asset management sfi group asset backed securities

Asset Backed Securities

Asset Management – SFI Group

Robert Wakiyama, Multi Credit & Unconstrained

November 2014

November 2014 Asset Management 2 The disclaimer at the end is also applicable to this page.

Specialized Fixed Income Group

Overview

USD 10 billion assets under management

24 investment professionals with an average of 13 years of experience

Global Developed and Emerging Market credit solutions across sectors and rating categories

Relative and absolute return solutions with customized benchmarks and investment guidelines

Investment process with a fundamental and relative value bottom-up security selection and top-down macro strategy

Tailor-made investment solutions for UHNW clients, family offices, independent asset managers, pension funds and corporations

Risk management, investment controlling and best execution are an integrated part of the investment process

Sophisticated client reporting

Comprehensive Offering

Asia

Global

Convertibles

UHNW

Solutions

Emerging

Markets

Absolute

Return

Multi Credit &

Unconstrained

SFI Group

Sources: Credit Suisse

As of 31.10.2014


Content

Introduction into Asset Backed Securities

Market Overview

ECB Covered Bond & ABS Purchase Program

Investor Considerations

Credit Suisse (Lux) Global Securitized Bond Fund


Tailwind for a Neglected Asset Class

Central Banks Drive the Revival of the Securitized Bond Market

Sources: Bloomberg, Financial Times, Reuters

Financial Times

Bloomberg

Reuters


Explaining Asset Backed Securities

Corporate Bonds versus ABS

Corporate Bond Investment Asset Backed Security Investment

Deutsche Bank Senior Unsecured Bond:

Investor has to trust the management decisions of the company, how to use the investment best and to generate cashflows to repay the investment + interests Investor has to understand the reporting standards Cushion for loss absorption (equity) is calculated on risk weighted assets and special reporting standards

German Mortgage Portfolio originated by DB:

No company management is involved. The investor

has to know the investment

Investor has a transparent look-trough of the investment and knows detailed parameter and its changes by a monthly reporting Investor has to trust the originator for a due diligent credit process and servicing Cushion for loss absorption: how many mortgages at which recovery rate could default without any loss for the investment

Source: Credit Suisse


Securitized Bonds

Covered Bonds vs. ABS

Source: Credit Suisse 1 Simplified illustration.

Assets remain on the issuer’s balance sheet, but legally and economically isolated. Protected by

1. the claim against the issuer bank 2. preferred claim to a defined pool of liabilities 3. solvency of borrowers of the liability pool

issue of

Covered Bonds

Assets (true sale) will be transferred out of the

balance sheet into an SPV. Protected by

1. solvency of a diversified pool of consumers 2. pledged asset of the consumer 3. lower ranked notes

Assets

... Equity

SPV

Assets Senior

Mezzanine

Covered Bonds Asset Backed Securities

Eligible

Assets


Explaining Asset Backed Securities

Who is Using ABS?

Example: Volkswagen Example: Italian Banks

Volkswagen is one of the most active issuer of ABS globally (USD 16 bn outstanding ABS). The issuance of ABS provide:

Diversification and building track record of securitized funding Increase RoE buy selling lower yielding assets Refinancing leasing and auto loans in local currency

Over 25 Italian banks issued in the last 10 years ABS. The issuance of ABS provide:

Diversification of funding and building track record of securitized funding 2nd/3rd tier corporates access to the capital market Increase RoE buy selling lower yielding assets (mortgages) Reduce RWA

Source: AFME & SIFMA, Volkswagen Credit Suisse As of 10.11.2014

0.0

50.0

100.0

150.0

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

in b

n U

SD

Issuance Italian ABS


Content


Market Overview





Global Securitized Market

Important Asset Class with USD 8 trillion Outstanding

US is still the biggest and most active market with a share of 66%.

