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Collateralized Debt Obligations: Structures and Analysis, 2nd Edition

ISBN: 978-0-471-71887-1
528 pages
May 2006
Collateralized Debt Obligations: Structures and Analysis, 2nd Edition (0471718874) cover image

Description

Since first edition's publication, the CDO market has seen tremendous growth. As of 2005, $1.1 trillion of CDOs were outstanding -- making them the fastest-growing investment vehicle of the last decade. To help you keep up with this expanding market and its various instruments, Douglas Lucas, Laurie Goodman, and Frank Fabozzi have collaborated to bring you this fully revised and up-to-date new edition of Collateralized Debt Obligations. Written in a clear and accessible style, this valuable resource provides critical information regarding the evolving nature of the CDO market. You'll find in-depth insights gleaned from years of investment and credit experience as well as the examination of a wide range of issues, including cash CDOs, loans and CLOs, structured finance CDOs and collateral review, emerging market and market value CDOs, and synthetic CDOs. Use this book as your guide and take advantage of this dynamic market and its products.
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Table of Contents

Preface.

About the Authors.

PART ONE: INTRODUCTION TO CASH CDOs.

CHAPTER 1:  Cash CDO Basics.

Why Study CDOs?

Understanding CDOs.

Credit Structures.

A CDO Structural Matrix.

CDOs Being Offered Today.

Parties to a CDO.

CHAPTER 2:  Cash Flow CDOs.

Distribution of Cash Flows.

Restrictions on Management: Safety Nets.

Credit Ratings.

Call Provisions in CDO Transactions.

PART TWO:  LOANS AND CLOs.

CHAPTER 3: High-Yield Loans: Structure and Performance.

The Loan Market.

The Syndication Process.

Loan Structure and Leaders.

Loan Interest Rates and Upfront Fees.

Loan Credit Quality.

Lender’s Liability.

Overview of Loan Terms.

Loan Terms versus Bond Terms.

A Tale of Two Loans.

The Secondary Market.

Loan Recovery Rates.

Loan Default Rates.

High-Yield Loan CLO versus High-Yield Bond CBO Performance.

Conclusion.

CHAPTER 4. European Bank Loans and Middle Market Loans.

European Bank Loans.

Middle Market Loans.

Conclusion.

PART THREE:  STURCTURED FINANCE CDOs AND COLLATERAL REVIEW. 

CHAPTER 5: Review of Structured Finance Collateral: Mortgage-Related Products.

Residential Mortgage-Backed Securities.

Commercial Mortgage-Backed Securities.

Real Estate Investment Trust Debt.

CHAPTER 6:  Review of Structured Finance Collateral: Nonmortgage ABS.

Credit Card Receivable-Backed Securities.

Auto Loan-Backed Securities.

Student Loan-Backed Securities.

SBA Loan-Backed Securities.

Aircraft Lease-Backed Securities.

Franchise Loan-Backed Securities.

Rate Reduction Bonds.

CHAPTER 7:  Structured Finance Default and Recovery Rates.

Structured Finance versus Corporate Default Rates.

S&P Rating Transition Studies and the Matrix Multiplying Approach.

Results of Multiplying S&P Rating Transition Matrices.

S&P on Structured Finance Loss Given Default.

S&P Constant Annual Default and Recoveries.

Moody’s Material Impairment Study.

Comparing and Reconciling Structured Finance Default Rates.

Moody’s on Structured Finance Historical Loss Rates.

Moody’s Constant Annual Default and Recoveries.

Blending S&P and Moody’s Studies.

Applying CDRs and Recoveries to SF CDOs.

Conclusion.

CHAPTER 8:  Structured Finance Cash Flow CDOs.

SF CDOs versus High-Yield CDOs.

Rating Agencies on Structured Finance CDOs.

Structured Finance Assets’ Negative Convexity.

Extension Risk.

Conclusion.

PART FOUR: OTHER TYPES OF CASH CDOs.

CHAPTER 9:  Emerging Market CDOs.

EM Sovereign Bond Defaults.

Why the Better Track Record?

CDO Rating Differences: EM versus High Yield.

Conclusion.

CHAPTER 10: Market Value CDOs.

Cash Flow versus Market Value Deals.

The Rating Process.

How Advance Rates Are Derived.

Conclusion.

PART FIVE:  SYNTHETIC CDOs.

CHAPTER 11: Introduction to Credit Default Swaps and Synthetic CDOs.

Credit Default Swaps.

Synthetic CDOs.

Conclusion.

