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Developments in Collateralized Debt Obligations: New Products and Insights

ISBN: 978-0-470-15139-6
288 pages
July 2007
Developments in Collateralized Debt Obligations: New Products and Insights (0470151390) cover image
Developments In Collateralized Debt Obligations

The fastest growing sector of the fixed income market is the market for collateralized debt obligations (CDOs). Fostered by the development of credit default swaps (CDS) on all types of indexes of corporate bonds, emerging market bonds, commercial loans, and structured products, new products are being introduced into this market with incredible speed.

In order to keep up with this dynamic market and its various instruments, you need a guide that provides you with the most up-to-date information available. That's why Douglas Lucas, Laurie Goodman, Frank Fabozzi, and Rebecca Manning have created Developments in Collateralized Debt Obligations.

Filled with in-depth insights regarding new products, like hybrid assets in ABS CDOs and trust preferred CDOs, and detailed discussions on important issues-such as the impact of CDOs on underlying collateral markets-this book will bring you completely up to speed on essential developments in this field.

Written in a straightforward and accessible style, Developments in Collateralized Debt Obligations will enhance your understanding of this ever-evolving market-and its numerous products.

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Preface.

About the Authors.

PART ONE Introduction.

CHAPTER 1 Review of Collateralized Debt Obligations.

Understanding CDOs.

Cash Flow CDOs.

Synthetic Arbitrage CDOs.

Conclusion.

CHAPTER 2 Impact of CDOs on Collateral Markets.

Collateralized Loan Obligations and the High-Yield Bank Loan Market.

Structured Finance CDOs and the Mezzanine Mortgage ABS Market.

Trust Preferred Securities CDOs and their Collateral Market.

Conclusion.

CHAPTER 3 CDO Rating Experience.

CDO Rating Downgrade Data.

CDO and Tranche Rating Downgrade Frequency.

CDO Downgrade Patterns.

Why Downgrade Patterns?

Downgrade Severity.

Extreme Rating Downgrades.

CDO “Defaults” and Near “Defaults”.

Summary.

PART TWO Developments in Synthetic CDOs.

CHAPTER 4 ABS CDO Collateral Choices: Cash, ABCDS, and the ABX.

Growth of the Subprime Synthetic Market.

Importance of ABCDS to CDO Managers.

ABCDS.

The ABX Index.

Fundamental Contractual Differences—Single-Name ABCDS/ABX Index/Cash.

Supply/Demand Technicals.

What Keeps the Arbitrage From Going Away?

Bottom Line—Buyers versus Sellers.

The Cash/ABCDS Basis and the CDO Arbitrage.

Single-Name ABCDS versus ABX in CDOs.

Summary.

CHAPTER 5 Hybrid Assets in an ABS CDO.

Corporate CDS and ABCDS.

Advantages of Hybrid Assets in an ABS CDO.

Illustrative Hybrid ABS CDO Structure.

Cash Flow Challenges.

Conclusions.

CHAPTER 6 Synthetic CDO Ratings.

Tests of Index Portfolios.

AAA Ratings and Expected Loss versus Default Probability.

Barbell Portfolios.

Summary.

CHAPTER 7 Credit Default Swaps on CDOs.

CDO CDS Nomenclature.

CDO Credit Problems and their Consequences.

Alternative Interest Cap Options.

Miscellaneous Terms.

Cash CDO versus CDO CDS.

Exiting a CDO CDS.

Rating Agency Concerns on CDOs that Sell Protection via CDO CDS.

Summary.

PART THREE Emerging CDO Products.

CHAPTER 8 Trust-Preferred CDOs.

Trust-Preferred Securities.

Other TruPS CDO Assets.

TruPS CDO Issuance.

Bank TruPS Prepayments and New CDO Issuance.

TruPS CDO Structure.

Assumptions Used by Rating Agencies.

TruPS CDO Performance.

TruPS Issuers and Issues.

Summary.

CHAPTER 9 Commercial Real Estate Primer.

Loan Origination.

Property-Level Loans.

Commercial Mortgage-Backed Securities.

REIT Securities.

Evaluating CREL and CMBS.

CREL Historical Performance.

CMBS Historical Performance.

Summary.

CHAPTER 10 Commercial Real Estate CDOs.

CRE CDO Defined.

Market Trends.

CRE Finance before CDOs.

Types of CRE CDOs.

CRE CDO Performance.

Investors.

CRE CDO Credit Analysis.

Rating CRE CDOs.

Summary.

CHAPTER 11 CRE CDO Relative Value Methodology.

Whole Loan CREL CDOs versus High-Yield CLOs.

Investment-Grade CMBS CDOs versus Mezzanine Structured Finance CDOs.

Relative Value among CRE CDOs.

Summary.

PART FOUR Other CDO Topics.

CHAPTER 12 Rating Agency Research on CDOs.

Using Rating Watches and Outlooks to Improve the Default Prediction Power of Ratings.

Changes in Rating Methodologies.

Conclusions.

CHAPTER 13 Collateral Overlap and Single-Name Exposure in CLO Portfolios.

Collateral Overlap in U.S. CLOs.

Favorite CLO Credits.

Single-Name Risk and Tranche Protections.

Excess Overcollateralization and Excess Overcollateralization Delta.

Summary.

Index.

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Douglas J. Lucas is Executive Director at UBS and head of CDO research. He has an MBA from the University of Chicago.

Laurie S. Goodman, PhD, is co-Head of Global Fixed Income Research at UBS. She holds a PhD in economics from Stanford University.

Frank J. Fabozzi, PhD, CFA, is Professor in the Practice of Finance at Yale University's School of Management and the Editor of the Journal of Portfolio Management.

Rebecca J. Manning is an Associate Director in the CDO Research Group at UBS. She holds an MBA from The Wharton School at the University of Pennsylvania.

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