You are previewing Collateralized Debt Obligations: Structures and Analysis, Second Edition.
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Collateralized Debt Obligations: Structures and Analysis, Second Edition

Book 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.

Table of Contents

  1. Cover Page
  2. THE FRANK J. FABOZZI SERIES
  3. Title Page
  4. Copyright
  5. Dedication
  6. Contents
  7. Preface
    1. PART ONE: INTRODUCTION TO CASH CDOs
    2. PART TWO: LOANS AND CLOs
    3. PART THREE: STRUCTURED FINANCE CDOs AND COLLATERAL REVIEW
    4. PART FOUR: OTHER TYPES OF CASH CDOs
    5. PART FIVE: SYNTHETIC CDOs
    6. PART SIX: DEFAULT CORRELATION
    7. PART SEVEN: CDO EQUITY
    8. PART EIGHT: OTHER CDO TOPICS
    9. ACKNOWLEDGMENTS
  8. About the Authors
  9. PART One: Introduction to Cash CDOs
    1. CHAPTER 1: Cash CDO Basics
      1. WHY STUDY CDOs?
      2. UNDERSTANDING CDOs
      3. CREDIT STRUCTURES
      4. A CDO STRUCTURAL MATRIX
      5. CDOs BEING OFFERED TODAY
      6. PARTIES TO A CDO
    2. CHAPTER 2: Cash Flow CDOs
      1. DISTRIBUTION OF CASH FLOWS
      2. RESTRICTIONS ON MANAGEMENT: SAFETY NETS
      3. CREDIT RATINGS
      4. CALL PROVISIONS IN CDO TRANSACTIONS
  10. PART Two: Loans and CLOs
    1. CHAPTER 3: High-Yield Loans: Structure and Performance
      1. THE LOAN MARKET
      2. THE SYNDICATION PROCESS
      3. LOAN STRUCTURE AND LEADERS
      4. LOAN INTEREST RATES AND UPFRONT FEES
      5. LOAN CREDIT QUALITY
      6. LENDER'S LIABILITY
      7. OVERVIEW OF LOAN TERMS
      8. LOAN TERMS VERSUS BOND TERMS
      9. A TALE OF TWO LOANS
      10. THE SECONDARY MARKET
      11. LOAN RECOVERY RATES
      12. LOAN DEFAULT RATES
      13. HIGH-YIELD LOAN CLO VERSUS HIGH-YIELD BOND CBO PERFORMANCE
      14. CONCLUSION
    2. CHAPTER 4: European Bank Loans and Middle Market Loans
      1. EUROPEAN BANK LOANS
      2. MIDDLE MARKET LOANS
      3. CONCLUSION
  11. PART Three: Structured Finance CDOs and Collateral Review
    1. CHAPTER 5: Review of Structured Finance Collateral: Mortgage-Related Products
      1. RESIDENTIAL MORTGAGE-BACKED SECURITIES
      2. COMMERCIAL MORTGAGE-BACKED SECURITIES
      3. REAL ESTATE INVESTMENT TRUST DEBT
    2. CHAPTER 6: Review of Structured Finance Collateral: Nonmortgage ABS
      1. CREDIT CARD RECEIVABLE-BACKED SECURITIES
      2. AUTO LOAN-BACKED SECURITIES
      3. STUDENT LOAN-BACKED SECURITIES
      4. SBA LOAN-BACKED SECURITIES
      5. AIRCRAFT LEASE-BACKED SECURITIES
      6. FRANCHISE LOAN-BACKED SECURITIES
      7. RATE REDUCTION BONDS
    3. CHAPTER 7: Structured Finance Default and Recovery Rates
      1. STRUCTURED FINANCE VERSUS CORPORATE DEFAULT RATES
      2. S&P RATING TRANSITION STUDIES AND THE MATRIX MULTIPLYING APPROACH
      3. RESULTS OF MULTIPLYING S&P RATING TRANSITION MATRICES
      4. S&P ON STRUCTURED FINANCE LOSS GIVEN DEFAULT
      5. S&P CONSTANT ANNUAL DEFAULT AND RECOVERIES
      6. MOODY'S MATERIAL IMPAIRMENT STUDY
      7. COMPARING AND RECONCILING STRUCTURED FINANCE DEFAULT RATES
      8. MOODY'S ON STRUCTURED FINANCE HISTORICAL LOSS RATES
      9. MOODY'S CONSTANT ANNUAL DEFAULT AND RECOVERIES
      10. BLENDING S&P AND MOODY'S STUDIES
      11. APPLYING CDRs AND RECOVERIES TO SF CDOs
      12. CONCLUSION
    4. CHAPTER 8: Structured Finance Cash Flow CDOs
      1. SF CDOs VERSUS HIGH-YIELD CDOs
      2. RATING AGENCIES ON STRUCTURED FINANCE CDOs
      3. STRUCTURED FINANCE ASSETS' NEGATIVE CONVEXITY
      4. EXTENSION RISK
      5. CONCLUSION
  12. PART Four: Other Types of Cash CDOs
    1. CHAPTER 9: Emerging Market CDOs
      1. EM SOVEREIGN BOND DEFAULTS
      2. WHY THE BETTER TRACK RECORD?
      3. CDO RATING DIFFERENCES: EM VERSUS HIGH YIELD
      4. CONCLUSION
    2. CHAPTER 10: Market Value CDOs