Global Securitized Bond Market Forms of Securitization

Covered

Bonds

(Pfandbriefe)

MBS

(Mortgage

Backed

Securities)

ABS

(Asset Backed

Securities)

CDO

(Collateralized

Debt

Obligation)

Mortgage Assets other

than

Mortgages

Various

Financial

Assets

Secured bank

funding

Sources: Bloomberg, Sifma, Barclays, Credit Suisse

As of 10.11.2014

16%

56%

8%

19% 1%

Covered Bonds US MBS US ABS European ABS other ABS


European ABS Market

Outstanding European ABS at 2007 Level

European ABS offer investors a broadly diversified and liquid alternative to invests in floating rate

notes

Over 90% of European ABS are Floating Rate Notes (for comparison: market size of European corporate FRN only USD 0,32 trn)

New Issuance Outstanding

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

in t

rn U

SD

Issuance European ABS

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

in t

rn U

SD

Outstanding European ABS

Sources: Bloomberg, Sifma, Barclays, Credit Suisse

As of 10.11.2014


European ABS Market

2014 - First Time more Upgrades than Downgrades

2/3 of outstanding European ABS are rated AAA and AA. Even senior tranches of peripheral

European issuer can receive ratings above the sovereign rating due to a high credit protection

(e.g., some new issued Italian Senior Auto ABS are rated AA by S&P)

2014: the upgrade to downgrade ratio shifted for the first time positive for European ABS

Current Outstanding Rating Rating Changes since 2007

Sources: Bloomberg, Citi, Moody’s, S&P, Fitch, Credit Suisse

As of 10.11.2014

46%

18%

10%

9%

5%

3% 1%

1% 7%

AAA AA A BBB BB B CCC CC C NR

2869

-1311

-8000

-6000

-4000

-2000

0

2000

4000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Upgraded Downgraded


European ABS Market

Current and Historical Spreads

Yield pick up versus other high rated credit solutions with low interest rate sensitivity such as floating

rate notes and short term bonds

2007–2009 undifferentiated illiquidity crisis of the asset class turning since 2009 into a performance

correlated to the underlying risk

Current Senior ABS Spreads Historical Spreads

Sources: Bloomberg, Barclays, Moody’s, S&P, Fitch, Credit Suisse

As of 10.11.2014

-

100

200

300

400

500

600

700

Oct

ober-

06

April

-07

Oct

ober-

07

April

-08

Oct

ober-

08

April

-09

Oct

ober-

09

April

-10

Oct

ober-

10

April

-11

Oct

ober-

11

April

-12

Oct

ober-

12

April

-13

Oct

ober-

13

April

-14

Oct

ober-

14

Ris

k p

rem

ium

IT RMBS IT Covered Bonds 5y UK RMBS

0

30

60

90

120

150

180

EU

CL

O A

AA

EU

CM

BS

Senio

r

PO

R R

MB

S S

enio

r

UK

RM

BS

NC

SP

RM

BS

senio

r

IT R

MB

S S

enio

r

UK

Cre

dit

Card

FR

RM

BS

UK

RM

BS

NL

RM

BS

EU

Auto

Senio

r

Ris

k P

rem

ium


Global Securitized Bond Market

Low Defaults in European ABS, Zero Defaults in Covered Bonds

Default probability of prime European ABS and corporate bonds is historically comparable

Focus Universe Excluded

10 years Corporates Covered

Bonds

EMEA

ABS

APAC

ABS

US ABS

ex

Subprime

US

CMBS

Global

CLO Global

CDO

US ABS

Subprime

Aaa 0.0 0.0 0.1 0.0 1.2 0.5 0.0 24.1 9.8

Aa 0.4 0.0 3.4 0.1 6.4 4.1 0.0 39.1 52.1

A 2.6 0.0 3.5 3.8 7.9 14.8 0.1 47.9 74.6

Baa 6.1 0.0 8.5 11.2 26.3 23.8 3.4 55.3 81.6

Ba 22.2 – 19.1 30.8 54.7 51.8 13.8 52.9 87.5

B 34.9 – 27.7 48.2 56.2 74.4 31.2 45.3 100.0

Caa–C 80.7 – 56.3 – 100.0 88.8 – 55.4 100.0

Investment Focus

Sources: Moody’s, Credit Suisse

1 CLOs (Collateralized Loan Obligations): ABS secured with senior secured loans.

For illustrative purpose only.


