ZAIS uses a proprietary analytical framework consisting of three steps:
The most important step in the ZAIS framework is the Structural Analysis. The structure of a bond determines the way in which the single risk/reward profile of a pool of assets is transformed into multiple risk/reward profiles liabilities. The Structural Analysis examines exactly how reward and risk are divided among the various tranches in the capital structure and, thus, helps to determine relative value among them. A key source for the Structural Analysis is the documentation for securtization or structured bond deal (Indenture, Prospectus, Trust Deed, etc.).
Among other things, the following points are being analyzed in this process:
- Capital Structure Analysis (Subordination, Compensations, Default Definition, Credit Enhancement)
- Priority of Payments
- Setup of “Hard Trigger” Tests such as OC, IC, AC Tests
- Setup of “Soft Trigger” Tests such as Diversity Score Test, Average Coupon, etc.
- Collateral Constraints
- Reinvestment Constraints
- Critical Definitions
- Tax issues
Credit and market risk analytics, diversification models and correlation matrices used to determine value of pool; asset/liability match analyzed to determine fit between assets and structure
The Collateral Analysis consists of an evaluation of the underlying asset pool within the structure based on each asset’s absolute investment value, as well as on its ability to fit properly within a specific structure. The absolute value of the pool is determined using credit and market risk analytics, as well as diversification models and correlation matrices. Duration, maturity profiles, coupon and spread characteristics of a pool of assets will predict if the assets and liabilities fit together well.
Before any purchase, ZAIS requires the disclosure of the complete list of assets. ZAIS does not invest without this information. Among other things, ZAIS analyzes the following points in relation to the asset side:
- Quality and diversity assessment
- Collateral Statistics
- Issuer Concentrations
- Rating or FICO Score Distribution
- Industry Distribution
- Geographical distribution
- Seasoning Analysis
- Suitability of Collateral to Structure (Asset-Liability Analysis)
- Risk/Reward Analysis including Hedge Analysis
| Manager/Servicer Analysis |
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Assess asset manager/originator background and fee structure. Gauge absolute compatibility of investment approach, motivation and experience with method and transaction structure.
The Manager/Servicer Analysis is similar to the Collateral Analysis in that it includes an assessment of the manager’s absolute ability to select, manage and service a portfolio of assets and a conditional assessment of those abilities given the constraints of the specific structure. The constraints imposed by the indenture can be quite extensive and it is therefore important to view a portfolio manager’s style in conjunction with the ABS structure to determine how well they fit together.
ZAIS performs a due-diligence process including on-site visits and/or conference calls with key personnel and management of the institution. Depending on the nature of the security among other factors, the following things are looked at:
- Organizational Structure & Processes
- System Infrastructure
- Depth & breadth of personnel, Capacity
- Financial stability
- Key man incentives
- Management Agreement with SPV