      1. CASH FLOW VERSUS MARKET VALUE DEALS
      2. THE RATING PROCESS
      3. HOW ADVANCE RATES ARE DERIVED
      4. CONCLUSION
  13. PART Five: Synthetic CDOs
    1. CHAPTER 11: Introduction to Credit Default Swaps and Synthetic CDOs
      1. CREDIT DEFAULT SWAPS
      2. SYNTHETIC CDOs
      3. CONCLUSION
    2. CHAPTER 12: Synthetic Balance Sheet CDOs
      1. CASH CLOs FOR BALANCE SHEET MANAGEMENT
      2. PARTIALLY FUNDED SYNTHETIC CDOs
      3. CONCLUSION
    3. CHAPTER 13: Synthetic Arbitrage CDOs
      1. FULL-CAPITAL STRUCTURE SYNTHETIC ARBITRAGE CDOs
      2. SINGLE-TRANCHE CDOs
      3. STANDARD TRANCHES OF CDS INDICES
      4. CONCLUSION
    4. CHAPTER 14: A Framework for Evaluating Trades in the Credit Derivatives Market
      1. ASSESSING SINGLE-NAME AND CDO TRANCHED EXPOSURES
      2. ASSESSING CDO EQUITY VERSUS A BASKET SWAP
      3. CONCLUSION
    5. CHAPTER 15: Structured Finance Credit Default Swaps and Synthetic CDOs
      1. DIFFERENCES BETWEEN CORPORATE AND STRUCTURED FINANCE CREDIT
      2. DIFFICULTIES IN SF CDS
      3. SF CDS EFFECT ON SF CDO MANAGEMENT
      4. TWO NEW TYPES OF SF CDOs
      5. EFFECTS OF SF CDS ON CDO CREDIT QUALITY AND SPREADS
      6. CONCLUSION
  14. PART Six: Default Correlation
    1. CHAPTER 16: Default Correlation: The Basics
      1. DEFAULT CORRELATION DEFINED
      2. DEFAULT PROBABILITY AND DEFAULT CORRELATION
      3. CONCLUSION
    2. CHAPTER 17: Empirical Default Correlations: Problems and Solutions
      1. EMPIRICAL RESULTS
      2. PROBLEMS WITH HISTORICAL DEFAULT CORRELATIONS
      3. PROPOSED SOLUTIONS
      4. CONCLUSION
  15. PART Seven: CDO Equity
    1. CHAPTER 18: Why Buy CDO Equity?
      1. NONRECOURSE TERM FINANCING
      2. THE FORGIVING NATURE OF CDO FINANCING
      3. CDO OPTIONS
      4. CDO EQUITY AS A DEFENSIVE STRATEGY
      5. CONCLUSION
    2. CHAPTER 19: CDO Equity Returns and Return Correlation
      1. FLAWED METHODOLOGIES
      2. THE APPROPRIATE LESSON FROM HISTORY
      3. LOAN DEFAULTS AND RECOVERIES
      4. CASH FLOW MODELING DEFAULTS AND RECOVERIES
      5. STRUCTURED FINANCE DEFAULTS AND RECOVERIES
      6. SF CDO CASH FLOW MODELING
      7. RETURN CORRELATION AND NONRECOURSE LEVERAGE
      8. CONCLUSION
  16. PART Eight: Other CDO Topics
    1. CHAPTER 20: Analytical Challenges in Secondary CDO Market Trading
      1. IMPORTANT DEVELOPMENTS: SPREAD TIGHTENING, INCREASED ACTIVITY
      2. PITFALLS IN SECONDARY CDO TRADING
      3. EIGHT-POINT CHECKLIST IN EVALUATING A CDO IN THE SECONDARY MARKET
      4. PRESCRIPTION FOR MAKING PRIMARY ISSUANCES CONDUCIVE TO SECONDARY TRADING
      5. CONCLUSION
    2. CHAPTER 21: The CDO Arbitrage
      1. BUILDING BLOCKS
      2. IMPACT OF CDO ARBITRAGE ON STRUCTURE
      3. CONCLUSION
    3. CHAPTER 22: How to Evaluate a CDO and Manage a CDO Portfolio
      1. INCENTIVE CLASHES IN CDO STRUCTURES
      2. EVALUATE STRUCTURAL ENHANCEMENTS
      3. EVALUATING THE MANAGER'S TRACK RECORD
      4. CONCLUSION
    4. CHAPTER 23: Quantifying Single-Name Risk Across CDOs
      1. COLLATERAL OVERLAP IN U.S. CLOs
      2. FAVORITE CLO CREDITS
      3. COLLATERAL OVERLAP IN U.S. STRUCTURED FINANCE CDOs
      4. SINGLE-NAME RISK AND TRANCHE PROTECTIONS
      5. EXCESS OVERCOLLATERALIZATION AND EXCESS OVERCOLLATERALIZATION DELTA
      6. MONTE CARLO SIMULATION OF SINGLE CREDIT RISK
      7. COMPARING THE TWO APPROACHES
      8. CONCLUSION
    5. CHAPTER 24: CDO Rating Experience
      1. CDO RATING DOWNGRADE DATA
      2. CDO AND TRANCHE RATING DOWNGRADE FREQUENCY
      3. CDO DOWNGRADE PATTERNS
      4. WHY DOWNGRADE PATTERNS?
      5. DOWNGRADE SEVERITY
      6. DOWNGRADES OF Aaa CDO TRANCHES
      7. EXTREME RATING DOWNGRADES
      8. CDO DEFAULTS AND NEAR DEFAULTS
      9. CONCLUSION
  17. Index