INDEPENDENT PRICING
Overview
 WHITEPAPER
Clayton’s IPS group provides accurate third-party, fair market pricing of hard-to-value and other mortgage and asset-backed securities for fixed-income managers and investors.  As it develops prices, the Clayton IPS process establishes the value that a security owner would receive over time by holding the asset on its balance sheet as well as producing (in accordance with FAS 157) the fair value expected to be received by liquidating the asset in the current market.

The Clayton IPS delivery output provides complete transparency in terms of the projections and assumptions used to derive the prices; this transparency documents the model assumptions for audit purposes (prepayment speeds (CPR); default rates (CDR); loss severity, discount rates, etc.), and supports issues and questions regarding impairment, liquidity (and marketability) factors, projected principal write-downs, and loss forecasts. 

In sum, Clayton IPS' pricing processes incorporate a blend of market and credit research, internal and external pricing models, and expert judgment to determine and verify the correct set of performance assumptions that drive an asset’s cash flow and ultimate fair market value.		        
      


Differentiation Through Proactive Pricing
In today’s environment, one of the biggest issues facing an asset manager is transparency to their direct investors and to their auditors – realistic, on-the-run assurances of essential asset value. Clayton IPS gives access to this critical information:
  • What level of losses are projected to occur over the near-, intermediate- and full-term of the asset?
  • Are prepayment speeds in line with the assumptions used at the time the asset was purchased?
  • How have the loss severities worsened over time, and what will the impact be?
  • What does the application of these assumptions mean in terms of a cash-flow driven value?
The Clayton IPS pricing output answers these questions and more.


How Does the Process Work?
  • Whether performing valuation or verification work, the Clayton IPS team assesses the merits and shortcomings of each security with rigorous care – it’s as if IPS is evaluating every asset for its own investment:
       - The process captures collateral and structural performance for each individual security being valued, as well as the
         current market and credit considerations that will impact price
       - The process strikes a balance between fundamental collateral analysis and technical evaluation of market
         observable inputs from a wide variety of market participants
  • The foundation of what we do is to build separate projections (vectors) for each of the underlying assumptions that will impact the expected future cash flows of every security we value
  • These assumptions include:
  -   Defaults
-   Loss severity
-   Prepayments
-   Cumulative loss estimates
-   Trigger assumptions
We do this to determine what the expected cash flows for a given deal will be and use INTEX as our evaluation tool
  • We don't perform a matrix-based pricing approach: each asset is analyzed based on its individually projected performance, risk characteristics and proper market color
  • In sum, the process strikes a balance between fundamental collateral analysis and technical evaluation of market observable inputs from a wide variety of market participants
Where Do the Assumptions Come From?
  • A diverse set of inputs are used to determine the most suitable underlying assumptions for use in the pricing model:
    -   Each day IPS receives Dealer-prepared research and market color (the synthetic and cash markets, inventories, bid
        lists and live trades, and various MBS spread and analytic reports)
    -   Additionally, we maintain a regular dialogue with our clients to gain clarity about the expectations they have for
        their assets (both performance and value)
    -   And most importantly, IPS draws detailed insight from Clayton's proprietary surveillance database (as credit risk
        manager for over $2.2 trillion of loan level data in MBS deals)
  • All of this data is then blended with IPS’ own understanding of a given security’s collateral make-up, historical performance, and changing characteristics to select the right set of terms for developing the assumptions
  • After building the projected curves, we apply an appropriate discount rate (given where the asset lies in the capital structure, risk characteristics and applicable market indications) to then calculate the security’s fair market value

What Products Does IPS Price?
  • Standard Valuation Products include:  
      -   RMBS
    -   ABS
    -   CMBS
    -   Credit default swaps
    -   Secured corporate debt
    -   Structured debt transactions
    While 80%+ of what we do is RMBS-related, other specific asset types that we can value include: aircraft and equipment leases, European SME (small-to-medium enterprise) bonds; European MBS; Equities (warrants and options); and non-performing whole loan pools (calculation of net proceeds through liquidation)

  • Further, IPS can provide a number of additional analyses once the base curves and pricing have been established:
      -   Cash flow projections and first principle writedown analysis
    -   Stress /scenario testing
    -   Monoline wrap evaluation
    -   Assessment of credit loss for OTTI
What Does this Mean for Your Business?
  • Additional insight into the true fair value of your portfolio holdings
  • FAS 157 fair value measurements in accordance with generally accepted accounting principles (GAAP)
  • Detailed fair value analytics to assist with the assessment of other-than-temporary-impairment (OTTI) of assets
  • Quantitative and qualitative pricing valuation and verification data to support your management decisions and share with your investors/auditors/regulators