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CDO: Collateralized Debt Obligation - PowerPoint PPT Presentation

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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

  • 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

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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


Collateral Manager

Diversified Pool of

Underlying Assets



Special Purpose

Vehicle (SPV)


Fixed or Floating Rate


Subordinated Notes


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Example of CDO Tranching

AAA 370M

A High Yield CLO arranged by Bear Sterns.

(Eaton Vance)

AA 49M



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”



AA 4%

AA 22.5M

A 10M


A 39%



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: