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Home > Business/Finance > Financial Services > Banking
Amortization Class Tranches & Other Financial Vehicles in the US - Industry Risk Rating Report
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| Published Date:
April 2008
Published By:
IBISWorld
Page Count:
22
Order Code:
R538-18792
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Industry Risk Ratings Synopsis
This Industry Risk Ratings report from IBISWorld evaluates the inherent risks associated with the Amortization Class Tranches & Other Financial Vehicles in the US industry. Industry Risk is assumed to be 'the difficulty, or otherwise, of the business operating environment'.
The report looks at the operational risk associated with this industry. Three types of risk are recognized in our analysis. These are: risk arising from within the industry itself (structural risk), risks arising from the expected future performance of the industry (growth risk) and risk arising from forces external to the industry (external sensitivity risk).
This approach is new in that it analyses non-financial information surrounding each industry. Industries are scored on a 9-point scale, where 1 represents the lowest risk and 9 the highest. The Industry Risk score measures expected Industry Risk over the coming 12-18 months.
Industry Definition
This industry comprises legal entities (i.e., funds (except insurance and employee benefit funds; open-end investment funds; estates and agency accounts; and Real Estate Investment Trusts - REITs)).Included are entities issuing collateralized mortgage obligations (CMOs). A CMO is a form of derivative security backed by a portfolio of mortgage loans. In general, the holder of a CMO owns the rights to receive interest and principal payments from outstanding debt. CMOs are backed by a pool of mortgage-backed securities (MBS) or mortgage loans themselves. These securities were developed to offer a wider range of investment time frames and greater cash flow certainty than was typically available with original MBS. These entities pool mortgages with similar characteristics, and finance their activities by issuing mortgage-backed securities. The goal is to produce a bond-like investment product that fits investors' needs better than direct participation in the loans. Issuers create different tranches by restructuring the principal and interest payments of the loans. A tranche constitutes a class of bondholders with similar maturities. A CMO can be made up of a number of different tranches, where bondholders will receive payments, either interest only, interest and principal or principal only payments, at different maturities depending on the life of the underlying loan and the type of CMO tranche held. By subscribing to a specific tranche, investors can therefore time the start of repayments on their invested funds. If an investor buys a CMO tranche that specifies payments will not be made until ten years into the life of a thirty-year mortgage, the investor will not receive any income from the CMO until ten years has passed.Also included in the industry are closed-end funds, a type of investment company that issues a fixed number of shares that are listed on a stock exchange or traded in the over-the-counter market.Finally, the industry comprises unit investment trusts (UIT), which is a registered investment company that buys and holds a generally fixed portfolio of stocks and bonds. Units in the trust are sold to investors who receive their proportionate share of dividends on interest paid by the UIT investments.
Report Contents
Risk Overview
The Risk Overview chapter includes sections on Industry Definition and Activities, Industry Risk Score and Risk Rating Analysis. The Industry Definition and Activities section provides a detailed definition of the activities carried out by operators in this industry as defined in NAICS. A list of the primary activities of the industry is also included. The Industry Risk Score section provides the Overall Industry Risk Score as well as the Risk Scores for each of the three types of risk covered that combine to form the Overall Industry Risk Score. These three types of risk are Structural Risk, Growth Risk and External Sensitivity Risk. The Risk Rating Analysis section discusses the underlying factors contributing to the Overall Industry Risk Score.
Structural Risk
The Structural Risk chapter looks at risk arising from within the industry itself and provides a detailed discussion of the industry’s level of exposure to seven key indicators. These key indicators are Barriers to Entry, Competition, Industry Exports, Industry Imports, Level of Assistance, Life Cycle Stage and Volatility of Industry. The Overall Structural Risk Score is a weighted aggregation of these seven key indicators. Each of the key indicators is discussed in detail in this section.
Growth Risk
The Growth Risk chapter looks at risks arising from the expected future performance of the industry. The Overall Growth Risk Score is determined by amalgamating the scores for Recent Industry Growth and Forecast Industry Growth. Detailed analysis is provided discussing the reasons for the growth scores of both.
Sensitivity Risk
The Sensitivity Risk chapter looks at risks arising from forces (sensitivities) external to the industry. The Overall External Sensitivity Risk Score is determined by identifying the most significant (up to 6) external factors and weighting them to represent how significant each sensitivity is to the performance of the industry. Examples of External Sensitivities are Exchange Rates, Interest Rates, Commodity Prices and Government Regulations. There is also a detailed analysis of the affect each of the sensitivities has on the industry, including charts and data tables where appropriate.
Industry Risk and Industry Risk Scoring Methodology
This chapter provides an overview of how IBISWorld defines Industry Risk and discusses the methodology used to arrive at an Industry Risk Score. There is also a table that provides a definition of the seven levels of Industry Risk.
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