Content


Market Overview






Instrument to Control More Directly the Monetary Base

The impact of the interaction could be (1) potential squeeze of funding cost and (2) increased return

on equity, which remains with the issuing bank

Target is (1) to incentivize banks to sell more assets in ABS from the balance sheet & (2) issue new

loans to the real economy

Asset Backed Security1

Senior Notes Rating AAA

Equity (retained

from the issuer)

Mezzanine Notes Rating A

Libor +1.1%

Libor + 2,1%

Excees Spread (9%)

Libor +0.5%

Libor + 1.5%

Excees Spread (15%)

Current cost of funding Potential Impact of ABSPP

Source: Credit Suisse 1 Simplified illustration. For illustration purpose only. Assumption of an average yield on the mortgage portfolio of 2%.



Ambitious Target for New Purchase Program

The ECB started it’s 3rd purchase program end of October 2014 and bought within the first 3 weeks

already EUR 10bn European covered bonds.

Expected start of the ABS purchase program end of November

ECB Purchase Program: targets (in bn EUR)

ECB Purchase Program: realized (in bn EUR)

Sources: Bloomberg, ECB, Credit Suisse As of 10.11.2014

0

20

40

60

80

2009/2011 2011/2012 2014/2016

Covered Bond PP 1 Covered Bond PP 2

Covered Bond PP 3 ABS PP

0

200

400

600

800

1000

1200

2009/2011 2011/2012 2014/2016

Covered Bond PP 1 Covered Bond PP 2 Covered Bond PP 3

ABS PP Target


Key Developments in the ABS Market

Risk retention

Issuer of ABS in Europe have to retain a certain portion of the first loss tranche of each investment.

This exposes issuers directly to the risk of each transactions and can mitigate the risk of moral hazard

and a negative selection bias of the assets in ABS.

Transparency

Central banks introduced new measures to address information asymmetry with the securitization

process. The new transparency requirements for ABS are now considerably above the requirements

for other assets classes, e.g., Covered bonds.

Regulatory environment

The regulatory framework in Europe and US currently differ in essential points. An international

alignment would be more supportive for an efficient and liquid market.


Investor sentiment

Awareness of inherent risks of the asset class


Content


Market Overview






Low Interest Rate Sensitivity Thanks to Floating Rate Structure

ABS provide a liquid investment solution to reduce interest rate risk

Attractive relative value for short term high rated credit risk

Performance after announcement of the FED tapering

Historical performance indications and financial market scenarios are no reliable indicator for current or future

performance. Performance indications do not consider commissions levied at subscription and/or redemption.

Sources: Barclays Global Agg Index, Credit Suisse

As of 31.10.2014

0.5

1.0

1.5

2.0

2.5

3.0

98

100

102

104

106

108

110

Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14

Inte

rest

Rate

in %

Pe

rfo

rmance

CS Global Securitized Bond Fund Barclays Global Agg Corp A 5 year US government yield (rhs)



Low Correlation to Other Asset Classes

ABS show low return correlations to equities and other fixed income asset classes. Hence, adding

securitized assets allows for additional alpha sources while simultaneously reducing risk.

A multi asset class portfolio offers a higher degree of diversification and better risk/return

characteristics

ABS EquitiesCorporate

Bonds

Government

Bonds

Inflation

LinkedHigh Yield

Emerging

Market

ABS 1.00

Equities 0.03 1.00

Corporate Bonds 0.20 (0.10) 1.00

Government Bonds 0.01 (0.36) 0.75 1.00

Inflation Linked 0.10 (0.19) 0.69 0.77 1.00

High Yield 0.22 0.64 0.41 (0.05) 0.07 1.00

Emerging Market 0.06 0.44 0.51 0.27 0.29 0.72 1.00

Historical performance indications and financial market scenarios are no reliable

indicator for current or future performance.

