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The New Choice in Global Reinsurance. CDO: Collateralized Debt Obligation. Contents. Why CDOs? What is a CDO Examples and Types of CDOs Advantages & Disadvantages New Solutions Approach Conclusion. Why Consider CDOs?. Fastest Growing Sector of the Asset Backed Securities Market (ABS)

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The new choice in global reinsurance l.jpg

The New Choice in Global Reinsurance

CDO: Collateralized Debt Obligation


Contents l.jpg
Contents

  • Why CDOs?

  • What is a CDO

  • Examples and Types of CDOs

  • Advantages & Disadvantages

  • New Solutions Approach

  • Conclusion


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Why Consider CDOs?

  • Fastest Growing Sector of the Asset Backed Securities Market (ABS)

  • 2nd Largest ABS after Credit Card Receivables

  • Global Issuance over the Last 3 Years: $137 billion per year



What is a cdo l.jpg

Debt Securitization

Pool of Diversified Debt Obligations is Packaged and Sold to the Capital Markets

The CDO Issues Multiple Layers/Tranches of Securities: Senior, Mezzanine, Equity (First Loss)

Payments to CDO Tranches depend on the performance of the Underlying Portfolio of Assets

Underlying Portfolio can be - Real or Synthetic; Actively Managed or Passive

What is a CDO?


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Generic CDO Structure

Senior Fixed or

Floating Rate

Notes

Collateral Manager

Diversified Pool of

Underlying Assets

(Collateral)

CDO

Special Purpose

Vehicle (SPV)

Mezzanine

Fixed or Floating Rate

Notes

Subordinated Notes

Equity


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Example of CDO Tranching

AAA 370M

A High Yield CLO arranged by Bear Sterns.

(Eaton Vance)

AA 49M

BBB 47M

BB 5M

Equity 40M


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Example of CDO Tranching

CDO arranged by Bear Sterns where underlying collateral is investment grade.

(Meliorbanca Parthenon I)

“Super Senior”

912.5M

AAA 15M

AA 4%

AA 22.5M

A 10M

BBB57%

A 39%

BBB 15M

BB 5M

Equity 20M

Equity to AAA 87.5M


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Types of CDOs

  • Arbitrage & Off-Balance Sheet

    • Arbitrage CDO

      Weighted Average Coupon of Underlying Securities > Weighted Average Coupon of Repackaged Securities

    • Off-Balance Sheet CDO

      Financial Institutions can achieve Capital Relief by securitizing balance sheet assets


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Types of CDO Collateral

CDOs Have Been Issued For:

  • Commercial Loans

  • Corporate Bonds

  • ABS

  • Mortgage Backed Securities

  • Emerging Market Debt

  • CDOs of CDOs


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Who Buys CDOs?

  • Insurance Companies

  • Institutional Investors


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CDO Advantages

  • Different Tranches allow Investors to customize their Credit Risk exposure

  • Efficient Mechanism for taking Diversified Credit Exposure

  • Attractive Spreads relative to similarly rated Assets



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CDO Downsides

  • Pricing is based on Rating Agency assigned default probabilities – which may not reflect True Underlying Risk

  • Expenses – Origination & Management Fees reduce the economics to Investors


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Market Yields on Identically Rated Bonds

  • Yields for identically rated securities can vary widely

  • This implies that the Market’s assessment of default probabilities is not uniform across a particular rating category

  • Both the bonds below are rated A2 by Moody’s: