)Collateralized Debt Obligation Squared (CDOSquared)Collateralized Loan Obligation (CLO)Collateralized Loan Obligation Squared (CLOSquared)Residential Mortgage Backed Security (RMBS)Synthetic Collateralized Debt Obligation (SCDO)Commercial Mortgage Backed Security (CMBS)Synthetic Collateralized Debt Obligation Squared(SCDO Squared)Asset Backed Security (ABS)Student Loan Asset Backed Security (SLABS)Asset Backed Security Collateralized Debt Obligation(ABS CDO)Collateralized Proportion Debt Obligation (CPDO)Commercial Real Estate Collateralized Debt Obligation(CRE CDO)Trust Preferred Collateralized Debt Obligation (TrupCDO)Collateralized Mortgage Obligation (CMO)Synthetic Indices – ABX, LCDX, HY CDX, LEV X,ITRAX, IG CDX and Tranches on some of these;multiple seriesAsset Backed Commercial Paper (ABCP)3
What Markets Depend On Securitization?US Securitization Markets – Outstanding IssuanceCredit Cards ( 134bn)Auto loans ( 194bn)Student Loans ( 221bn)MortgagesPrime ( 2.6tr, 735 non-agency ’07)Subprime ( 243bn ’07)US Commercial Real Estate ( 600bn)High Yield LoansUS/EUR CLOs ( 400bn)Source: Barclays, Citigroup4
What Is The Size Of The Structured Products Market?Size of Structured Products Markets – Issuance Per Year through 2008European and US ABS Issuance (EUR Bn)2,500US ABS Issuance by Sector (USD Bn)USEurope1,400Student it opean and US CMBS Issuance (USD Bn)350Euro ABS Issuance by Sector (EUR Bn)European Is s uanc e700US Is s uanc e300600Whole Covered bonds200100100501997Source: 05
Structured Finance IssuanceStructured Products issuance is a fraction of Corporate issuance post 2008 crisisUS & Europe Structured Finance Issuance Vs Corporate IssuanceIssuance in TrillionsStructured Finance IssuanceCorporate Bond and Loan 0152Q20160.3x0.2xRatio of Structured Finance to Corporate Issuance2.0x1.6x1.3xAs of June 30, 2016Source: SIFMA for Structured Finance issuance; SP LCD, Barclays Research for Corporate issuance0.2x0.3x6
Securitized Products: A Market of ManySecuritized Products are an amalgam of many different investment opportunity sets, suitable for awide range of investors with varying return objectives and risk toleranceSource: Morgan Stanley Research7
Banking System Effects of the Financial Crisis BillionsHSBCJP 23381824MorganStanley471723Max Market Capitalization as of 1H2008Market Capitalization as of January 1, 2009Source: Bloomberg as of February 22, 2016Market Capitalization as of February 22, 20168
The Policy Response Plan In A Disintermediated World9Source: Morgan Stanley
Emergency Policy Initiatives Post Crisis Unprecedented global central bank intervention with goal of stabilizing housing, recapitalizing the banksystem, reviving structured products and especially lending to consumers–Conventional methods: interest rate easing–Un-conventional: “quantitative” easing and “credit” easing methods–Read Bernanke’s statements; makes for good bedtime stories Securities / Market Related Initiatives–TARP: 700 Billion program total, purchases of equity in financial institutions or assets–TLGP: Temporarily guarantee of newly issued senior unsecured debt of FDIC-insured depositoryinstitutions for 3-years (proposed to be extended to 10 years)–FDIC: Government guarantees and financing (e.g. IndyMac)–TALF: 200 Billion of non-recourse term financing of AAA consumer ABS with no re-marginingrequirements. Likely to be expanded to 1 trillion and include CMBS, and potentially others such asCLOs Initiatives Aimed at the Consumer–Loan-modification programs including principal reduction–Refinancing through Hope for Homeowners Act–New job creation through fiscal stimulus10
Policy Interaction11
3rd Annual Conference September 2016 Joseph Naggar, Partner & Senior Portfolio Manager . 2 Securitized Products Overview and CLO Deep Dive . 3 Financial Innovation Acronym Alphabet Soup Structured Investment Vehicles (SIVs) Collateralized Bond Obligation (CBO) Collateralized Debt Obligation (CDO) Collateralized Loan Obligation (CLO) Residential Mortgage Backed Security
