Collateralised debt obligations

The following Financial Services practice note provides comprehensive and up to date legal information covering:

  • Collateralised debt obligations
  • What is a CDO?
  • Core concepts
  • Securitisation of financial assets
  • Principal parties
  • CDO structuring
  • Credit exposure—available options
  • Portfolio management—available options
  • Capital structure of the SPV
  • Hedging
  • More...

Collateralised debt obligations

What is a CDO?

Core concepts

Collateralised debt obligations (CDOs) are complex, high-value transactions involving numerous parties, extensive documentation and, usually, several jurisdictions.

A CDO transaction involves an orphan shell company (known as a special purpose vehicle (SPV) established by the investment bank arranging the CDO transaction) issuing newly created structured finance instruments (being debt securities in the form of bonds or notes and referred to in this Practice Note as 'CDO securities') which are:

  1. divided into several classes or tranches of varying size, credit rating and priority ranking (categorised as senior, mezzanine or subordinated)

  2. backed, that is funded by and secured over, a diverse portfolio of financial assets (typically consisting of commercial loans, corporate bonds and/or structured finance securities (including asset-backed securities, mortgage-backed securities and CDO securities issued by other SPVs)) acquired by the SPV

For information on SPVs, see Practice Note: The insolvency remote SPV in structured finance.

The newly issued CDO securities can be tailored to offer a risk/return profile which is correlated to the credit risk of selected parts of the underlying portfolio, in order to meet the needs of particular investors. The SPV will purchase the assets in the open market or directly from the balance sheet of the portfolio manager or arranging bank. It will fund this purchase with the proceeds arising from the issue of its CDO securities.

Securitisation of financial

Popular documents