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In a market value CDO, the amount of tranche debt supportable by an asset type, expressed as a percent of the market value of the asset type. Varies according to the characteristics of the asset type and the desired rating of the tranche.
The period, after the reinvestment or revolving period, in which new collateral purchases are not allowed and principal cash flow is used to pay down tranche principal.
A CDO whose purpose is to allow a money manager to expand assets under management and equity investors to achieve non-recourse leverage to CDO assets. There is no arbitrage in the classic sense of the word. Rather, equity holders hope to capture the difference between the after-default yield on the assets and the financing cost due debt tranches. Assets are purchased over a warehousing period before closing and a ramp-up period after closing. Arbitrage CDOs and repackagings are exceptions to the usual balance sheet purpose of securitizations.
Party responsible for trading CDO assets.
A CDO whose purpose is to allow a commercial bank or other entity to reduce their balance sheet or free up economic or regulatory capital. An existing portfolio (or the risk of the portfolio) is transferred to the CDO and the transferor usually purchases CDO equity. Compare to Arbitrage CDO.
An external guarantee of debt tranche performance from a financial guarantor insurance company.
A CDO where subordinated tranches are sized so that senior tranches can be paid from after-default cash flow with a high degree of confidence. If portfolio quality deteriorates, asset cash flow may be redirected from subordinated tranches to senior tranches.
Cash flow CDO tests that divert cash flows from subordinated tranches, prevent reinvestment in new CDO assets, and cause senior tranches to be paid down. The two main collateral coverage tests are the over-collateralization test and the interest coverage test. Sometimes a ratings-based test is also used.
Cash flow CDO tests that restrict portfolio trading. Tests may include objective measures of portfolio diversity, average rating, average life, prospective average recovery, and minimum weighted average coupon or spread.
A securitization of corporate bonds. Refers to the special purpose vehicle (SPV) that holds the asset portfolio and issues liabilities and also the obligations the SPV issues. See the definition of collateralized debt obligation.
A securitization of corporate bonds, bank loans, ABS RMBS, CMBS, or almost any non-consumer obligation. Refers to the special purpose vehicle (SPV) that holds the asset portfolio and issues liabilities and also the obligations the SPV issues.
A securitization of bank loans, usually commercial and industrial loans. Refers to the special purpose vehicle (SPV) that holds the asset portfolio and issues liabilities and also the obligations the SPV issues. See the definition of collateralized debt obligation.
Addresses the presence in the portfolio of a single issuer, loan participations, non-U.S. obligors, triple-C credits, deferred interest instruments and the like.
A note whose cash flow depends upon a credit event or credit measure of a reference entity or asset such as default, credit spread, or rating change.
Tranches ranking in seniority above the equity tranche.
The process of eliminating intermediaries between ultimate users of capital and ultimate providers of capital. It is brought about by better communication, transparency, and securitization technology. See securitization.
Moody's index of a portfolio's diversity based on the insight that a number of correlated credits will exhibit the same return variance as a smaller number of uncorrelated credits. For example, ten credits in ten industries have a Moody's diversity score of ten, while ten credits in the same industry have a diversity score of four. Besides industry diversity categories, Moody's has geographical diversity categories for emerging market obligors and asset categories for ABS and MBS assets.
A securitization of bonds of bank loans from obligors domiciled in emerging markets. Refers to the special purpose vehicle (SPV) that holds the asset portfolio and issues liabilities and also the obligations the SPV issues. See collateralized debt obligation.
The most subordinate tranche, regardless of whether the instrument is structured to look like equity or debt or issued in the legal form of equity or debt. Sometimes referred to as junior subordinate notes, preference shares or income notes.
While the exact amortization of CDOs is not known for cash flow CDOs because it depends on defaults and cells, the latest maturity date on the underlying CDO assets provides this outside limit.
One of the collateral coverage tests that diverts cash flows from subordinate tranches, prevents reinvestment in new CDO assets, and causes senior tranches to be paid down.
A market value CDO test of the equity tranche value that, if breached, causes the CDO to sell its assets and retire debt tranches.
The amount that interest rates or currency rates are multiplied by to calculate the cash flow of a derivative.
An arm's-length non-recourse sale of financial assets between unaffiliated entities in which the seller receives payment in full at the time of the sale and takes such payments in the form of cash, rather than in the form of the buyer's securities.
Over-collateralization test (OC Test) is a common structural covenant in CDO transactions. It measures the actual subordination of a given tranche relative to a defined requirement. A breach of an OC Test typically causing a diversion of cash flows from the lower tranches to the higher tranches in order to restore the required subordination.
A structuring and credit rating device to achieve a higher rating for an investment. A high yield instrument, such as an equity CDO tranche, is combined with a high credit quality zero coupon security, often a stripped Treasury bond. The rating agency limits their credit assessment solely to the cash flow supported by the zero coupon bond and is silent to the upside potential contributed by the more risky asset. Generally, this is done when regulatory or capital requirements restrict or penalize the purchase of the two assets separately.
The schedule that determines distribution of interest and principal proceeds to cash flow CDO tranches, taking into account collateral coverage tests.
The distribution of principal repayment to tranches simultaneously.
Period after CDO closing in which assets are purchased. Associated with arbitrage rather than balance sheet CDOs.
The market value of the asset after it defaults or the present value of all after-default cash flows.
The asset or obligor whose performance determines cash flows in a total return or credit default swap.
In a cash flow CDO, the period in which principal proceeds can be reinvested in new assets so long as collateral coverage tests are met.
The process and the result of pooling financial assets together and issuing liability and equity obligations backed by the pool of assets. The entity that issues the obligations and purchases the assets is generically called a special purpose vehicle (SPV) or special purpose entity (SPE). The SPV is set up solely for the purpose of the securitization and might be a trust, limited liability company, partnership or a corporation. The obligations of the SPV are typically tranched into multiple classes with different maturities and seniorities.
Refers to the special purpose vehicle (SPV) that holds the asset portfolio and issues liabilities and also the obligations the SPV issues and is a securitization of corporate bonds, bank loans, ABS RMBS, CMBS, or almost any non-consumer obligation.
A note which, for example, embeds a total return or credit default swap and whose cash flow depends on some referenced asset or obligor.
A CDO that gains exposure to credit-risky assets via derivative transactions rather than cash purchase of the assets.
A derivative that references an underlying asset in respect to its total return, i.e., all of its income in plus appreciation or depreciation of its market value.
Set in a senior or subordinate position relative to one another.
A transfer of financial assets that, for purposes of US bankruptcy or insolvency laws, constitutes a sale of such assets, rather than a transfer of the assets as collateral in connection with a secured financing in which the transferor is the debtor and the transferee is the secured creditor.
The purchase of assets before a CDO closes.
The schedule that determines distribution of interest and principal proceeds to cash flow CDO tranches, taking into account collateral coverage tests.