Collateralized Debt Obligations: Structures and Analysis, by Douglas J. Lucas

By Douglas J. Lucas

In view that first edition's book, the CDO marketplace has visible great development. As of 2005, $1.1 trillion of CDOs have been extraordinary -- making them the fastest-growing funding automobile of the decade. that will help you stay alongside of this increasing industry and its numerous tools, Douglas Lucas, Laurie Goodman, and Frank Fabozzi have collaborated to deliver you this totally revised and updated new version of Collateralized Debt tasks. Written in a transparent and available sort, this worthwhile source offers serious information about the evolving nature of the CDO industry. you will discover in-depth insights gleaned from years of funding and credits event in addition to the exam of quite a lot of concerns, together with funds CDOs, loans and CLOs, based finance CDOs and collateral assessment, rising industry and industry worth CDOs, and artificial CDOs. Use this booklet as your advisor and reap the benefits of this dynamic marketplace and its items.

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Extra info for Collateralized Debt Obligations: Structures and Analysis, 2nd Edition (Wiley Finance)

Example text

So as collateral deteriorates, the overcollateralization and interest coverage tests are breached. When the Baa overcollateralization or interest coverage tests are breached, then the cash flow spigot is turned away from the equity tranche, and onto paying down the Aaa bonds. When Aaa overcollateralization or interest coverage tests are breached, then interest payments to the Baa tranche are suspended and those flows go toward paying off the Aaa class. Again, these triggers provide important protection to the bondholders on all deals, but particularly so on lower-rated collateral deals due to the higher thresholds and greater excess spread.

6 CDO Structural Matrix Assets High-yield loans High-grade structured finance Mezzanine structured finance Capital notes High-yield bonds Purpose Credit Structure Fixed/floating rate PIK/non-PIK Arbitrage Balance sheet Cash flow Market value Guaranteed/unenhanced Short term/long term Delayed draw/ revolving Origination Liabilities Emerging market debt 2 Imperial Savings’ September 1987 issue, managed by Caywood Christian, underwritten by Drexel Burnham, and rated by S&P. 2, we showed that 91% of CDOs issued so far in 2005 are backed by high-yield loans and structured finance (ABS, CMBS, RMBS) assets.

Collateral Diversification Moody’s methodology reduces the number of credits in the CDO portfolio to a smaller number of homogenous, uncorrelated credits. For example, for CDOs backed by corporate bonds, a diversity score is calculated by dividing the bonds into different industry classifications. 3. Each industry group is assumed to have a zero correlation with other industry groups. Two securities from different issuers within the same industry group are assumed to have some correlation to each other.

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