Course outline: An Overview of the CDO Market

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Objective: This introductory one day course is designed to explain how the Collateralised Debit Obligation (CDO) market works, incorporating CMO, CBO and CLO structures, how they are designed and used by various participants, including the use of credit default swaps.
Course aims:
  • Provide a background to the Asset Backed Securities (ABS) market
  • Look at the origins of the market for Mortgage Backed Securities (MBS)
  • Explain why and how different institutions use the CDO market
  • Describe in turn the different structures for CMO, CBO and CLO's
  • Explain the terminology in the market
  • Provide examples and case studies of different CDO structures and uses

Introduction to Securitisation

This section provides an introduction to the area of securitisation, encompassing Asset Backed Securities (ABS), Mortgaged Back Securities (MBS) and the role of Special Purpose Vehicles (SPV) together with sponsor and investor motivation.

  • What is the meaning of securitisation?
  • What's the difference between ABS, MBS, CDO, CLO, CMO, CBO, CLN, etc?
  • Who are the main players in the CDO market? What are their motivations?
  • How are the deals structured and credit rated? What's the role of a SPV?
  • What's the role of certain derivatives such as CDS in these structures?
  • What does credit enhancement mean and the idea of tranches?

Introduction to Collateralised Mortgage Obligations (CMO)

This section provides an introduction to the market place for CMO's, considering the early origins of the market and recent innovations.

  • How has the market evolved from the early mortgage pass-through and MBS?
    • WAC and WAM and GNMA
    • prepayment risk , contraction and extension risk
  • Sequential bonds, PACS and SUPS
  • Principal only and interest only classes
  • Floaters and inverse floaters, z-bonds
  • Coverage tests
    • over collateralisation and interest coverage tests
  • How do Collateralised Mortgage Obligations work?
    • demand from investors, risk reward profiles

Introduction to Collateralised Bond Obligations (CBO)

The following section offers an overview of the collateralised bond obligation market, the different types of classes or tranches within the structure and how the CBO is credit rated.

  • Diversification and the underlying bond pools
  • Senior, mezzanine and equity tranche construction
    • Cash flow and market value structures
  • Why invest in a CBO?
    • returns to investors
  • Rating a CBO tranch
    • WARF score, diversity score
  • Modelling the probability loss
    • expected losses, credit rating the CBO structure
  • Sponsor motivation
    • arbitrage or balance sheet transaction
  • Static and managed deals
    • ramp up period
    • investment (revolver) period
    • final period
  • Cash flow and market value deals

Introduction to Collateralised Loan Obligations (CLO)

This section looks at a CLO, how it is constructed and compares the merits of cash versus synthetic structures.

  • How and why do banks sell on debt?
    • Basle II accord and capital adequacy requirements
    • risk weighted assets, obtaining capital relief
  • CLO structure and the use of Special Purpose Vehicle (SPV)
  • Cash and Synthetic CLO's
  • Fully funded synthetic CLO
  • Partially funded CLO structure
  • What are Credit Default Swaps (CDS) and how are they used in CDO's?
    • first default swaps, basket swaps, total return swaps
  • Creating a super senior structure with CDS
  • Balance sheet and arbitrage CDO's

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