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Collateralised debt obligations and its prospects for development in our country

Author: WangShuTong From: www.yourpaper.net Posted: 2009-04-01 09:50:54 Read:
Abstract: collateralized debt obligation portfolio, is an emerging securitization technology extends to assets debt, to become the new mainstream of the international market in recent years, securitized products. Asset securitization in China is still in its infancy, with the strengthening of the financial system innovation, the expansion of the scale of the corporate bond market and gradually mature, the strengthening of supervision as well as the improvement of laws and regulations, collateralised debt obligations will have good development potential and prospects.

Keywords: collateralized debt obligations; asset securitization; structure; risk - income
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Collateralised debt obligations (Collateralized Debt Obligation, CDO) asset-backed securities (Asset-Backed Securities, referred to as ABS) in the sudden emergence of a product. In the past few years, the the global CDO annual circulation an average of $ 137 billion. CDO of asset-backed securities market in the United States, the proportion of from 1% in 1995, increased to nearly 15% in 2005, the growth rate is very alarming. CDO's interest rates are usually higher than time deposits or government bonds, in today's era of little profit, CDO attractive on the international market gradually increased, to become the new mainstream securitized products in recent years.


A , CDO its type



(A) CDO origin


CDO is a new portfolio of mortgage debt credit it to one or more categories and decentralized basis, repartition the investment return and risk, in order to meet the needs of different risk preferences of investors.


CDO originated from the United States residential mortgage securitization. Demand for funds since 1980 to meet the post-war baby boom triggered by a large number of buyers, the mortgage loan composition of the pool of assets secured mortgage debt certificates (MBS), the release contains a number of different investment period. After gradually expanded the scope of the underlying assets of the constructed asset pool, car loans, credit card loans, student loans, corporate receivables, real estate can be used to act as a pledge of assets, issue debt obligations of the different priority. Claims due to corporate bonds, asset-backed securities (ABS) and other debt instruments with different term assets with stable cash flow in the future, can also be used to construct the pool of assets, issuance of debt obligations of the different order. Bank loans pledged assets issued debt certificates called CLO, corporate or government bonds, the issuance of debt certificates of pledged assets called CBO, bank loans, bonds, ABS, MBS and other assets pledged debt (DEBT), collectively referred to as CDO. As can be seen from CDO development process, the CDO securitization technology extends to a wider range of assets creditor type, is a re-securitization securitization based on broadly ABS.


(B) CDO and ABS has a very clear distinction


First, the underlying asset. The securitization of the underlying asset is cash assets that can not be traded in the capital markets, and the the CDO underlying asset is cash or synthetic asset transactions in the capital markets. CDO is repackaged mortgage, asset-backed securities, corporate bonds and other risks, the issue of debt obligations of the different priorities, so CDO is not a separate asset class, its risk also depends on the risk of the underlying assets of the structure of CDO situation. Secondly, the different characteristics of the asset pool. CDO asset pool composition, asset correlation as low as possible, can play the role of risk diversification. ABS asset pool assets source is relatively consistent, and poor dispersibility, the risk is high correlation. Once again, the issue of different purposes. CDO issuance More to arbitrage, ABS and more in order to improve the capital adequacy ratio, the transfer of risk.







(C) the main types of CDO


1.CBO and CLO. In accordance with the proportion of different types of assets of the asset pool, CDO can be divided into a collateralized debt obligation (CBO) and the secured loan certificate (CLO), a high proportion of the assets of the former pool bonds, the latter behind the support of the vast majority of bank Loan bonds. CBO or CLO investors income from the cash flows of the asset pool and to compensate for the credit risk of the portfolio of credit enhancement. Credit enhancement often take the form of over-collateralization, by CBO or CLO is subdivided into a limited series of securities and subordinated securities of each securities have different credit rating, loss of status and over-collateralization.


