Introduction
Understanding the cash flows generated by an Asset-Based Security (ABS) is paramount for investors seeking to assess its profitability and make informed decisions. However, predicting future cash flows can pose a significant challenge, especially given the intricate nature of ABS transactions. Such complexity can often lead to unforeseen losses. The inability to accurately forecast cash-flows not only impedes risk detection but also hampers proactive risk mitigation efforts. This is where our Cash-Flow Simulation tool comes in to help.
What’s in it for you?
- Asset level forecast: Our tool operates at a single asset level, generating the underlying pool’s cash flows forecast with the highest level of accuracy.
- Comprehensive performance evaluation of your existing or new ABS transactions: You will gain insight into the cash-flows generated by the ABS tranches through the exact waterfall structure, and access key metrics such as Internal Rate of Return (IRR) and Fair Value.
- Sophisticated stress testing: You can properly stress-test your assumptions by generating a wide range of scenarios and comparing them. This empowers you to anticipate various market conditions and proactively manage potential risks, minimizing the impact of unforeseen events.
Why does it matter?
When it comes to ABS investments, it’s crucial to navigate the intricate landscape of potential future scenarios to effectively manage risks and mitigate losses. This is especially true when it comes to mezzanine and junior tranches, as they often carry higher levels of risk, requiring diligent monitoring and proactive risk management strategies. Given the high volume of data and the complexity of ABS transactions’ structures, relying solely on Excel is not an optimal solution, as it is prone to manual errors, and setting up an accurate cash-flow model can be extremely time-consuming.
By leveraging our tool, investors can understand the evolving landscape of cash flows, defaults, and prepayments and gain invaluable insights into the performance and resilience of their ABS investments, effortlessly and in a matter of seconds. Armed with this knowledge, investors can tailor their strategies, adjust their portfolios, and implement risk mitigation measures to navigate market uncertainties with confidence.
In essence, our tool offers investors the means to anticipate unforeseen events, enabling them to effectively manage risks and maximize returns in dynamic market environments.
How does it work?
Our tool operates on a dual level, providing cash-flow forecasts for both the underlying assets of an existing or new portfolio and the associated ABS tranches. The forecasts are based on a wide array of user inputs, ranging from interest rates to default and prepayment rates. These inputs can be customized by providing a flat value or a curve, and stressed by creating multiple scenarios, allowing the users to explore various market conditions and their potential impact on cash flows (See Figure 1). Moreover, for each scenario, the tool offers the option to specify inputs for specific clusters within the portfolio, based on underlying asset attributes such as borrower’s geography or interest rate type, for example.
Figure 1: Inputs set up for comprehensive scenario analysis
Once the parameters are set, users can execute the scenario. The tool then computes forecasts for each individual underlying asset, taking into account the specified parameters and market conditions, returning the aggregate evolution over time of cash-flows, defaults, and prepayments. It also generates cash-flows for each ABS tranche, according to the transaction’s waterfall structure.
In addition to cash flow forecasts, the tool calculates essential metrics such as IRR, Fair Value, and Losses on the tranches. These metrics offer valuable insights into the performance and risk profile of the ABS tranche, empowering users to make informed decisions and effectively manage their investments. The scenario outputs are presented in configurable views to facilitate the results analysis and get immediate insights (See Figure 2).
Figure 2: Result views (Cash-flow charts)
Use case
Our client, a leading European asset manager specializing in mezzanine and junior ABS tranches investments, faced challenges in accurately understanding the returns on their investments as the underlying portfolio evolved. With a diverse portfolio containing a high number of assets, they struggled to create a cash-flow model in Excel. Additionally, modeling the transaction’s waterfall structure proved to be complex. Consequently, the client resorted to forecasting on an aggregated level, relying on broad assumptions for tranches repayment. This approach, however, yielded less accurate results.
Upon adopting Cardo AI, the client experienced a transformative shift. They gained access to more accurate results in a fraction of the time, thanks to our tool’s advanced capabilities. The ability to simulate multiple scenarios provided invaluable insights, allowing them to assess potential losses across various scenarios. Moreover, with the Fair Value estimation, the client could proactively identify notes at higher risk of losses and take preemptive actions. This empowered them to optimize their portfolio and mitigate potential losses effectively.
In summary, our client leveraged Cardo’s sophisticated tools to enhance decision-making, minimize risks, and maximize returns in their investments.
See how Cardo AI replaces your Excel cash flow models with accurate, asset-level forecasts across any market scenario. Book a demo →