Fundamental Value vs Pre-COVID Market Levels

by Semper Capital, on Aug 23, 2021

The table below, most recently included in our 2021 Outlook, has been updated to show relative yield and spread data for a representative RMBS deal, highlighting the relative yield movements of tranches across the capital stack. This is a Non-Qualified Mortgage deal, AOMT 2019-5, issued in October 2019. The table shows each class/tranche in the deal, along with its level of credit enhancement (C/E) in February 2020 before the impact of COVID-19, in November 2020, reflecting growing credit enhancement (better credit quality) and slow recovery of prices/yields/spreads, especially for mezzanine classes, and again in May 2021. C/E is a measure of how much collateral loss a bond can withstand before suffering principal loss. For example, C/E for the BBB rated M1 class increased from 10.7% to 13.3% from February to November, and again to 16.9% by May 2021. At this same time, our view of expected lifetime collateral losses has only marginally increased, a benefit of the very strong housing market and strong loan performance we have witnessed this year.

 Projected Lifetime Collateral Loss Range: .5% to 1.5%
Source: Semper Capital
Credit rating is determined by using the highest credit rating for each security from Moody’s, Standard & Poor’s, Fitch Ratings, DBRS Morningstar Credit Ratings, LLC and Kroll, five credit rating agencies providing credit assessments for mortgage-backed securities.

While spreads have continued to contract and mezzanine spreads in particular have improved, the levels remain wider than pre-COVID, while credit quality is much stronger and uncertainty with respect to these bonds’ performance is much lower.


Opinions expressed in this document represent the views of Semper Capital Management, L.P., are valid only as of the date indicated, and are subject to change without notice. There can be no guarantee that any of the opinions expressed in this document or any underlying position will be maintained at the time of this presentation or thereafter. We are not soliciting or recommending any action based on this material. The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any securities.

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