Oliver Wyman's last Friday published valuations of the troubled RMBS and CLOs held by Spanish banks that would be bought by the Spanish government's "bad bank". The analysis provides a benchmark for the kind of losses securitized transactions face, said Royal Bank of Scotland (RBS) analysts in a report published on Monday.
The "bad bank" would buy a large amount of the assets and inject capital into the banks to cover the resultant shortfall of capital.
A caveat of the Spanish government implementing a "bad bank" was to have the troubled assets valuated. Banco de Espana hired two external consultants to provide a valuation of the assets held by Spanish banks.
Overall, the study suggested that several banks would be short of capital over the next few years and would need significant capital injections.
In RMBS, the adverse case projections suggest that many mezzanine tranches and some senior tranches are vulnerable to principal losses. The study forecasted high losses for collateral from Santander, Caixabank and Valencia so that even senior tranches of RMBS from these banks can be hit.
In terms of SMEs, the study also projected high levels of losses. RBS analysts explained that since many transactions have de-levered substantially, the senior tranches are generally well-protected and the exposure to losses is mostly for the mezzanine tranches.
However, the firm said that the study has some inherent limitations. For starters, the Oliver Wyman valutions are based on macro scenarios that are, in RBS' opinion, far too optimistic. For instance, analysts said that the base scenario for unemployment has already been passed and is therfore meaningless. "Any further austerity could cause it to worsen beyond even the Adverse scenario," analysts said.
Another concern is that loss projections over the period 2012-2014 may not be long enough to adequately assess actual losses on loans. "While losses in some sectors, such as corporate loans may be realized in this time frame, in other asset classes, losses could take much longer to be realized," analysts said in the report. "This will be compounded by forbearance."
RBS also said that securitized transactions might not be representative of the broader bank portfolio. "The ABS bonds could experience either higher or lower losses depending on the transaction," RBS analysts said. "For example, some RMBS has higher LTV collateral than an average bank portfolio. On the other hand, many securitized portfolios have seasoned so that the weakest loans have already defaulted, improving the outlook for the remaining portfolio."