Tuesday, May 21, 2013

Fitch Rolls Out New Ratings Indenture Abstract

By Tim Dulaney, PhD and Tim Husson, PhD

It is looking more and more like collateralized debt obligations (CDOs) and other asset-backed securities-- the 'toxic' assets highlighted as some of the worst excesses of the financial crisis--are back.  And while the agencies that rate asset-backed securities are still at the center of the debate over the validity of these investments, at least one of them is trying to improve its explanation of their labyrinthine terms and conditions.

Fitch has recently published the first example of their new "Indenture Abstracts," which provide a relatively digestible summary (at least to those familiar with these structures) in a form that is easier to navigate and more logically organized.  The example* covers the Race Point VIII Collateralized Loan Obligation (CLO) which closed on February 20 of this year.

The March 13, 2013 prospectus for Race Point VIII CLO can be found on the Irish Stock Exchange's website.  You'll notice that the prospectus is a staggering--though by no means unusual--three hundred pages of dense text that is cumbersome to parse.  What Fitch has done with their new indenture abstracts is to provide a synopsis of some of the most important features of the deal in less than fifteen pages.

In addition, Fitch compares each deal with other similarly structured deals priced around the same time.  On page 2 of the indenture abstract, Fitch compares Race Point VIII to it's predecessor Race Point VII CLO as well as two other deals of comparable size priced within a month of Race Point VIII.  The comparison covers a broad range of important characteristics ranging from coupon rates of senior debt to the minimum weighted average spread on the portfolio constituents.

Perhaps our favorite feature is their abbreviation of principal and interest waterfall payments (page 7).  These waterfalls determine if, when, and how much investors will receive for their investment in the CLO.  This abbreviated structure allows investors to easily locate themselves in the waterfall and determine if that is where they would like to be in the priority of payments.

Obviously by dropping nearly three hundred pages from the prospectus, important information and disclosures are going to be lost.  Any document of this type will not replace the prospectus, which still must be reviewed carefully by any potential investor.  That said, good summaries of asset-backed securities are hard to find, and Fitch's abstracts are a significant improvement over previous descriptions.  We applaud Fitch for their efforts to bring more transparency to this often murky market.
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* Access to the abstract is free, but you will need to create an account with Fitch.

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