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Summary of Collateralized Debt Obligations and Structured Finance

The most cutting–edge read on CDO and credit market structures
Collateralized Debt Obligations and Structured Finance provides a state–of–the–art look at the exploding CDO and structured credit products market.

Title Information

ISBN:

9780471462200

Pages:

352 pages

Format:

Hardback

Product Code:

15958

Publisher:

John Wiley & Sons Ltd

Published:

19/09/2003

Press and Industry Reviews

"Caveat emptor! Never in the history of finance has this warning been more appropriate. With the development of CDOs, credit derivatives, and other esoteric structured finance techniques, market participants - the savvy as well as the novice - are exposed to a bewildering array of new ideas, concepts, and structures. Janet Tavakoli has tackled these subjects in an outstanding mixture of exposition, mathematics, and skepticism. A must–read for anyone who plans to play in these markets."
- Jack Caouette, Vice Chairman, MBIA Insurance Corporation

"A timely and comprehensive survey of the latest developments in structured finance, particularly given the rapid pace of change in the last few years. The author’s depth of knowledge and wide experience are conveyed clearly to the reader. At a time when the industry's ability to meet the complexities of the differing requirements of market participants is under challenge from both the events of the last cycle and the authorities, the insights offered in this book are especially valuable."
- Mark Hale, Group Strategist, Ansbacher & Co., Ltd.

"Structured finance is central to the continued development of active credit portfolio management. In this book, Tavakoli not only provides an authoritative account of many of the structured finance products employed by portfolio managers, but also addresses, in a forthright manner, a number of the 'burning issues' affecting the industry in a post–Enron world."
- John Cross, Global Head, Portfolio Management, Standard Chartered Bank

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About Janet M. Tavakoli

JANET M. TAVAKOLI is the President of Tavakoli Structured Finance, Inc. (www.tavakolistructuredfinance.com). Tavakoli has over eighteen years of experience trading, structuring, and marketing derivatives and structured products with major financial institutions in New York and London. She is a former Adjunct Associate Professor in the Finance Department of the University of Chicago's Graduate School of Business where she taught Derivatives. Tavakoli is also the former Executive Director and Head of Financial Engineering for the Global Capital Markets Group of WestLB in London.

Contents of Collateralized Debt Obligations and Structured Finance

Introduction

1: The CDO Paradigm Shift
Estimated Market Size

2: The Origins of Securitization
The CDO "Arbitrage"
Portfolio Diversification and Credit Events
Terminology
True Sale, Hybrid, and Synthetic Structures
Credit Enhancement
CDO Classifications
Market Value CDOs
Cash Flow CDOs
The Origins of U.S. Securitization
Collateralized Mortgage Obligations

3: Structured Finance and Special Purpose Entities
SPCs and Historical Abuse
SPEs and SPVs
Documentation
Example of a Multiple Issuance Entity (MIE)
Cayman Domiciled SPEs
Repackagings to Satisfy Investor Demand
CLNs and Funding Costs
Structured Floaters
Principal Protected Notes (PPNs)
Loan Repackagings
Mismatched Maturities
Liquidity
Setup Costs
Unwind Triggers Linked to Derivatives Transactions
DAX-Linke d Note with Triggers
Ratings
Master Trusts
Owner Trusts
Grantor Trusts
REMICs
Multiseller and Single Seller Conduits
Domestically Domiciled Corporations
Bankruptcy Remote?

4: Credit Derivatives and Total Rate of Return Swaps
Risks to Portfolio Value
CDSs
Are You Hedged? - The Regulatory Viewpoint
Digital Cash Payment - Alternate Termination Payment
Initial Value _ (Par _ Market Value): Alternate Termination Payment
Normalized Price Method - Alternate Termination Payment
Hedge Costs in Cash and Synthetic CDOs
Deliverables: CDOs and the “Cheapest to Deliver” Option
Convertible Bonds and Asset Swaps
Default and Recovery Rate
The Default Protection Seller: Credit and Correlation
Default Language for Sovereign Debt
Default Language for Nonsovereign Debt: Controversy and CDOs
Comments on CDS Prices
Total Rate of Return Swaps (Total Return Swaps)
Pricing TRORS on Levered CDO Tranches
TRORS versus Repos
Moral Hazard with Bank Loan Reference Assets
CDS versus TRORS

