Forums  > Basics  > Variation in corporate CDO/CLO issuers "skin in the game"  
     
Page 1 of 1
Display using:  

Rookie_Quant


Total Posts: 746
Joined: Jun 2004
 
Posted: 2018-05-08 18:32
Is it common for issuers of CDOs (synthetic or cash) and CLOs in the corporate markets to retain a piece of the deal on balance sheet? If they do, does that retention always take the same form (I keep some of the equity tranche, or a vertical slice, or neither)?

Does anyone know of any good data sources on these deals (historically)? I've looked at the Creditflux data and that has a fair amount of the info I need, but I dont know if originator data like this is public knowledge or data that is kept anywhere.

"These metaphors and similes aint similar to them, not at all." -Eminem

Cheng


Total Posts: 2853
Joined: Feb 2005
 
Posted: 2018-05-09 11:01
The fun part about synthetics was that you didn't keep anything on the balance sheet (those were just hedged). In cash land keeping something (usually the equity) was common to show that you eat your own cooking. Besides that, you could pocket the juicy excess spread and (hopefully) still come out ahead. This changed, however, as risk appetite grew and more investors were ready to take the equity, too.

There were discussions about vertical slices (basically you keep a part of the underlying portfolio) but I never saw them in real life.

"He's man, he's a kid / Wanna bang with you / Headbanging man" (Grave Digger, Headbanging Man)

Cheng


Total Posts: 2853
Joined: Feb 2005
 
Posted: 2018-05-09 11:02
As for data sources you probably have to read the docs...

"He's man, he's a kid / Wanna bang with you / Headbanging man" (Grave Digger, Headbanging Man)

deeds


Total Posts: 383
Joined: Dec 2008
 
Posted: 2018-05-09 13:20
The recent period of risk retention requirements from Dodd Frank has caused many to hold vertical slices that equate to 5% equity stake. "L-shaped slices" also held by some. These requirements are relaxed now.

Rookie_Quant


Total Posts: 746
Joined: Jun 2004
 
Posted: 2018-05-14 20:47
L-shaped slices are a small vertical piece with more equity or?

Did Dodd Frank mandate a certain rules-based retention that manifested as specific holdings or was it more a general requirement to hold on to "something"?

Im trying to triangulate adverse selection here, ultimately. Literature on mortgages is pretty conclusive (I saw some of this stuff first-hand anyway), but for some reason corporate CDOs dont get tarred with that same brush. But every study I've seen doesnt actually control for the features of the deal. I have some very small data collected (by reading docs) and find evidence that certain deal features are associated with significantly worse portfolio performance.

It would be cool to be able to do more "science" that low-power inference though. Like if regulators required retention of some equity tranche for deals above $XXX but not below, or something like that. Or even if there was a general rule based on diversification of the portfolio, or overall deal ratings or just something quasi-objective.

"These metaphors and similes aint similar to them, not at all." -Eminem

polysena


Total Posts: 1061
Joined: Nov 2007
 
Posted: 2018-05-14 21:10
Synthetic balance sheet CLOs or CDOs depending how you want to call them, also called risk transfer deals, where a bank transfers to a 3rd party the first loss on a portfolio of exposures originated on balance sheet in the usual course of business, usually retain a vertical tranche not "issued" (ie not under the form of a 0-100% bond).. so say if the pool is 3bn, then say 20% of the exposures can be retained if the deal is done on a "non name by name" basis and 80% of exposures are hedged via 1-2-3 tranches; if the trade is done on a name-by-name basis the risk retention percentage can be lower again most often as vertical tranche (5%, 10%) again not in form of an issued bond, depending on what the HF requires.
For cash CLOs, it all depends on what rules are in place in the jurisdiction in which the deal is made and basically whether the retention is mandatory or not. Some jurisdictions do not have mandatory retention rules. If it is the US: 3 possibles ways vertical, horizontal, or L shape. In some cases, if there are special arrangements, no retention might be required. In some cases that can be an issued bond [0,100%]. B I do not know whether that helps.
For synthetic deals as they are not public deals you cannot figure out-- but very often it is done via a vertical inner tranche.

For cash CLOs some jurisdictions require to post the deal characteristics- reg AB you might be able to read the prospectuses. Reasons for the shapes are a) regulatory requirements b) maximisation of other regulatory computation (capital rules mainly). It is not effective to retain a piece of each issued tranche often.

