- Evaluating CLO Modeling Methodology and Stress Test Scenarios
Evaluating CLO Modeling Methodology and Stress Test Scenarios
-
juillet 17, 2024
DownloadsDownload Case Study -
Beginning in late 2022, the National Association of Insurance Commissioners (“NAIC”) published its proposed collateralized loan obligation (“CLO”) modeling methodology and stress test scenarios to assess the credit risk of CLOs for setting the related capital charges for insurance companies. FTI Consulting was engaged by the American Investment Council (“AIC”), which represents private equity companies, to prepare an objective, unbiased study on the CLO modeling methodology and stress test scenarios proposed by NAIC.
Our Impact
- FTI Consulting’s report was well received by the client and AIC members and received praise from preeminent private equity firms.
- We presented our findings and recommendations before the director of NAIC’s Structured Securities Group (“SSG”) and representatives from the NAIC Valuation of Securities Task Force.
- Our work provided the client with key strategic options and critical foundations for evaluating NAIC’s future proposal of CLO capital charges.
Our Role
FTI Consulting analyzed the proposed CLO modeling and showed that it failed to account for all factors relevant to credit risk, such as prepayment risk, purchase price discount and default correlation, and ignored qualitative risk factors and CLO dynamics.
Private Equity Consulting Learn more
Our team identified the limitations of NAIC’s proposed stress test scenarios, including that the proposed default and recovery rate data for the stress test scenarios did not reflect the credit risk of collateral and the proposed stress test scenarios did not reflect market reality.
We independently valued NAIC’s selected CLOs using Moody’s CDOnet software and assumptions consistent with the NAIC’s stated approach.
We calculated valuations and expected losses for each tranche with our own analytics using methods such as Monte-Carlo simulation and binomial expansion technique.
Published
juillet 17, 2024
Key Contacts
Senior Managing Director, Leader of Securities, Commodities and Derivatives
Managing Director
Managing Director