Credit Index tightening and CPDOs

Holmes · Post by **Holmes** » Wed Jan 24, 2007 6:47 pm

I believe I put the Surf link is above? I can't tell anymore: internet security at work. Apparently its pornographic/ dangerous. I thought that quite funny

Anand · Post by **Anand** » Wed Jan 24, 2007 6:54 pm

The SURF pdf posted on this site is a Marketing ppt that ABN uses. I am looking for the prospectus with information on say the waterfall, leverage formula and say the effect of the index roll.

Quite a few people have mentoned having seen it, it would be very helpful if some one can mail it to me at anandpriyankagmailcom

Thanks!

rowdyroddypiper · Post by **rowdyroddypiper** » Thu Jan 25, 2007 1:35 am

If you can't figure out a basic model from the presentation posted then you don't have a shot of doing it from the OM. First of all there is no waterfall in this deal (at least in the traditional sense of a structured deal) as there is only a single note issued. It's a safe assumption that the Admin and the Leverage facility fee are senior to the note. That should really be your only payouts.

Read the presentation and see if you can create a model from there. It contains everything you need to get the deal approximately right.

Anand · Post by **Anand** » Thu Jan 25, 2007 11:04 am

Thanks, I'll try that !

simonsays · Post by **simonsays** » Fri Jan 26, 2007 7:56 am

Can anyone recommend papers on default contagion? I've seen some recently by Duffie. He appears to have the most common sense of anyone I've seen who writes on default risk. Is there anything available on cascading effects/bounded rationality/belief heterogeneity?

Cheng · Post by **Cheng** » Fri Jan 26, 2007 9:14 am

Depends. There are some papers by Duffie with a statistical approach. Schoenbucher, Yu and a few more published papers about default contagion in reduced form/intensity models. What are you looking for ?

simonsays · Post by **simonsays** » Fri Jan 26, 2007 3:25 pm

I guess what I'm really after is a model for what underlies spread compression, or a credit bubble, which seems to relate directly to default contagion. i.e. something that incorporates the notion of limited investor attention (Hong/Stein) or informational cascades.

Cheng · Post by **Cheng** » Sat Jan 27, 2007 10:18 am

You might want to have a look at Fan Yu's paper ("Contagion in intensity models" or so). I don't have it here but you should be able to find it on defaultrisk.com.

Protter wrote a few interesting papers about information asymmetry, comparing structural and reduced form models. Maybe this helps, too.

kr · Post by kr » Sat Jan 27, 2007 1:36 pm

imho this is all trying a bit too hard

the point about spread compression, dropping corrs etc is a structural supply/demand thing

I am reading on bbg just now that eurozone M3 is ca. 10% against growth which is way below that.  If there is a macroeconomist in the house, it would be nice to hear the story on how money supply growth gets allocated to consumption vs. investment. My assumption is that there is too much of the latter (petrodollar effect and maybe something to do with the barbelling of consumer wealth?) You could model it randomly but I am not sure where one would start.

Negative credit risk premia are not any more impossible than negative real rates. I sometimes think there is a kind of relation between the two and the relative pricing control split between central banks and commercial banks. Let's say ST interest rates are 10%. A commercial banker is not going to differentiate credit risks by moving the credit spread he charges from +10bps to +20bps. On the other hand if rates are 1%, then all the power is in the hands of the bankers if they are talking about switching from +100bps to +150bps.  It is a bit different from asset managers who are floating-benchmarked vs. HF's and their famous 'absolute returns' mantra. Earning alpha just ain't the same when rates are increasing.

Anyhow it's clear that money is seeking to own existing assets, which are sourced through LBOs and other corporate transformations. You can see the gold rush occuring in the PE space. It is a shame that we don't have the optimism about growth to justify creating new assets. In my mind the issue there is labor costs which are so high.

The thing is that even if we have negative credit risk premia, I don't really feel that it is stopping the cycle.  For instance, HF returns haven't been that great, but I haven't seen a lot of news about attrition in the HF sector. In fact, a lot of people got caned on CDO investments not all that long ago but the beat goes on.

JabairuStork · Post by **JabairuStork** » Sat Jan 27, 2007 5:04 pm

Yes, I will pay you CRAZY MAD DOLLAS to take my money and put it at risk!

Why will I do this?

Because I can finance like nobody's bizness from some other SUCKA!

Point taken on the loan side, but when you look at the big macro drivers of AA/AAA corp paper, it looks like "desperately seeking spread", hence the massive bid for all the fun levered paper and synthetics like the very one that started this thread.

I don't care if spreads compress to 1/100 of a bp, we can find a way to inject enough risk to pump it back up to where yankee banks and european regional banks and all the other usual cats will be happy. But as soon as they go negative, fuck it, I'm packing up and moving to home equity loans.