Written by GlobalCapital
When the 2007-8 crisis hit, appetite for analytics using macro forecasts to project tranche-level impacts across structured finance was fairly limited. There were models that could forecast the performance of residential mortgages, but few issuers or investors saw the need to try to determine how, for example, unemployment might affect a specific RMBS tranche. Then came stress testing and a host of new regulatory and accounting initiatives that helped drive the need for increasingly refined modelling. Fast forward to the shock of 2020, and Moody’s Analytics found the unparalleled speed and accuracy of its platforms in huge demand.
“The pandemic shone a light on asset quality,” says David Little, general manager of Structured Finance at Moody’s Analytics. “With swift deterioration in macroeconomic fundamentals, there was increased focus on the underlying assets in structured finance.” Market players wanted to know what would happen to a tranche or a portfolio if the unemployment rate tripled. They wanted to examine the impact of multiple different scenarios and they wanted the answers quickly. Moody’s Analytics was the obvious choice. “We've got so much content across Moody’s Analytics’ different business lines that we can provide solutions like that,” Little says. “When an economic shock like the pandemic happens and you want to translate macro forecasts into tranche performance, not only can we do that, we can do that off the shelf.”
The firm’s off-shelf products put customers in a position to run through different situations and model cash-flows themselves, and Moody’s Analytics welcomed a range of new clients to those services in 2020. But there were also opportunities for research initiatives across asset classes. Nicole Lawrence, Senior Director of Strategy, worked on a project taking macro forecasts from the firm’s economics team and looking at how different forecasts would ultimately affect portfolios.
“In CLOs we applied different levels of stress to see what would happen to each tranche,” she says. “Would it experience loss, would the stress potentially create losses in another tranche, would downgrades get triggered?” Similarly, the analytics team looked at the auto ABS market and how the macro projections would affect the performance of specific deals. “We’re able to take that data and content to create research and thought leadership pieces that provide insight on the state of the market,” she says.
Moody’s Analytics also saw demand from government entities and academic institutions that wanted to study areas of the market that were behaving in ways you wouldn’t expect. “People came to us because we have the data, the track record, the models and they know they can work with us,” says Little.
The firm stands out as one of the few providers with both its own data and technology. Moody’s Analytics has gone through a multi-year programme of infrastructure investment that has allowed it to scale-up new products and provide the same cutting edge analytics with greater speed and accuracy. Taking CMBS as an example, the firm has built out the capacity to analyse underlying properties.
“It’s not enough to just have CMBS data,” says Little. “We’ve processed CMBS deal data for many years, but now we’re getting much deeper and richer information on the underlying properties in those deals due to a series of investments and acquisitions in our CRE group.”
Moody’s Analytics has seen significant growth in customers across all asset classes in the last couple of years, which in turn has driven new hires in areas like strategy and customer support. The firm has a strong client base in the US and Europe, which continues to expand. Demand from smaller European markets is the most recent trend, as new firms enter or re-enter the structured market. “We see a lot of demand from Japan, we’ve recently seen demand in Australia and perhaps starting to see demand in the Middle East as well.”
Part of this growth stems from deepening capital markets, but also from a strong return into structured finance specifically. There are also accounting drivers like IFRS 9 and CECL, which require firms to adapt their forecasting in line with new accounting rules. Moody’s Analytics offers integrations to its software platform that help with accounting and ALM. Ultimately, the firm stands out for its infrastructure investments, which combined with developments around cloud and database technology have allowed for much more rapid delivery of analytics.
“It comes down to quality, innovation and understanding how customers want to consume the information we provide,” says Little.