Evaluated Prices for Asset-Backed Securities (ABS).
Overview: DIH provides evaluated prices on a comprehensive set of asset-backed securities (ABS).
Coverage: We currently cover approximately 25,000 securities.
History: Most of our ABS data goes as far back as the security’s issue date.
Updates: We update our ABS data monthly.
Delivery: You can receive our data in bulk files via download, S3 to S3, or on-demand via API.
Pricing: Several inputs go into the pricing for our data. For example, do want data for all available instruments, or a subset? How much history do you want? Do you want updates going forward? Contact us to learn more.
Why Firms Choose DIH’s Data.
Institutional investors use DIH’s evaluated prices to determine the fair value of these securities that are traded over-the-counter.
There are several reasons institutional investors rely upon our data:
- Market Coverage – we currently provide month-end evaluated prices for approximately 25,000 asset-backed securities, which closely matches the securities in their portfolio and target universe.
- Accuracy – also referred to as “market alignment”, the accuracy of our evaluated prices versus actual transaction prices is critical to our clients.
- Cost – There are not a lot of sources for ABS data, and so the legacy data providers are typically inflexible when it comes to what they charge for such data. In contrast, DIH works with its clients to provide data within their budget.
An Overview of Asset-Backed Securities (ABS).
Before we get into the details of how our ABS prices are created, a quick review of asset-backed securities may be helpful.
WHAT ARE ASSET-BACKED SECURITIES (ABS)?
An asset-backed security (ABS) is a kind of financial investment that is collateralized by an underlying pool of assets that usually generate a cash flow from debt. Such assets may be loans, leases, credit card balances, or receivables. ABS take the form of a bond or note, paying income at a fixed rate for a set amount of time until they mature. Asset-backed securities can be an alternative to other income-generating debt instruments, like corporate bonds or bond funds.
Financial institutions issue asset-backed securities to raise cash that they can use for lending or other investment opportunities. The underlying assets of asset-backed securities are often illiquid and hard to sell on their own. So issuers pool such assets together to create financial instruments that they can sell to investors. This process is called “securitization“ and enables issuers to make illiquid assets marketable to investors and get riskier assets off their books, thus reducing their credit risk. For investors, buying an ABS gives them the opportunity of a revenue stream.
The following are typical underlying assets of ABS:
- Home equity loans
- Automobile loans
- Student loans
- Credit card receivables
However, ABS have also been issued based upon:
- Movie revenues
- Royalty payments
- Aircraft landing slots
- Toll roads
- Solar photovoltaics
Virtually any cash-producing asset can be securitized into an ABS.
HOW ASSET-BACKED SECURITIES WORK.
In order to better illustrate how asset-backed securities work, let’s look at an example…
Assume that Student-Loans-R-Us makes student loans. It gives cash to people who want to borrow money to advance their higher education, and those people are obligated to repay their loans with a certain amount of interest. Student-Loans-R-Us may make so many loans that it starts to run out of cash. So Student-Loans-R-Us bundles its current loans and sells them to ABS Investments. Student-Loans-R-Us receives cash from ABS Investments, which it can then use to make more student loans.
ABS Investments then categorizes the purchased loans into different groups called tranches. These tranches contain loans with similar characteristics, such as maturity, interest rate, and expected delinquency rate.
ABS Investments creates three (3) tranches:
- Class A is the senior tranche and the largest tranche. It is structured to have an investment-grade rating to make it more attractive to investors.
- The B tranche has lower credit quality and, thus, has a higher yield than the senior tranche.
- The C tranche has a lower credit rating than the B tranche and might have such poor credit quality that it can’t be sold to investors. In this case, ABS Investments keeps the C tranche and absorbs the losses.
Next, ABS Investments issues securities based on each tranche. Like bonds, each ABS receives a 3rd party rating of its degree of riskiness. Investors use such ratings to better understand the likelihood the underlying loans will go into default.
When investors purchase ABS Investments’ asset-backed securities they receive the cash flows from the underlying pool of auto loans, minus an administrative fee that ABS Investments keeps for itself.
TYPES OF ASSET-BACKED SECURITIES.
