Structured Finance and the Financial Turmoil of 2007 2008

Cdo program conduits siv lites 4 conduits that partly

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CDO program conduits (SIV- lites) 4% Conduits that partly or fully finance specific CDO tranches by issuing ABCP. They operate more like CDOs than like “traditional” SIVs. Other 5% SOURCE: Moody’s (2008a) and (2008b), BIS (2008d), Criado and Van Rixtel (2007), Deutsche Bank (2007), JP Morgan (2007), Polizu (2007), Moody’s (2003) and Moody’s (2002). 1 JP Morgan (2007), p.2.
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BANCO DE ESPAÑA 23 DOCUMENTO OCASIONAL N.º 0808 Chart 3. US ABCP outstanding amounts 3.3 "@RG±lNV [email protected]@KHYDC CDAS [email protected] (CDOs) Collateralized debt obligations (CDOs) are securities that are based on the packaging of in particular higher risk assets, such as risky loans, mortgages, bonds and asset backed securities, into a new security [Cousseran and Rahmouni (2005); Lucas et al. (2007)]. Thus, a pool or number of debt contracts is grouped within a SPE/SPV (see also section 2). The CDO’s liabilities are divided in tranches of different credit quality and therefore of different subordination, as is the case with the asset-backed securities discussed before. The investors in the tranches of a CDO have the ultimate credit risk exposure to the underlying reference entities. There are a number of ways to classify CDOs. The main classi [email protected] of CDOs is based on the RODBHj c way credit risk is being transferred, in accordance with similar practices in securitizations in general. If the SPE/SPV of a CDO owns the underlying debt obligations, the CDO is referred to as a “cash l ow” or “true sale” CDO. In case the SPE/SPV does not acquire the portfolio of underlying debt instruments, but sells a credit default swap (CDS) to transfer the credit risk exposure of these instruments, the CDO is referred to as a “synthetic” CDO. In addition, some other types of CDOs exist, such as a hybrid variant combining elements of the “cash kNVt and fRXMSGDSHBt CDOs. These other CDOs will not be discussed in this Occasional Paper. As is shown in Chart 4, the bulk of CDOs exist of “cash kNVt CDOs (including “hybrid t CDOs), with a much smaller share accounted for by fRXMSGDSHBt CDOs. Another classi j cation of CDOs is based on the RODBHjB underlying portfolio. Here, CDOs can be divided in collateralized loan obligations (CLOs) and collateralized bond obligations (CBOs). CLOs are CDOs completely based on the packaging in a new security of loans, such as bank loans. CBOs are similar but then based solely on bonds [Jobst (2003)]. As is shown in Chart 5, the issuance of CDOs collateralized by loans traditionally has been much larger than that of CDOs collateralized by bonds. Apparently, institutional investors in the US and Europe have been the main investors in CLOs. A large part of the loans underlying CLOs has been originated by private equity and LBO operations and consequently CLOs have performed a crucial role in the recent boom in these operations [see BIS (2008b)].
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