Structured Products and Related Credit Derivatives: A Comprehensive Guide for Investors

CHAPTER 10

CDOs by Asset Type

Brian McManus

Senior CDO Analyst

Wachovia Capital Markets, LLC

Dave Preston, CFA

Associate CDO Analyst

Wachovia Capital Markets, LLC

Anik Ray

Associate CDO Analyst

Wachovia Capital Markets, LLC

Steven Todd, Ph.D.

CDO Analyst

Wachovia Capital Markets, LLC

All types of debt securities have been used as CDO collateral, and the options for collateral continue to expand. The most popular CDO assets are corporate leveraged loans, subprime and nonconforming residential mortgage-backed securities (RMBS), commercial real estate (CRE), trust preferred securities (TruPS), other CDO notes, investment-grade corporate bonds, and high-yield corporate bonds. In addition, many CDOs now contain a bucket for credit default swaps (CDS) that reference the aforementioned assets (see Exhibit 10.1). As explained in the previous chapter, a pure synthetic structure uses only CDS to gain exposure to its collateral. Investment-grade collateralized bond obligations (CBOs) have evolved from a cash structure to a pure synthetic structure.

This chapter highlights the special risks and consideration for various asset classes. We choose to focus on the most prominent CDO sectors found in the primary market in the summer of 2007. The new issue mix, however, can change significantly over time. As an example, high-yield bonds were the most prevalent assets of new issue CDOs in the 1990s, while by 2006 asset-backed securities (ABS) were the most prominent collateral.

EXHIBIT 10.1 Collateral ...