Sources: Bloomberg, Credit Suisse, JP Morgan, Citigroup, Barclays

Fas of 30.09.2009–31.08.2014



Conservative Investment Approach

Historical performance indications and financial market scenarios are no reliable

indicator for current or future performance. For illustrative purpose only. Sources: Barclays, JPM, Citigroup, Credit Suisse

Liquidity

and Short

Term

High Yield Fixed Income Cash

High Yield

Global Government

Cash

Credit Suisse

Global

Securitized

Bd Fd US Broad IG

US IG 1-3y Floating Rate

Notes

Senior Secured Loans

Emerging Market

0%

1%

2%

3%

4%

5%

6%

7%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

Yie

ld

Volatility

Yie

ld

Volatility


Content


Market Overview





Credit Suisse (Lux) Global Securitized Bond Fund Fund Performance (Net) versus Peers

60

70

80

90

100

110

120

130

Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14

CS Global Securitized Bond Fund USD Julius Baer ABS Fund

Legg Mason Adj Rate Income Fund Amundi ABS fund

Historical performance indications and financial market scenarios are no reliable indicator for

current or future performance. Performance indications do not consider commissions levied at

subscription and/or redemption.

Sources: Bloomberg, Credit Suisse

As of 31.10.2014



Portfolio Overview



subscription and/or redemption


As of 31.10.2014

Key Figures Maturity in Years Industry Sector Allocat ion

Reference Currency USD 00-01 RMBS 25.8%

BM type HEDGED 01-02 CLO 16.8%

Portfolio Yield 1.41% 02-03 COMMERCIAL MBS 14.3%

Modified Duration 0.25 03-04 COVERED BOND 8.1%

Number of Positions 285 04-05 RMBS NC 8.0%

Average Rating AA- 05-07 STUDENT LOAN ABS 5.4%

Average maturity in years 3.75 07-10 AUTOMOBILE ABS 5.3%

Top 10 issuer cumulated 20.4% 10-15 BANKS 4.1%

Largest Position 1.59% 15-20 SME ABS 3.6%

Current AuM in m 1356 20+ CREDIT CARD ABS 3.2%

Data as of 31.10.14 OTHER 5.4%

11.3%

5.5%

12.0%

10.8%

18.4%

19.2%

21.9%

0.7%

0.2%

0.0%

0% 20% 40%



Portfolio Overview



subscription and/or redemption


As of 31.10.2014

Top Posit ions Country Allocat ion Rat ing Allocat ion

SIENA 2010-7 A3 1.6% UNITED KINGDOM 20.8% AAA 51.2%

STORM 2014-3 A2 1.2% UNITED STATES 20.1% AA+ 12.1%

CHSNT 2014-1 A 1.2% ITALY 12.4% AA 9.4%

BCARD 2014-1X A 1.2% PAN-EUROPE 11.3% AA- 2.1%

OKK 1 A 1.1% NETHERLANDS 8.6% A+ 3.8%

WESTPAC BANKING 1.1% GERMANY 5.0% A 12.8%

BSCMS 2005-T20 A4A 1.1% AUSTRALIA 4.6% A- 9.3%

ALBA 2011-1 A2 1.1% LUXEMBOURG 4.5% BBB+ 0.4%

GFUND 2014-1 A2 1.1% FRANCE 3.9% BBB -1.5%

TAURS 2013-GMF1 B 1.0% NORWAY 3.3% BBB- 0.5%

PARGN 20 A 0.9% PORTUGAL 1.4% BB+ 0.0%

MODA 2014-1 A 0.9% SWEDEN 1.3% BB 0.0%

BERAB 3 A 0.9% OTHER 2.8% < BB 0.0%



Avoid High Risk Bucket within Second Tier Assets

Italian ABS

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0–1 1–3 3–5 5–7 7+

CS Global Securitized Bond Fund BM

0.0%

0.5%

1.0%

1.5%

2.0%

AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+


UK RMBS Non-conforming

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0–1 1–3 3–5 5–7 7+


0.0%

2.0%

4.0%

6.0%

8.0%

AA+ AA AA- A+ A A- BBB+ BBB BBB-


Data for illustrative purpose only. Sources: Bloomberg, Credit Suisse


Summary

Market Highlights Fund Highlights

Central banks highlight the importance

of ABS and provide the basis of being