CHAPTER 12:  Synthetic Balance Sheet CDOs.

Cash CLOs for Balance Sheet Management.

Partially Funded Synthetic CDOs.

Conclusion.

CHAPTER 13:  Synthetic Arbitrage CDOs.

Full Capital Structure Synthetic Arbitrage CDOs.

Single-Tranche CDOs.

Standard Tranches of CDS Indices.

Conclusion.

CHAPTER 14:  A Framework for Evaluating Trades in the Credit Derivatives Market.

Assessing Single-Name and CDO Tranched Exposures.

Assessing CDO Equity versus a Basket Swap.

Conclusion.

CHAPTER 15:  Structured Finance Credit Default Swaps and Synthetic CDOs.

Differences between Corporate and Structured Finance Credit.

Difficulties in SF CDS.

SF CDS Effect on SF CDO Management.

Two New Types of SF CDOs.

Effects of SF CDS on CDO Credit Quality and Spreads.

Conclusion.

PART SIX: DEFAULT CORRELATION..

CHAPTER 16:  Default Correlation: The Basics.

Default Correlation Defined.

Default Probability and Default Correlation.

Conclusion.

CHAPTER 17: Empirical Default Correlations: Problems and Solutions.

Empirical Results.

Problems with Historical Default Correlations.

Proposed Solutions.

Conclusion.

PART SEVEN:  CDO EQUITY.

CHAPTER 18:  Why Buy CDO Equity?

Nonrecourse Term Financing.

The Forgiving Nature of CDO Financing.

CDO Options.

CDO Equity as a Defensive Strategy.

Conclusion.

CHAPTER 19:  CDO Equity Returns and Return Correlation.

Flawed Methodologies.

The Appropriate Lesson from History.

Loan Defaults and Recoveries.

Cash Flow Modeling Defaults and Recoveries.

Structured Finance Defaults and Recoveries.

SF CDO Cash Flow Modeling.

Return Correlation and Nonrecourse Leverage.

Conclusion.

PART EIGHT:  OTHER CDO TOPICS.

CHAPTER 20: Analytical Challenges in Secondary CDO Market Trading.

Important Developments: Spread Tightening, Increased Activity.

Pitfalls in Secondary CDO Trading.

Eight-Point Checklist in Evaluating a CDO in the Secondary Market.

Prescription for Making Primary Issuances Conducive to Secondary Trading.

Conclusion.

CHAPTER 21:  The CDO Arbitrage.

Building Blocks.

Impact of CDO Arbitrage on Structure.

Conclusion.

CHAPTER 22:  How to Evaluate a CDO and Manage a CDO Portfolio.

Incentive Clashes in CDO Structures.

Evaluate Structural Enhancements.

Evaluating the Manager’s Track Record.

Conclusion.

CHAPTER 23:  Quantifying Single-Name Risk Across CDOs.

Collateral Overlap in U.S. CLOs.

Favorite CLO Credits.

Collateral Overlap in U.S. Structured Finance CDOs.

Single-Name Risk and Tranche Protections.

Excess Overcollateralization and Excess Overcollateralization Delta.

Monte Carlo Simulation of Single Credit Risk.

Comparing the Two Approaches.

Conclusion.

CHAPTER 24:  CDO Rating Experience.

CDO Rating Downgrade Data.

CDO and Tranche Rating Downgrade Frequency.

CDO Downgrade Patterns.

Why Downgrade Patterns?

Downgrade Severity.

Downgrades of Aaa CDO Tranches.

Extreme Rating Downgrades.

CDO Defaults and Near Defaults.

Conclusion.

INDEX.

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Author Information

Douglas J. Lucas is Executive Director and Head of CDO Research at UBS. He is also Chairman of The Bond Market Association's CDO Research Committee and ranked top three in CDO research in the Institutional Investor's fixed income analyst survey. Lucas has been involved in the CDO market for nearly two decades, having developed Moody's rating methodology for CDOs in 1989.

LAURIE S. GOODMAN, PhD, is Managing Director and co-Head of Global Fixed Income Research at UBS. She manages U.S. Securitized Products and Treasury/Agency/Derivatives Research. Goodman has worked on Wall Street for over twenty years and is well regarded by the investor community, having won more #1 slots on the Institutional Investor All-American Fixed Income Team than any other analyst.

FRANK J. FABOZZI, PhD, CFA, CPA, is an Adjunct Professor of Finance and Becton Fellow at Yale University's School of Management and a Fellow of the International Center for Finance. Fabozzi is the Editor of the Journal of Portfolio Management.

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