I picked one of the ABX BBB- 2006-2 bond from the venerable issuer Goldman Sach. Yes, the GSAMP 2006-HE3 series, bond M9.
Using software built to analyze such bonds under different assumptions of refinancing speeds (CPR), the default rate (CDR), and a severity of 40% (upon default the mortgage loans has 40% deficiency - common assumptions for subprime loans), here are the result:
The number in the intersection, -5,553, is the amount of spread in basis points over Libor, which will be realized assuming 18% default rate and 15% annual refinancing rate, which I deduced is more than very lenient, given how the collateral is performing as described in the other graph (Bankrupt, REO, and Foreclosure as of March is already 22%+, not including the delinquency rate - as noted in the second picture).
Yes, as in -55% under Libor (which is like 2.7%). That is a yield of roughly -50% a year.
This great investment, will wipe out 50% of a fully funded investment ($100 per par) of the AAA CDO within a year.
If however, the investors in question leveraged up (say 5-10x) and only has 10% of the notional value in reserve, you can clearly see how we can arrive at
- An ENTIRE LOSS of equity
- PLUS Debt loss the size of 4x the equity
within ONE YEAR of Investment. (which I think was in 2006 and 2007)
That is, ladies and gentlemen, the TRUE state of Balance Sheet in Ambac and MBIA.
I hope you enjoy your tour today.