an active player in the ABS market

The floating rate profile of ABS provides a protection against rising interest rates

Securitized bonds offer diversification

benefits due to low correlation to other asset classes

Conservative investment approach

focusing on securitizations of prime assets

with high seniority allows the generation of

low volatile returns The fund has daily liquidity and targets

an average AA-rating

Current portfolio yield offers a pick-up versus floating rate notes and short term

bonds

Broad diversification across countries,

collateral types and issuers to limit credit

risk

Historical performance indications and financial market scenarios are no reliable indicator for current or future performance.


As of 31.10.2014



Key Facts

Fund name Credit Suisse (Lux) Global Securitized Bond Fund

Domicile Luxembourg

Platform Credit Suisse Investment Funds 1

Investment Advisor Credit Suisse Asset Management, Zurich

Currency share classes USD/EUR/CHF/GBP (hedged share classes – other currencies and distribution share classes available on request)

Investment objective The fund targets sustainable returns with limited volatility

Benchmark Barclays 50% US ABS FRN + 50% Pan Euro ABS FRN ex Spain

Minimum investment EB and EBH classes: one unit; IB and IBH classes: 1,000,000 (in share class currency)

EU taxation In Scope

Liquidity and subscriptions Daily, with cutoff at 3:00 p.m. CET

Share Classes Management Fee Expected TER1 Valor no. ISIN Number

Institutional/HNWI IB (USD, accumulating) 0.42% 0.57% 23727978 LU1034382256

Institutional/HNWI IBH (EUR hedged, accumulating) 0.42% 0.57% 23729139 LU1034382413

Institutional/HNWI IBH (CHF hedged, accumulating) 0.42% 0.57% 23729088 LU1034382330

Institutional/HNWI IBH (GBP hedged, accumulating) 0.42% 0.57% 23729148 LU1034382504

Institutional/discretionary EB (USD, accumulating) 0.42% 0.55% 3679006 LU0340000263

Institutional/discretionary EBH (EUR hedged, accumulating) 0.42% 0.55% 3679016 LU0340000933

Institutional/discretionary EBH (CHF hedged, accumulating) 0.42% 0.55% 3679019 LU0340001154

1 Estimated expected TER, including custody, admin, tax d’abo, others. Source: Credit Suisse


Investment Management Team

Credit Suisse (Lux) Global Securitized Bond Fund (1/2)

Oliver R. Gasser Head Multi Credit Solutions

Securitization Expertise: Since 2002 Focus on US & European CMBS and RMBS Structuring Balance Sheet Securitization Senior PM multi-credit strategies/asset allocation advise

Previous Positions:

2002–2007 Head Structuring Securitization at UBS loan book (focus on RMBS, CMBS and B/S CLOs). 1990–2002 Fixed Income Trading and Sales at Credit Suisse.

Mr. Gasser holds a Degree in BA from the University of Applied Sciences Zurich and qualified as a Chartered Financial Analyst (CFA) in 2006.

Securitization Expertise: Since 2009 Focus on European RMBS & CMBS as well as Consumer ABS Macroeconomic ABS strategy

Previous Positions:

Research assistant at the institute of financial management at the University of Bern, responsible for the development of quantitative models and tools for resolving financial and economic question.

Dominique Gilgen qualified as Chartered Financial Analyst (CFA) and holds a Master of Science in Economics from the University of Bern with focus on financial market theory and econometrics.

