Professional Money and Loans Advice

Professional Advice with Equity Score Report

The Moody’s Equity Score Report breaks down results by vintage and asset type, and further into terminated and nonterminated deals. This report lists each deal (with a nine-digit number as the Moody’s Equity Score Report Deal ID), and then lists the following information: the total cash return, dividend yield, previous dividend yield, cash-on-cash return, XIRR and payoff date (if applicable). Total cash return is the nondiscounted sum of all payments to equity from closing to the most recent payment date, divided by initial equity balance. Dividend yield is the most recent payment to equity, divided by initial equity balance, multiplied by the payment frequency. Nonpayments are treated as zero for dividend yield calculations. Cash-on-cash return is the nondiscounted sum of the equity payments over the previous year, divided by the initial equity balance. Deals with less than one year of equity payments do not have the cash-on-cash return calculated. XIRR is the internal rate of return for equity cash flows, adjusted for the timing of these payments. The Moody’s XIRR assumes equity is purchased at par, and that the equity has zero liquidation value. This last assumption is problematic, as it is highly doubtful that the collateral pool has zero value, and leads to large negative XIRRs for deals in which the equity holder has not yet been made whole.

The Equity Score Report shows investors how the equity of different deals is performing. Moody’s disguises the deal names, but investors still can use the report to look at trends in equity performance. For example, the investor can examine how many 2001 RESECs are currently paying double-digit dividends, or how many CBOs terminated without making whole equity holders.

Advice on Hard Delinquency Triggers

The second type of trigger is a hard delinquency trigger. Hard delinquency triggers are not tied to the senior enhancement percentage. Rather, the threshold is a fixed percentage of the current collateral balance. The hard delinquency trigger offers several advantages over a soft delinquency trigger.

First, it mitigates the adverse selection risk due to rapid repayments. Second, a hard delinquency trigger’s ability to prevent step-down does not diminish with the increase in subordination to the senior bonds like a soft delinquency trigger.

The hard delinquency trigger equivalent of a soft delinquency trigger can be estimated as follows: multiply the soft trigger by two times the initial senior enhancement and the soft delinquency trigger threshold. Using the 30% CPR example, the equivalent hard trigger at year three would be (0.20 times 2 times 0.233) = 9.3%.