Свобода - это то, что у меня внутри. (Ленинград и Кипелов - "Свобода") Кому то очень больно, а кому то заебись (Серебряная свадьба)

polysena


Total Posts: 1061
Joined: Nov 2007
 
Posted: 2018-05-14 21:14
"L" shapes can take any form that maximise other regulatory requirements. It is quite bespoke. You best figure out by reading the regulation in general, plus the capital rules, if the issuer is a banking institution. If not then read special rules for CLO managers (EU rules for example or US- which have been relaxed recently by DT).

Свобода - это то, что у меня внутри. (Ленинград и Кипелов - "Свобода") Кому то очень больно, а кому то заебись (Серебряная свадьба)

polysena


Total Posts: 1061
Joined: Nov 2007
 
Posted: 2018-05-16 10:23
"Like if regulators required retention of some equity tranche for deals above $XXX but not below, or something like that. Or even if there was a general rule based on diversification of the portfolio, or overall deal ratings or just something quasi-objective. " no such reg rules in place, nor would they probably ever happen, they would be overly complex to design and be approved by a community of public stake-holders with different political agendas.

Свобода - это то, что у меня внутри. (Ленинград и Кипелов - "Свобода") Кому то очень больно, а кому то заебись (Серебряная свадьба)

Rookie_Quant


Total Posts: 746
Joined: Jun 2004
 
Posted: 2018-05-17 16:27
Polysena,

Thank you for the answer/info. A few follow-ups.

"For cash CLOs, it all depends on what rules are in place in the jurisdiction in which the deal is made and basically whether the retention is mandatory or not."

I take this to mean if I have an identical collateral pool, but issue one deal in country A and an identical deal in country B, as the issuer I may need to retain some exposure in A and can lay the whole thing off in B. Is this correct?

Do most US issuers structure themselves so as to avoid retention requirements? I saw the DC Circuit Court appeal a few months back and it seems like if a deal is not a balance sheet deal, the issuer need not hold any risk in the deal, but if it is a balance sheet transaction, they still are subject to Dodd-Frank Rules. Is that right?


"These metaphors and similes aint similar to them, not at all." -Eminem

polysena


Total Posts: 1061
Joined: Nov 2007
 
Posted: 2018-05-21 21:24
Rookie.
Answer to 1 yes.

Retention rules in US and EU differ, in the principles, haven't ever read those in JP. AU, CA- I think but I may be wrong that other countries have non in place (but their markets are inexistent). If you issue deal and you aim to sell in a jurisdiction X only you might only look at their rules. If they have none, then. If you want to ensure re-salability in various jurisdictions then you are left with no so many options (intersect all various reg regimes; however there are some forms that might satisfy a few regimes simultaneously then you pick those.).

Answer to 2. Pretty much so... there are ways enshrined in the regulation- if I recall- something about ensuring an Inv Bank taking the first loss (then you do not need to retain for BS deals-- but I have not all the rules in my head). US rules are a little in a in-between-transitional phase given the revision that the President has directed be done.. I did not follow closely.

Свобода - это то, что у меня внутри. (Ленинград и Кипелов - "Свобода") Кому то очень больно, а кому то заебись (Серебряная свадьба)

polysena


Total Posts: 1061
Joined: Nov 2007
 
Posted: 2018-05-24 10:02
https://www.reuters.com/article/us-marketreaction-clodecision/clo-market-cheers-end-of-risk-retention-rules-idUSKCN1FX29C

link to US retention rules that is easy to navigate https://www.law.cornell.edu/cfr/text/17/part-246/subpart-B

In the meanwhile I have learned that China also has retention rules in place.

Свобода - это то, что у меня внутри. (Ленинград и Кипелов - "Свобода") Кому то очень больно, а кому то заебись (Серебряная свадьба)

Rookie_Quant


Total Posts: 746
Joined: Jun 2004
 
Posted: 2018-06-04 23:45
many thanks for all of these answers. I found an interesting quirk in the retention rules between middle market and open market CDOs (i/e a risk retention requirement applying to one group but not the other). Could be interesting through a sort of quasi- "natural experiment" lens.

"These metaphors and similes aint similar to them, not at all." -Eminem

polysena


Total Posts: 1061
Joined: Nov 2007
 
Posted: 2018-06-06 15:44
"middle market and open market CDOs " can you decode?

Свобода - это то, что у меня внутри. (Ленинград и Кипелов - "Свобода") Кому то очень больно, а кому то заебись (Серебряная свадьба)
Previous Thread :: Next Thread 
Page 1 of 1