Case Studies

Most MBS securitizations contain a call right that is vested with the servicer of the bonds. Imagine a pool of 4,000 30-year mortgages. By the time year 29 comes around, there may be less than 50 mortgages remaining. So the servicer is not stuck collecting from 50 mortgagees and applying those payments to various bonds, the call right allows the servicer to call the outstanding bonds and possibly re-securitize the remaining mortgages with other mortgages from other trusts that may have also been called. Typically, these call rights trigger when there is less than 5% to 10% of the original principal value of the trust remaining.

Most MBS securitizations contain a call right that is vested with the servicer of the bonds. Imagine a pool of 4,000 30-year mortgages. By the time year 29 comes around, there may be less than 50 mortgages remaining. So the servicer is not stuck collecting from 50 mortgagees and applying those payments to various bonds, the call right allows the servicer to call the outstanding bonds and possibly re-securitize the remaining mortgages with other mortgages from other trusts that may have also been called. Typically, these call rights trigger when there is less than 5% to 10% of the original principal value of the trust remaining.

Investors need to understand that the Cboe Volatility Index (VIX) is not the same as VIX futures, and this has important implications when it comes to trying to hedge a portfolio with a long volatility approach. The VIX index itself is a fantastic indicator of 30-day implied volatility. VIX futures are simply the market’s best guess where the VIX index will be on settlement at that point in time.

Investors need to understand that the Cboe Volatility Index (VIX) is not the same as VIX futures, and this has important implications when it comes to trying to hedge a portfolio with a long volatility approach. The VIX index itself is a fantastic indicator of 30-day implied volatility. VIX futures are simply the market’s best guess where the VIX index will be on settlement at that point in time.

The managers identified a bond where the servicer was not correctly interpreting the payout. In this case, the servicer was paying the principal on the bonds to an insurance company before the senior bondholders. It was paying the insurance company for losses the insurance company had previously paid out on mezzanine bonds. Insurance recovery rights are called rights of subrogation. ESM bought the senior bonds and challenged the servicer.

The managers identified a bond where the servicer was not correctly interpreting the payout. In this case, the servicer was paying the principal on the bonds to an insurance company before the senior bondholders. It was paying the insurance company for losses the insurance company had previously paid out on mezzanine bonds. Insurance recovery rights are called rights of subrogation. ESM bought the senior bonds and challenged the servicer.

In this case study we will take a close look at the large, liquid and mature $1.2 trillion U.S. senior secured corporate loan market. In this study, we present our case for loans in every rate environment.