Developments in Collateralized Debt Obligations New Products and Insights

by Lucas, Douglas J.; Goodman, Laurie S.; Fabozzi, Frank J.; Manning, Rebecca

• ISBN13: 9780470135549
• ISBN10: 0470135549
• Edition: 1st
• Format: Hardcover
• Copyright: 2007-05-04
• Publisher: Wiley

Summary

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.

Author Biography

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.

Table of Contents

Preface

About the Authors

Introduction

Understanding CDOs

Cash Flow CDOs

Synthetic Arbitrage CDOs

Conclusion

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

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

Developments in Synthetic CDOs

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

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

Synthetic CDO Ratings

Tests of Index Portfolios

AAA Ratings and Expected Loss versus Default Probability

Barbell Portfolios

Summary

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

Emerging CDO Products

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

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

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

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

Other CDO Topics

Rating Agency Research on CDOs

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

Changes in Rating Methodologies

Conclusions

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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