Table of Contents
Preface xi
About the Authors xv
Part One Introduction 1
Chapter 1 Review of Collateralized Debt Obligations 3
Understanding CDOs 3
Cash Flow CDOs 10
Synthetic Arbitrage CDOs 28
Conclusion 37
Chapter 2 Impact of CDOs on Collateral Markets 39
Collateralized Loan Obligations and the High-Yield Bank Loan Market 39
Structured Finance CDOs and the Mezzanine Mortgage ABS Market 42
Trust Preferred Securities CDOs and their Collateral Market 46
Conclusion 48
Chapter 3 CDO Rating Experience 49
CDO Rating Downgrade Data 50
CDO and Tranche Rating Downgrade Frequency 52
CDO Downgrade Patterns 54
Why Downgrade Patterns? 56
Downgrade Severity 58
Extreme Rating Downgrades 58
CDO “Defaults” and Near “Defaults” 61
Summary 71
Part Two Developments in Synthetic CDOs 73
Chapter 4 ABS CDO Collateral Choices: Cash, ABCDS, and the ABX 75
Growth of the Subprime Synthetic Market 75
Importance of ABCDS to CDO Managers 76
ABCDS 79
The ABX Index 82
Fundamental Contractual Differences—Single-Name ABCDS/ABX Index/Cash 83
Supply/Demand Technicals 89
What Keeps the Arbitrage From Going Away? 92
Bottom Line—Buyers versus Sellers 94
The Cash/ABCDS Basis and the CDO Arbitrage 94
Single-Name ABCDS versus ABX in CDOs 96
Summary 97
Chapter 5 Hybrid Assets in an ABS CDO 99
Corporate CDS and ABCDS 100
Advantages of Hybrid Assets in an ABS CDO 103
Illustrative Hybrid ABS CDO Structure 105
Cash Flow Challenges 107
Conclusions 115
Chapter 6 Synthetic CDO Ratings 117
Tests of Index Portfolios 117
AAA Ratings and Expected Loss versus Default Probability 120
Barbell Portfolios 121
Summary 122
Chapter 7 Credit Default Swaps on CDOs 125
CDO CDS Nomenclature 126
CDO Credit Problems and their Consequences 127
Alternative Interest Cap Options 130
Miscellaneous Terms 133
Cash CDO versus CDO CDS 134
Exiting a CDO CDS 135
Rating Agency Concerns on CDOs that Sell Protection via CDO CDS 136
Summary 137
Part Three Emerging CDO Products 139
Chapter 8 Trust-Preferred CDOs 141
Trust-Preferred Securities 141
Other TruPS CDO Assets 144
TruPS CDO Issuance 144
Bank TruPS Prepayments and New CDO Issuance 147
TruPS CDO Structure 148
Assumptions Used by Rating Agencies 150
TruPS CDO Performance 161
TruPS Issuers and Issues 163
Summary 166
Chapter 9 Commercial Real Estate Primer 169
Loan Origination 170
Property-Level Loans 172
Commercial Mortgage-Backed Securities 178
REIT Securities 182
Evaluating CREL and CMBS 183
CREL Historical Performance 186
CMBS Historical Performance 197
Summary 203
Chapter 10 Commercial Real Estate CDOs 205
CRE CDO Defined 205
Market Trends 207
CRE Finance before CDOs 209
Types of CRE CDOs 210
CRE CDO Performance 211
Investors 212
CRE CDO Credit Analysis 214
Rating CRE CDOs 215
Summary 220
Chapter 11 CRE CDO Relative Value Methodology 221
Whole Loan CREL CDOs versus High-Yield CLOs 221
Investment-Grade CMBS CDOs versus Mezzanine Structured Finance CDOs 228
Relative Value among CRE CDOs 234
Summary 241
Part Four Other CDO Topics 243
Chapter 12 Rating Agency Research on CDOs 245
Using Rating Watches and Outlooks to Improve the Default Prediction Power of Ratings 245
Changes in Rating Methodologies 252
Conclusions 255
Chapter 13 Collateral Overlap and Single-Name Exposure in CLO Portfolios 257
Collateral Overlap in U.S. CLOs 258
Favorite CLO Credits 263
Single-Name Risk and Tranche Protections 265
Excess Overcollateralization and Excess Overcollateralization Delta 266
Summary 272
Index 275
