Establishing Transparency in Obscure Markets

Houlihan Smith & Company’s Structured Finance Advisory Group is nationally recognized for its expertise valuing sophisticated structured securities. Houlihan has valued billions of dollars of Structured Investment Vehicles (SIVs), Collateralized Debt Obligations (CDOs), Collateralized Loan Obligations (CLOs), and other complex securities such as Auction Rate Securities (ARS). Also, as a member in good standing of the Financial Industry Regulatory Authority (FINRA) and registered as a licensed broker-dealer, Houlihan has the ability to obtain bids from the secondary market.

Many hedge funds and institutional investors invest in strategies that try to maximize the total return potential of undervalued structured securities. However, to achieve such above market returns, there are many risk factors built into the strategy - including structure risk due to the lack of transparency inherent in the instruments themselves. Houlihan’s team of specialists understands the complex valuation issues of these products and is able to use proprietary quantitative models that estimate a range of fair values. Working closely with auditors and investors, Houlihan provides reliable, timely, and precise valuation services for its clients, for the following types of securities:

Structured Investment Vehicles (SIVs)

SIVs are financial conduits or Special Purpose Entities (SPEs) that issue debt to fund the purchase of high-quality investment grade products such as asset-backed securities (ABS). The goal of an SIV is to provide attractive returns over LIBOR while limiting interest rate or currency risk exposure. Funding for SIVs comes from the issuance of commercial paper that is continuously renewed or rolled over; the proceeds are then invested in longer maturity assets that offer less liquidity but pay higher yields. SIVs attempt to profit from credit spreads between the short-term debt it issues and the longer maturity asset.

Collateralized Debt Obligations (CDOs)

A CDO is an investment-grade security backed by a pool of bonds, loans, and other assets with varying credit risks. CDOs are often referred to as “tranches” or “slices” with each CDO having a different maturity and risk associated with it. There are form variations of CDOs including Synthetic CDOs, and CDOs Squared and CDOs Cubed.

Synthetic CDOs invest in credit default swaps (CDSs) or other non-cash assets to gain exposure to a portfolio of fixed income assets. Synthetic CDOs are divided among various tranches and each tranche receives periodic payments based on the cash flows from credit default swaps. Although Synthetic CDOs yield a higher return, investors could end up owing more than their initial investments if a credit event occurs.

CDO² and CDO³ are backed by actual CDO tranches as opposed to bonds, loans or other asset collateralizations. These complex structures were devised to provide additional risk management tools to the commercial paper market; however, they lack transparency and are subject to significant liquidity and credit risks.

Collateralized Loan Obligations (CLOs)

A collateralized loan obligation is substantially similar to a CDO, except the assets owned by the SPE are corporate loans and to a lesser extent corporate bonds, rather than asset-backed securities. CLOs allow banks to reduce regulatory capital requirements by selling large portions of their commercial loan portfolios, thereby reducing the risks associated with lending.

Mortgage Backed Securities (MBS)

A mortgage-backed security (MBS) is a type of asset-backed security that is secured by an undivided beneficial ownership interest in a group or pool of mortgages. The mortgage loan is made by a financial institution or other lender to a borrower to finance or refinance the purchase of a home or other property, and vary in their terms. Because mortgage loans may take years to pay off, lenders must find ways to replenish their funds in order to fund new mortgage loans. To do this, lenders sell groups of mortgages with similar characteristics into the secondary mortgage market to issuers or guarantors of mortgage-backed securities. Additionally, an MBS is commonly used to redirect the interest and principal payments from the pool of mortgages to shareholders. These payments can be further broken down into different classes of securities, depending on the risk profile of different mortgages as they are classified under the MBS.

The Houlihan Structured Finance Advisory Group has represented a broad spectrum of clients enabling investor confidence and overcoming auditing conflicts. We continue to work with our clients providing valuation support and resolving uncertainties inherent in today’s markets.

Please contact our valuation specialist, Karl D’Cunha at 1-800-654-4977 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it for more information.