Structured Product Valuations

Collateralized Debt Obligations (CDOs)

PLATFORMedia currently works with Fieldstone Capital Group’s CDO team. The CDO team covers the area of Collateralized Debt Obligations (including CBOs and CLOs), pursuing opportunities to help clients with valuation, research, and secondary market trading.

The primary goal of the CDO team is to help create an active secondary CDO market. Currently, the CDO secondary market is very illiquid – primary issuance dealers “make markets” in their own issuance, but not in others. The term “make markets” can be used only loosely as the quotes given by dealers tend to be wide, often with a 20 point spread. Healthy markets are transparent, liquid, and have multiple market makers. The primary goal of the Fieldstone Capital CDO team is to help create an active secondary CDO market.

We have developed a market based valuation model based on:

  • real world pricing of all bonds in a portfolio – a snapshot NAV

  • prediction of the distribution of future portfolio defaults on a bond by bond basis, not by a constant current default rate as is commonly done

  • prediction of future flows to each tranche to arrive at an NPV valuation

The above factors are then run through a Monte–Carlo simulation to come to a comprehensive valuation. By way of confirmation of the validity of our approach, one of the Big Four accounting firms has contracted to use our model for its audits.

20 October 2009