Principia Partners recently surveyed over 500 investors, issuers, regulators and other structured finance professionals on the subject of investor due diligence.
It uncovered some interesting results regarding investors’ inclination and ability to re-enter the global securitization markets.
Close to two thirds of European investors said they had plans to re-enter or increase activity in the market in the next 12 months. However, over half said they were ‘ineffective’ at performing necessary levels of analysis and risk oversight.
More than 500 senior securitization market participants from 200 organizations took part in the study between June and September 2010. Of the investors, 90% stated that in the next two years their organizations had plans to implement technology to improve analytical, risk and operational processes to overcome challenges in managing ABS, MBS and structured credit investment portfolios.
Investors selected and ranked the investment analysis, risk surveillance and operational requirements they saw as most critical to compliance with regulatory due diligence requirements in the next 12 months. They also provided insight into how well they currently performed against these key criteria.
The most important objective identified by investors was the timely access and effective integration of collateral pool performance data for investment and risk analysis. This was followed by the effective modeling of deal waterfall structures and cashflows for all the assets managed within a given portfolio.
Although recognized as critical activities, 54% of all the investors surveyed stated that they were ineffective at accessing and monitoring performance data for the securities they held, or those they planned to invest in. This includes an inability to monitor pool performance measures that must be tracked for capital relief under the Basel II securitization framework enhancements, such as delinquency, default, recovery and prepayment rates.
Similarly, over 50% of investors stated that they were not effective at modeling deal structures and cashflow behavior within their systems, hindering forecasting, ongoing valuations and stress testing.
“We have not performed well in these areas given a lack of information and systems to accomplish the necessary level of analysis and oversight. Systems limitations are still a primary shortcoming,” stated a managing director in credit investment at a global bank based in the U.S. “A lack of focus to implement a global system for structured finance continues and manual entries are still needed to pull together the broad coverage and data required for all our exposures.”
The survey also found that 75% of investors ranked the consolidated risk surveillance of portfolio, deal, tranche and collateral pool performance in their top two risk management concerns. 55% stated they were not effective at addressing this concern.
Another key finding of the survey was that 72% of investors said they were ineffective at establishing and monitoring hard and soft triggers related to structured finance assets and only 35% of investors felt they effectively managed their global structured finance exposures in a single integrated environment.
“Investors are cognizant of new due diligence requirements and their need to address the shortfalls in analytical, risk management and operational practices before new rules are enforced in 2011, "said Douglas Long, executive vice president in business strategy at Principia. "Even with greater issuer disclosure, understanding new deals will be an intensive task without the right tools and operations in place. Worse, it can lead to misinformed investment decisions, capital penalties or being priced out of the market altogether,”