CH17 - Collateral Debt Obligations

Question 1

What is a CDO?

Answer 1

• Securitisation transactions in which the collateral consists of debt instruments such as commercial loans or asset-backed securities (ABSs)
• The SPV issues securities to investors and uses the proceeds to buy loans or ABSs
• What differentiates the major families of CDOs is the nature of the collateral

Question 2

What are the two main families of CDOs?

Answer 2

1. CLOs: the collateral is a pool of leveraged (ie. noninvestment-grade) loans or, less frequently, of loans to SMEs
2. ABS CDOs: the collateral is composed of securities, themselves issued by securitisation schemes. Typically, the collateral consists of sequential paying, non-agency residential mortgage-backed securities

Question 3

Cash vs Synthetic CDO

Answer 3

• Cash/cash flow CDO is used for both CLOs and ABS CDOs when assets, loans, or ABSs are physically acquired by the CDO in exchange for cash.
• Synthetic CDO refers to structures in which the credit risk attached to the loans or the ABSs is transferred to the CDO via a CDS, without exchange of cash.