Dominique Gilgen Co-Manager of the CS (Lux) Global Securitized Bond Fund


Investment Management Team

Credit Suisse (Lux) Global Securitized Bond Fund (2/2)

Securitization Expertise: Since 2004 Focus on global CDOs & US ABS market Covered Bonds specialist Structured Credit Modeling

Previous Positions:

2007–2012 Fixed Income Portfolio Manager at Clariden Leu: In charge of the global ABS and CDO investments of the Asset Management. 2004–2007 Analyst for CDO & ABS and Structured Credit Modeling at LBBW. 2000–2004 Risk Management & Private Banking at LBBW.

Mr. Wakiyama graduated from the University of Hohenheim with a Masters degree in Economics.

Robert Wakiyama Co-Manager of the CS (Lux) Global Securitized Bond Fund

Securitization Expertise: Since 2006 Focus on European Credit Card and Consumer ABS

Previous Positions:

2004–2006 Fixed Income Portfolio Manager at VP Bank. 2000–2004 Private Client Portfolio Manager at Bank Leu.

Mrs. Slater graduated in Economics, Financial Planning and Asset Planning from the University of St. Gall in 1999 and successfully qualified as a Certified International Investment Analyst (CIIA) in 2002.

Laura Slater Fixed Income Portfolio Manager Fund


Disclaimer

This document was produced by Credit Suisse AG and/or its affiliates (hereafter “CS”) with the greatest of care and to the best of its knowledge and belief. However, CS provides no guarantee with regard to its content and completeness and does not accept any liability for losses which might arise from making use of this information. The opinions expressed in this document are those of CS at the time of writing and are subject to change at any time without notice. If nothing is indicated to the contrary, all figures are unaudited. This document is provided for information purposes only and is for the exclusive use of the recipient. It does not constitute an offer or a recommendation to buy or sell financial instruments or banking services and does not release the recipient from exercising his/her own judgment. The recipient is in particular recommended to check that the information provided is in line with his/her own circumstances with regard to any legal, regulatory, tax or other consequences, if necessary with the help of a professional advisor. This document may not be reproduced either in part or in full without the written permission of CS. It is expressly not intended for persons who, due to their nationality or place of residence, are not permitted access to such information under local law. Neither this document nor any copy thereof may be sent, taken into or distributed in the United States or to any U. S. person (within the meaning of Regulation S under the US Securities Act of 1933, as amended). Every investment involves risk, especially with regard to fluctuations in value and return. Investments in foreign currencies involve the additional risk that the foreign currency might lose value against the investor’s reference currency. Historical performance indications and financial market scenarios are no reliable indicator for current or future performance. Performance indications do not consider commissions levied at subscription and/or redemption. Furthermore, no guarantee can be given that the performance of the benchmark will be reached or outperformed. Discretionary mandates and/or investment products used within the framework of the mandates (e.g. alternative instruments, structured instruments and derivatives) may involve a high degree of complexity and risk, or may be subject to stock market fluctuations. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. CS Investment Funds 1- Credit Suisse (Lux) Global Securitized Bond Fund has been established under Luxembourg law as undertakings for collective investment in transferable securities (UCITS) subject to EU Directive 2009/65/EC, as amended. The representative in Switzerland is Credit Suisse Funds AG, Zurich. The paying agent in Switzerland is Credit Suisse AG, Zurich. Subscriptions are only valid on the basis of the current sales prospectus, the simplified prospectus, the bylaws and/or contractual terms and conditions and the most recent annual report (or semi-annual report, if more recent). The prospectus, simplified prospectus and/or the Key Investor Information Document (KIID), bylaws and/or the contractual terms and conditions and the annual and semi-annual reports are available free of charge from Credit Suisse Fund Services (Luxembourg) S.A., Luxembourg, from Credit Suisse Funds AG, Zurich or from any branch of Credit Suisse AG in Switzerland. Copyright © 2014 Credit Suisse Group AG and/or its affiliates. All rights reserved.

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