Should Your Next Deal be Cash or Synthetic?. CDOs in the Heartland March 20, 2003. Marion Silverman. Types of Synthetic CDOs. Static Investment Grade Synthetics Eg. SALS, EPOCH. n th to Default Baskets Eg. (private). High Yield Arbitrage CLOs Eg. SERVES, ELFS. Synthetic Structures.
CDOs in the Heartland
March 20, 2003
Static InvestmentGrade SyntheticsEg. SALS, EPOCH
nth to DefaultBasketsEg. (private)
High Yield Arbitrage CLOs
Eg. SERVES, ELFS
Eg. HYDI Credit Linked Trust
Single Name CreditLinked NotesEg. TIERS Trust
Excess ReservesSynthetic HY Arbitrage CDO (Total Return Swap)
Portfolio Cash Flow, Net of Swap Rate
(L+ Spread Paid to Bank of America)
Source: Bank of America Securities LLC. Diagram of a SERVES transaction.
Ratings for synthetic arbitrage CDOs build off established CDO criteria, including default scenarios and recoveries. Other unique considerations include:
Reference Portfolio Yield L + 265*
Less: Senior Financing / Total Return Swap <L + 70>
Less Current Management Fee/Admin Fees <30>
Equals = Available Excess Spread 165
Available Excess Spread provides levered cash flow to cover credit losses as well as rated note coupon and equity coupon
*Fitch stress assumption.
* Assumes LIBOR at 3%
(Both Cash and Synthetic)