CDOs Overview

CDOs Overview

CONTENT

INTRODUCTION TO SECURITIZATION

This section provides an introduction to the area of securitisation, encompassing Asset Backed Securities (ABS) Mortgage Back Securities (MBS) and the role of Special Purpose Vehicles (SPV) together with sponsor and investor motivation. What is the meaning of Securitization? What's the difference between ABS, MBS, CDO, CLO, CMO, CBO, CLN, etc? Who are the main players in the CDO market? What are their motivations? How are the deals structured and credit rated? What's the role of a SPV? What's the role of certain derivatives such as CDS in these structures? What does credit enhancement mean and the idea of tranches?

INTRODUCTION TO COLLATERALISED MORTGAGE OBLIGATIONS (CMO)

How has the CDO market evolved from the early mortgage pass- through? WAC and WAM and GNMA. Prepayment risk, contraction and extension risk How do Collateralised Mortgage Obligations work? Demand from investors, risk reward profiles Sequential bonds, PACS and SUPS Principal only and interest only classes Floaters and inverse floaters Collateralisation and interest coverage tests

INTRODUCTION TO COLLATERALISED BOND OBLIGATIONS (CBO)

The following section offers an overview of the collateralised bond obligation market, the different types of classes or tranches within the structure and how the CBO is credit rated. Diversification and the underlying bond pools Senior, mezzanine and equity tranche construction. Cash flow and market value structures Why invest in a CBO? Returns to investors Rating a CBO tranche, WARF score, Diversity score Modelling the probability loss expected losses. Credit rating the CBO Structure Sponsor motivation, Arbitrage or balance sheet transaction

INTRODUCTION TO COLLATERALISED LOAN OBLIGATIONS (CLO)

This section looks at a CLO, how it is constructed and compares the merits of cash versus synthetic structures. How and why do banks sell on debt? Basle II accord and capital adequacy requirements Risk Weighted Assets, Obtaining capital relief CLO structure and the use of Special Purpose Vehicle (SPV) Cash and Synthetic CLO's Fully funded synthetic CLO Partially funded CLO structure What are Credit Default Swaps (CDS) and how are they used in CDO's? First default swaps, basket swaps, total return swaps Creating a super senior structure with CDS