Collateralized Debt Obligation

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Related to Collateralized Debt Obligations: Credit default swap, Collateralized Loan Obligations

Collateralized Debt Obligation (CDO)

Collateralized Debt Obligation

An asset-backed security backed by the receivables on loans, bonds, or other debt. Banks package and sell their receivables on debt to investors in order to reduce the risk of loss due to default. Returns on CDOs are paid in tranches; that is, the individual loans backing each CDO have different levels of risk, and investors are paid out according to the level of risk they have acquired. Banks offer higher interest rates to investors willing to buy CDOs backed by higher-risk loans. From a bank's perspective, in addition to reducing risk, CDOs also reduce their capital requirements because they can raise funds through the issue of CDOs. While, theoretically, CDOs can be backed by mortgages, one usually refers to these as collateralized mortgage obligations.

collateralized debt obligation (CDO)

A debt security collateralized by a variety of debt obligations including bonds and loans of different maturities and credit quality.
Case Study Collateralized debt obligations (CDOs) originated in the 1990s when financial institutions began moving debts off their balance sheets by selling new securities (CDOs) using bonds and loans—often of relatively low credit quality—as collateral. Each CDO package permits investors to choose particular securities of different risk, ranging from investment-grade to very speculative. A CDO is considered high quality when it enjoys first claim on cash flows produced by the package of loans and bonds. This safety results in high-quality CDOs promising investors relatively low rates of return. CDOs with a lower claim to a package's cash flows carry a high rate of return because of the increased likelihood that some of the payments from the underlying collateral will not occur. Many CDOs were issued with low-grade bonds as collateral at a time when junk bond defaults were in the range of 2% to 3%. The subsequent meltdown of telecommunications and other high-tech firms in 2000 and 2001 resulted in increased defaults on debt that caught many CDO investors by surprise. In fact, the sudden decline in credit quality surprised even professional investors. Financial services company American Express was forced to take pretax writeoffs of over $1 billion in the first seven months of 2001 to account for the decreased market value of the CDOs and other debt securities held in its portfolio. Bank One and insurance companies Lincoln National, American General, and Torchmark were also forced to take large writeoffs on CDO holdings.
References in periodicals archive ?
LNR CDO IV is a collateralized debt obligation (CDO) that closed on March 2, 2006 and is supported by a static pool of commercial mortgage-backed securities.
Since close, the pool has migrated towards more whole loans and A notes (to 58% from 39%), and less B notes, second mortgages, mezzanine debt, and preferred equity (to 35% from 42%), and maintained its exposure to commercial real estate collateralized debt obligation securities (7%).
The Leveraged Investments Group, part of Credit Suisse's Alternative Investments platform, is the largest manager of collateralized debt obligations backed primarily by leveraged loans.
For more information about Fitch's comprehensive subscription service Fitch Research, which includes all presale reports, surveillance, and credit reports on more than 20 asset-backed securities (ABS) asset classes, including collateralized debt obligations (CDOs), contact product sales at +1-212-908-0800 or at 'webmaster@fitchratings.
The notes issued by Trainer Wortham III are supported by a portfolio composed of residential mortgage-backed securities (83%), commercial mortgage-backed securities (5%), asset-backed securities (4%), corporate debt (4%), and collateralized debt obligations (4%).
Jupiter II has a static portfolio composed of approximately 79% residential mortgage-backed securities (RMBS), 11% collateralized debt obligations (CDOs), 9% synthetic securities, and 1% commercial asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS).
This is a static synthetic collateralized debt obligation (CDO) that issued US$15.
Arroyo is a collateralized debt obligation (CDO) managed by Western Asset Management Company (Western) which closed Aug.
North Street 2002-3A is a partially funded synthetic collateralized debt obligation (CDO) created to enter into a credit default swap with UBS AG referencing a portfolio of $2 billion high grade asset-backed securities.