Survey Reveals the Heavy Burden ABS Investors Carry in Managing Cashflow and Waterfall Models

New York, NY, September 18, 2013 --( Principia Partners, the leading software provider for the portfolio management, risk and operational control of structured finance investments, today announced the key findings of a survey focusing on ABS, MBS and CDO investors’ use of cashflow and waterfall models. The full results show that, while the growing commoditization of issuer reporting, collateral performance and loan level data has benefited the modeling of cashflows, it is not enough to lighten the burden investors carry when building and managing cashflow and waterfall models.

100 structured finance investors from 62 organizations took part in the Q2 2013 study. The results confirmed that most investors are juggling several different modeling methods and/or providers and as a consequence, integration issues are commonplace. For example, over 50% of investors are using more than one method for obtaining or modeling cashflows and for those using commercially available models, over 66% are using two or more providers.

Respondents expressed frustration with the amount of integration they face and the criticality of ensuring the accuracy of the models they use. This finding aligns with the degree of consolidation and the investment in expanding asset coverage by commercial waterfall model providers.

Unlike the reported use of waterfall models, the survey also shows that only 35% of investors rely on commercial prepayment and loss models. However, the greater access to current and historical loan level data in the US makes a notable difference: US investors reported using commercial models almost twice as often as EU investors (45% US to 25% EU).

“Cashflow models are at the very heart of understanding the future behavior of structured finance transactions. Pricing data and key performance indicators, along with loan-level detail, definitely provide much-needed support for these activities. However, without the underlying cashflows, they tend to be more preventative measures rather than proactive ones. Bringing all of those together, in a way that is consistent, reliable and automated is critical to successfully managing a large portfolio,” stated Douglas Long, EVP Business Strategy at Principia. “With so many pieces and methods employed, doing the work necessary to unify investment analysis with risk management on a single dedicated infrastructure is the only way to place attention where it is meant to be: fully focused on investment management and due diligence.”

The full survey results, including a breakdown of the methods and providers used by investors for ABS, MBS and CDO cashflow and waterfall modeling can be found here:

This is the third survey conducted by Principia focusing on the operational demands of structured finance investors. The first study, “Trends in ABS, MBS & CDO Market Pricing”explores investor’s use of secondary market pricing data. The second, “Trends in ABS, MBS & CDO Loan Level & Collateral Performance Data” investigated the approaches and level of detail investors go to when analyzing their securitization exposures. Both of these earlier reports can also be found on the link above.
Principia Partners LLC
Douglas Long
+44 207 618 1350