Structured Credit / Asset Backed Finance Case Study Prep?

For a structured credit/asset-backed finance (ABF) case study, preparation is key, especially since you'll be building a cash flow model and providing an investment recommendation. Based on the most helpful WSO content, here’s how you can prepare effectively:

1. Understand the Asset Classes

• CLO (Collateralized Loan Obligations): Familiarize yourself with how CLOs work, including the tranching structure, cash flow waterfalls, and key metrics like weighted average life (WAL), overcollateralization (OC) tests, and interest coverage (IC) tests.
• CMBS/RMBS (Commercial/Residential Mortgage-Backed Securities): Review the structure of these securities, focusing on prepayment risks, default risks, and how cash flows are distributed among tranches.
• Esoteric Assets (e.g., insurance settlements, litigation): These are less standardized, so focus on understanding the unique risks and cash flow characteristics of these assets.

2. Brush Up on Cash Flow Modeling

• Key Components: Ensure you can model inflows (e.g., interest, principal repayments) and outflows (e.g., fees, servicing costs) for a pool of assets.
• Waterfall Structures: Be prepared to build a waterfall model that allocates cash flows to different tranches or stakeholders based on priority.
• Stress Testing: Incorporate scenarios like higher default rates, prepayment speeds, or interest rate changes to assess the robustness of the cash flows.

3. Key Metrics to Know

• Yield and IRR (Internal Rate of Return): Calculate the return for investors based on cash flows.
• DSCR (Debt Service Coverage Ratio): Measure the ability of the asset pool to cover debt obligations.
• Default and Recovery Rates: Understand how these impact cash flows and tranche performance.
• Duration and WAL: Assess the timing of cash flows and the average life of the assets.

4. Prepare for the Investment Recommendation

• Risk Assessment: Identify key risks (e.g., credit risk, prepayment risk, interest rate risk) and how they impact the investment.
• Mitigation Strategies: Suggest ways to mitigate risks, such as credit enhancements or structural protections.
• Valuation: Be ready to justify your recommendation using metrics like yield, IRR, or NPV (Net Present Value).

5. Practice with Similar Case Studies

• If you have access to any structured credit or ABS case studies, practice building models and writing concise investment memos.
• Use resources like the WSO Financial Modeling Series, which includes templates and lessons on cash flow modeling, DCF, and LBOs. These can be adapted for structured credit scenarios.

6. Time Management

• With only 2 hours, focus on building a clean, functional model and providing a clear, well-supported recommendation. Avoid overcomplicating the model.

7. Presentation Skills

• Be prepared to explain your assumptions, methodology, and conclusions clearly. Highlight the key drivers of your recommendation and any risks you’ve identified.

By focusing on these areas, you’ll be well-prepared to tackle the case study and impress your interviewers. Good luck!

Sources: Private Credit Resources and Prep, https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1, DCF Modeling Course ~ Pre-training text.pdf, How to Prepare for Restructuring Technical Questions, How would you approach a 4 hour case study?