APS 2021 CRT mock draft
admin | April 23, 2021
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
As the National Football League’s annual Player Selection Meeting, better known as the NFL Draft, approaches, prognosticators scan the universe of eligible prospects to rank players on their ‘big board’ ahead of teams making their selections. Players have certain measurable attributes that everyone can agree on but opinions will vary on how much upside a given player may have. Somewhat akin to this, bonds across the universe of GSE Credit Risk Transfer can be ranked based on certain measurable attributes but investors will likely have differing opinions on how they may perform in the future. Given this, Amherst Pierpont is providing investors with an insight to prospects across the universe of CRT, the APS 2021 CRT Mock Draft.
The analogy between draft prospects and CRT holds up in other ways as well. Different types of investors may value more measurable qualities such as a bond’s credit enhancement, rating, NAIC designation or other metrics when making investment decisions while others may look to more intangible qualities such as OAS or projected loss coverage multiples to rank investment prospects. Often times, prospects will be evaluated in terms of their ‘floor’ and ‘ceiling.’ And measurable aspects of CRT can likely be viewed as a floor while projected ones may be viewed as ceiling with regards to how that bond may perform in the future based on model forecasts.
With that said, here is your APS 2021 CRT Mock Draft:
Round 1: STACR 2020-DNA5 B2
Stated Margin: 1150
Credit Enhancement: 0.10%
Higher premium, post-COVID B2s may offer some of the biggest upside in the CRT market. Given the relative steepness of the forward curve coupled with lower WAC collateral, these bonds can offer upside to not only to significantly slower forecasted speeds but a locked-out, long-spread-duration asset that can roll down a steep curve. Investors should also benefit from lower projected cumulative losses on this profile as the deal was issued in the wake of the pandemic and any borrowers known to be in forbearance were removed from the reference pool. Given this, the bond offers a loss coverage multiple greater than one despite a relatively small amount of credit enhancement. And while it prepaid at roughly 45 CPR last month, projected 1-year speeds are just over 25 CPR, potentially creating significant value associated with the large amount of IO on the bond which model projections predict may translate to just over 825 bp of OAS.
Round 2: CAS 2019-R04 2B1
Stated Margin: 525
Credit Enhancement: 0.60%
Despite a steep forward curve, B classes backed by higher WAC, deep in-the-money reference collateral should continue to prepay fast and roll down the credit curve as the M2 classes of these deals de-lever and the B class of the deal becomes as a current pay bond. The CAS 2019-R04 deal is a REMIC structure with a Supplemental Subordinate Reduction Amount (SSRA) trigger, also known as the minimum credit enhancement test, which allows the deal to be paid both scheduled and unscheduled principal irrespective of whether the collateral is passing the deal’s delinquency trigger test. The CAS 2019-R04 deal has current credit enhancement of 5.85%, putting the deal right at its adjusted SSRA threshold after accounting for first loss risk retained by Fannie Mae. With forecasted cumulative losses of 33 bp and 1-year projected prepayment speeds of nearly 42 CPR, the deal should continue to pass it’s SSRA test, allowing the B class of the deal to continue to roll down the curve. The combination of a projected OAS of 454 bp coupled with a loss coverage multiple of 1.9 expected losses gives the 19-R04 deal the edge of a higher ceiling than other similar profiles.
Round 3: CAS 2016-C01 2M2
Stated Margin: 695
Credit Enhancement: 3.70%
This bond is a classic case of need meeting value for portfolios that need investment grade ratings or higher NAIC designations as the bond is currently rated A3 by Moody’s and carries an NAIC 1 designation. The combination of the back up in rates coupled with the potential for an additional six month extension to GSE forbearance plans could slow speeds while keeping delinquency triggers on pre-REMIC structures failing for longer, locking these bonds out from any unscheduled principal and increasing the value associated with larger amounts of IO in 2016 vintage deals. High LTV CAS M2s offer some of the highest projected loss coverage multiples and OAS relative to other pre-REMIC premium last cash flows as higher WAC, seasoned high LTV pools have been subjected to elevated prepayments over the past year. The combination of lockout and fast speeds have served to increase credit enhancement and expand loss coverage multiples on this cohort. With 370 of current credit enhancement the bond offers protection of over sixteen times expected losses with a projected OAS of 315.
Round 4: STACR 2018-HQA2 B2
Stated Margin: 1100
Credit Enhancement: 0.20%
The fourth round the selection is a pre-REMIC B2 that, based on a projected 25% slowdown in prepayments over the next year, offers one of the widest projected OAS across the CRT universe at a projected 891 bp. Despite exhibiting a relatively high delinquency rate, the combination of seasoning, borrower deleveraging and more exposure to rising home prices in 2018 vintage high LTV pools puts expected pool losses roughly in line with current credit enhancement or a loss coverage multiple of one. While certain 2018 and 2019 B2s have stated margins in excess of 1,000 2018 B2s have significantly lower WACs and likely have more upside to slower speeds despite comparable premium dollar prices across both vintages.
Round 5: STACR 2020-HQA5 B1
Stated Margin: 400
Credit Enhancement: 0.90%
The fifth round selection is akin to taking multiple players from a program like Alabama where both players exhibit sound fundamentals but one may have a higher floor but a lower ceiling. The STACR 2020-HQA5 B1 is a post-COVID deal with no loans reported as in forbearance in the reference pool similar to the first round selection STACR 2020-DNA5 B2. The high LTV B1 has significantly less upside from a slowdown in speeds given the lower stated margin and dollar price coupled with the fact that the difference between current and forecasted speeds in the 2020-HQA5 deal is substantially less than that of the 2020-DNA5 deal. With 90 bp of current credit enhancement the bond has a higher ‘floor’ than the B2 and a projected loss coverage multiple of just over eight times expected losses, so while it may have substantially less upside than the first round pick, it may prove to be a stable source of return, similar to a late round selection that adds depth and can play special teams.
Round 6: STACR 2015-DN1 B
Stated Margin: 1150
Credit Enhancement: 0.0%
The late rounds of the NFL draft are generally marked by developmental players or those that may project to have a high ceiling but for some reason or another did not merit an earlier round grade. STACR 2015-DN1 B is potentially a good example of a bond with less than ideal measurables but potential upside. It is a fixed severity first loss bond. The tranche is 466 bp thick with 60+ day delinquencies of 3.96% and an additional 110 bp of loans that are 30 days past due meaning current delinquency rates are higher than the detachment point of the bond. Given the fact the deal is fixed severity, loans will be discharged from the trust once they are more than 180 days past due. However, the deal does have reversal language which would allow for the bond to be written back up if borrowers re-perform after exiting forbearance. The bond offers an 1150 bp stated margin at a discount, making it a potential high ceiling option for a team that thinks the overwhelming majority of borrowers will re-perform as they exit forbearance.
Round 7: Pick Traded
The last pick in the draft is commonly referred to as ‘Mr. Irrelevant’. Given no bond in the universe should be saddled with that moniker the pick has been traded for future considerations.