ABCs of CDO (CLO, CBO, CDO of ABS)

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This video summarizes the various types of CDO structures that exist in the market and the differentiating factors; such as: motivation, risk transfer, fully funded or partially funded, and the composition of the reference portfolio.

This video summarizes the various types of CDO structures that exist in the market and the differentiating factors; such as: motivation, risk transfer, fully funded or partially funded, and the composition of the reference portfolio.

The motivation of the CDO could be either for the purposes of moving assets off the balance sheet or it could be for the purpose of seeking yield by investors.  When we talk about risk transfer, CDOs can either synthetically diversify the risk with credit default swaps or diversify risk through the true sale of assets.  Finally, the reference portfolio can either be physical debt in the form of bonds or other loans, or structured debt. 

At a high level, the speaker discusses the structure of a CDO and talks about the risk to reward characteristics of investors who are in different tranches.  He then moves on to discussing the differences between the reference securities that can be purchased by the special purpose entity.  Collateralized loan obligations, collateralized bond obligations, asset backed securities, credit default swaps, or even securities issued by other CDOs can be used as reference securities.

 

Tim Ord
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