2 balance sheet CDO arbitrage CDO. Balance sheet type CDO arbitrage CDO, CDO can be divided into the issue of motive and the asset pool from different sources. Balance sheet CDO and more from itself can be holders of securitized assets (such as commercial banks), to the creditor assets from the balance sheet, in order to transfer the credit risk and interest rate risk, improve capital adequacy ratio, asset management functionality. Arbitrage CDO issued by the fund companies, financial companies, such as its high-yield bonds or debt instruments to the market to buy, to regroup packaging, lower average income securities issued in the market, to get the spreads. In this process, the purpose of the issuer does not lie in the transfer of assets, but rather a re-packaging, large banks may loan debt to buy small banks, packaged for sale, access arbitrage income.


Cash flow CDO and market value CDO. Whether balance CDO or arbitrage CDO, can be divided into cash flow CDO and market value CDO, arbitrage CDO is also a synthetic CDO. Most of the so-called cash flow CDO, packaging transfer debt from bank loans to a special purpose vehicle SPV different credit quality of the bonds issued by the SPV, the value of their claims and the cash flows of the loan claims connected together, the risk depends on the outstanding The aggregate principal amount of the nominal price of the asset pool of debt and interest income actually received. The value of the market capitalization type CDO considerable degree depends on the the debt asset pool market capitalization situation, the key to its credit risk that the over-collateralization ratio, daily market value of the asset pool of debt is sufficient to pay the principal and interest, so the risk compared to cash flow type CDO higher price volatility and sensitivity.


4. Traditional CDO and synthetic CDO. Synthetic CDO is a a traditional CDO derivative products, on the basis of traditional CDO transformation from. Traditional CDO will support debt instruments, such as bank loan debt, the actual transfer of the sale to a third party as a risk isolation, ie the SPV, the whole structure as a true sale, SPV different credit quality of the bonds issued on the basis of the traditional CDO in to the transfer of risk, but also the interests of the fund-raising. Synthetic CDO does not have to bear the economic risk of the pool of assets, the synthetic CDO commitments corresponding subject of credit exposure to the economic risks facing only, instead of the economic risks of legal title. First synthetic CDO issuer in the United States and Europe, the bank, through the issuance of a synthetic CDO delinked from ownership of the underlying assets and economic risks, making banks more flexibility in asset and liability management. While retaining ownership of the underlying assets, reduce the statutory capital requirements and economic risks, such a financing structure of the CDO known as synthetic balance sheet CDO. The specific structure of the synthetic CDO promoters (Figure 1): a set of loan debt summary packaging, and entered into a credit default swap contracts (credit default-swapping transaction with the SPV CDS), the promoters regularly paying royalties . CDS is similar to buy insurance for the loan obligations, when an event of default occurs, in accordance with the contract in full or part of the compensation. Like a traditional CDO's SPV, synthetic CDO SPV different series of bonds to be issued. Different SPV will issue bonds in cash to purchase a group of high credit quality of the bonds, in order to ensure the safety of future principal. Synthetic CDO does not belong to the true sale the loan bond assets have not been sold to investors, through a mechanism similar to bond insurance, founding institutions can transfer the credit risk of their loans to investors. Above premium and investment interest income as interest payment each series of bonds issued by the SPV are the asset pool loan debt default occurs, the SPV need to sell the bonds of high credit quality as the amount paid to the promoters, this part of the losses from CDO investors assume.







Two CDO basic structure and risk - return characteristics analysis


(A) CDO structure


In the construction process of the CDO, different mortgage portfolio debt varieties of interest and principal cash flows included in the CDO debt series of different priority levels are generally divided into priority Series, the middle series, interests series. In addition to the equity series, other debt series rating to the general priority debt credit rating of at least A-level, middle-class debt is rated BBB, equity series obtained the remaining portion of the cash flow, so that part does not require a rating. When there is a loss occurs first absorbed by the share capital of the series, followed by equity Series Intermediate Series bear to advanced series. In other words, the CDO credit enhancement is reached with the Securities structure design, unlike most ABS is the use of external credit enhancement mechanism to increase the safety of the securities. Secondary series, intermediate and advanced series split according to interest rates for small series, for example, of the other fixed and floating rate, zero-coupon and interest-bearing points, etc., to suit different investors' risk appetite.
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