Combination notes: market segmentation and equity transfer

This paper empirically analyzes a particular type of notes observed insecuritization transactions: combination notes. Combination notes are formedby combining parts of two or more tranches of securitization transactions,where one part usually consists of a share of the first loss piece. It is analyzedwhether combination notes are purely demand driven, or whether combinationnotes also appear to be structured to enable equity transfer. Results indicatethat combination notes serve both purposes: market segmentation severelydetermines the structuring of combination notes, but risk transfer needs seemto be catered by combination notes as well. Further, an analysis of launchspreads indicates, that the observed equity transfer via combination notes hasan impact on the pricing of the ordinary tranches of each deal. This papermakes use of unique data on 126 deals containing 1385 tranches, thereof 398combination notes...