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Collateralized debt obligations, or CDOs, are structured vehicles that are similar to leveraged closedend funds. Since their creation in the late 1980s, CDOs have evolved into three major classifications: cash flow CDOs; synthetic CDOs; and market value CDOs. CDO structures contain various covenants and mechanisms that dictate the composition of the collateral portfolio, define the trading activities permitted, allocate cash proceeds to the rated notes and equity, and aim to protect noteholders by paying down debt if certain triggers are tripped. This section will focus on the features common to most CDOs, outline considerations and risks associated with each, and highlight Standard & Poor’s criteria developed to address such concerns. Standard & Poor’s new CDO Evaluator refines CDO default analysis. This new model uses Monte Carlo statistical methodology to evaluate the credit quality of a portfolio of CDO assets and to provide scenario-default rates for the portfolio at each rating level. The CDO Evaluator system is used to determine the credit risk of a portfolio of assets both for cash flow and for synthetic CDOs. The goal of any CDO manager analysis is to attempt to anticipate, as well as possible, how well equipped the CDO team is to meet the diverse needs of a variety of constituents. Given the complexity of the analysis and the poor availability of data, it is necessary to take a multifaceted approach. The three major elements that must be assessed are: the team and the organization, the performance of the existing deals, and the operational, systems, and compliance infrastructure. To aid in this assessment, Standard & Poor’s is introducing CDO Manager Focus, a new approach for analyzing CDO managers. The exact capital structure for cash flow CDO transaction, or for synthetic CDO transaction with cash flow components, is determined by modeling cash flow simulations under different assumptions. The aim of this analysis is to show that each tranche can withstand the stresses commensurate with the desired rating. CDO will use some combination of interest rate swap and cap agreements to hedge its risks against interest rate mismatches between fixed rate assets and floating rate liabilities, or visa-versa. Similarly, it may be necessary to employ a basis-risk swap where the collateral consists of floating-rate assets linked to one index, while the liabilities pay interest based on another. In addition to these interest-rate and basis-risk swaps, a transaction may employ currency hedges where assets and liabilities are paid in different currencies to protect against foreign-exchange risk.
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The eight papers that compse this book analyze all dimensions of Collateralized Debt Obligations. The papers are written by analysts at Standard & Poor's.About the Author:
Standard and Poor’s holds the copyright to Global Cash Flow and Synthetic CDO Criteria. This material was first published by Standard & Poor’s Ratings Service on March 21st, 2002. The Financier, Inc. has received permission from Standard & Poor’s to reproduce Global Cash Flow and Synthetic CDO Criteria in The Securitization Conduit.
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Book Description The Financier Inc., 2002. Condition: New. book. Seller Inventory # M0974078425