CDOOverview.pdfVIP

Session 19: Repackaging bonds and loans into CDOs What is a CDO? A pool of fixed income assets with a set of claims on those assets. Flavors: ? CBO: assets are corporate bonds CLO: assets are secured or unsecured loans to corporate? customers ? CDO: a general term for either of the above, or any entity where the assets are a mix of loans and bonds 1. B8308 Debt Markets Fall 2009 1 Session 19: An overview of CDOs Three Main CDO Types ? CASH FLOW CDOs: ? SYNTHETIC CDOs: - Loans / bonds are purchased by the SPV and are normally held to maturity - Corporate bonds and loans are not purchased, only referenced. CDO ll t ti t f. - Interest and principal payment from the asset pool are used to repay the claimants (senior junior - se s pro ec on on a se o underlying names. - CDO assets are invested in Treasuries or something similar , , and residual or equity claimants) - Interest coverage (IC) and overcollaterization (O/C) ratios . Treasury interest plus net CDS cash flows are available to pay CDO claimants. determine the cash flow allocation (“waterfalls”) to various claimants. - If an asset defaults manager may - CDO sponsor is typically the protection buyer and may get regulatory capital relief. workout or sell to realize recovery. ? MARKET VALUE CDOs: 2. - SPV can actively trade. B8308 Debt Markets Fall 2009 2 Session 19: An overview of CDOs Cash Flow CDO Structure Sale of Loan/Bond Market / Portfolio cash SPV notes cash Class A Class B Sponsor Class C Equity Asset Manager 3. B8308 Debt Markets Fall 2009 3 Session 19: An overview of CDOs XYZ CDO’s Balance Sheet ASSETS LIABILITIES $ 305mm Class A - ‘AAA’ $ 95mm Class B - ‘AA’ $ 65 Cl B ‘A ’ $ 500mm leveraged loans (‘BB’) $ 40mm HY Bonds mm ass - - $ 20mm Class C - ‘BBB’ $ 15mm Class D - ‘BB’ $ 5mm ABS / MBS $ 5 th ti CLN TOTAL = $ 500mm mm syn e c TOTAL = $ 550mm EQUITY $ 50mm preferred shares h 4. or common s ar