In theory, asset-based securities can be created out of almost anything that generates an income stream. However, let’s look at the most typical ABS:
Collateralized Debt Obligation (CDO) – A CDO is an ABS issued by a business entity or trust formed specifically to issue that ABS called a special purpose vehicle (SPV). SPVs issue several types of CDOs, including:
- Collateralized loan obligations (CLOs) are CDOs made up of bank loans.
- Collateralized bond obligations (CBOs) are composed of bonds or other CDOs.
- Structured finance-backed CDOs have underlying assets of ABS, residential or commercial mortgages, or real estate investment trust (REIT) debt.
- Cash CDOs are backed by cash-market debt instruments, while other credit derivatives support synthetic CDOs.
- Collateralized mortgage obligations (CMOs) are composed of mortgage-backed securities.
Though a CDO is essentially structured the same as an ABS, some consider it a separate type of investment vehicle. Because CDOs often own a more diverse range of assets (including other ABS), some market participants consider CDOs to be a different investment type than ABS.
Home Equity ABS – One of the largest categories of ABS is home equity loans. These loans are often taken out by borrowers who have lower credit scores or few assets, and therefore don’t qualify for a mortgage.
Note: A mortgage-backed security (MBS) is sometimes considered a type of ABS, but most market participants think of it as a separate variety of investment. The main difference is that mortgage-backed securities are formed by pooling together mortgages exclusively, while ABS can include many different types of loans or debt instruments.
Auto Loan ABS – Car financing is another large category of ABS. The cash flows of an auto loan ABS include monthly interest payments, principal payments, and sometimes prepayments.
Credit Card Receivables ABS – Different than home equity and auto loan ABS in that they are non-amortizing, credit card receivables are another popular type of ABS. Because credit card ABS go to a revolving line of credit, rather than towards the same set sum, they do not produce fixed payment amounts. The cash flows of credit card receivables include interest, principal payments, and annual fees.
Note: Credit card receivables typically have a lock-up period during which no principal will be paid. If the principal is paid within the lock-up period, new loans will be added to the ABS with the principal payment that makes the pool of credit card receivables staying unchanged. Once the lock-up period expires, the principal payment is passed on to ABS investors.
Student Loan ABS – This form of ABS can be collateralized by either government student loans, guaranteed by the U.S. Dept. of Education, or private student loans.
METHODOLOGY BEHIND OUR EVALUATED PRICES.
Securities are grouped into categories based on collateral type, fixed or floating bond type, tranche type, average life, and collateral coupon. For some securities, assets are further classified into issuer and collateral quality tiers. A benchmark range of yield, DM, or spread is determined for each category. Due to the large volume of new ABS deals, new issue pricing is also used as an input to determine the benchmark level.
Each individual tranche is reviewed to assign an adjustment factor to the baseline yield or spread. The adjustment factor is based on tranche type, collateral coupon, loan size/age, structural / waterfall features, and recent collateral performance.
Prepay and default assumptions are generated, and then cashflows are discounted at the appropriate yield or spread according to the matrix and adjustments described above.
Model adjustments may be made to prepay and default in accordance with performance and prevailing market conditions.
Prices are then checked against available recent trading and indicative color on each bond, bonds from the similar collateral, and bonds with similar structural characteristics. Appropriate adjustments are made based on these observable prices.
Who Can Benefit from DIH’s Evaluated Prices?
ABS are bought and sold on the over-the-counter bond market often by institutional investors and banks. Such firms utilize our evaluated prices in various ways, especially in their research and risk management.
How Firms Use Our Asset-Backed Securities Data.
Institutional investors rely upon evaluated prices from multiple sources to determine the fair value of securities traded over-the-counter. Evaluated prices are also widely used as benchmarks for comparison and defensibility.
Flexible Updates & Data Delivery Methods.
Our ABS data is updated on a monthly basis.
You may customize our data to best suit your needs. For example, request data on all available instruments or provide a custom list.
We offer several ways to access our ABS data:
Bulk File Download – For most of our clients, downloading our data in bulk files is most convenient. We deliver files in .CSV format via download or S3 to S3.
API – Some use cases are better suited for on-demand delivery of data via an API.