5: Cash versus Synthetic Arbitrage CDOs
Comparison of Managed Arbitrage CDO Features: Cash versus Synthetic Deals
The Arranger and the Manager
Mandate Agreement
Deal Assembly
CDS Language for the Synthetic CDO
Selecting the Portfolio and Impact on Rating
Rating Criteria and Restrictions
Substitution and Reinvestment Criteria
Warehousing Assets
Pricing and Closing
Ramping-Up the Portfolio
Reinvestment Period
Non-Call Period
Pay Down Period
Weighted Average Life and Expected Final Maturity
Early Termination
Legal Final Maturity
Tranching and the Synthetic Arbitrage Advantage
Waterfalls for Cash versus Synthetic Arbitrage CDOs
Payment-in-Kind (PIK) Tranches
Psychic Ratings: Rating Agency Treatment of PIK Tranches
The Super Senior Advantage
CDS versus Cash Asset Spreads
Simplified Examples of Interest Rate Swaps and Asset Swaps
Hedging the CDO Portfolio Cash Flows
Settlement in the Event of Default or Credit Event
Documentation
Cash versus Synthetic Arbitrage CDO Equity Cash Flows
Sample Cash Flows
Summary of Cash Arbitrage CDOs versus Synthetic Arbitrage CDOs

6: Cash Flow Caveats
Conventional Wisdom
Accruing Errors
Probability of Receipt
Equity Structures
Equity Earns all Residuals, But Loss Is Limited to Original Investment
Equity Investor Injects Cash as Overcollateralization
Rated Equity Earns Stated Coupon Appropriate to Rating
Rated Equity: Static Deal
Equity Investor Earns a Stated Coupon on the Remaining Equity Investment
Conflict of Interest between the Residual Holder and Senior Tranche Investors
Unfunded Equity Investments - Ultimate Leverage
Actively Traded and Limited Substitution Synthetic Arbitrage CDOs
Interest Subparticipations (ISPs): When Equity Isn’t First Loss
Participation Notes (PNs)
Capped PNs
Combination Notes (CNs)
Investor Motivation
Principal Protected Structures

7: Balance Sheet CDOs
True Sale ("Fully Funded"): Delinked Structure
Linked Nonsynthetic Structures
Linked Black Box Credit Linked Note (CLN) CDOs
Synthetic Structure with SPE (BISTRO)
Partially Synthetic Linked CDOs
Fully Synthetic CDOs
Small to Medium-Size Enterprises (SMEs) - Europe
SMEs: United States versus Europe
Secured Loan Trusts
Regulatory Capital - The Model Advantage
Regulatory Capital - BIS II

8: Structured Finance and Risk
Credit Risk Dumping Grounds: The Bank’s Balance Sheet and Trading Books
Loans and Other Exposures
New Structured Finance Deals
Fraud
Enron, J.P. Morgan, and Offshore Vehicles
Participation Notes
Equity Total Rate of Return Swaps (TRORS) - Loans Disguised as Capital Injections
The Trading Book Parking Lot: Regulatory Capital Arbitrage
Trading Books and CDOs: Short Mezzanine and Long Equity
Hedge Funds as Investors
Structured Finance and Accounting (Kidder Peabody)
The Sarbanes-Oxley Act of 2002
Will Sarbanes-Oxley Make a Difference?

9: Super Senior Sophistry
The AAA Rip-Off
Rating Agencies - Moody's Tranching
AAA Basket with 2 Percent First-Loss Tranche
Super Senior Attachment Point
Super Senior Pricing
Super Seniors or Senile Seniors?
Where Are the Regulators?
Junior Super Seniors
Super Senior "Investors"
Final Thoughts on Super Seniors

10: Selected Structured Finance Products
Future Flows: Payment Rights Securitizations
Emerging Market Caveats 298
Multisector CDOs: CDOs2
Structured Investment Vehicles (SIVs): Credit Arbitrage Funds
Hedge Funds and Collateralized Fund Obligations (CFOs)
First (and nth)-to-Default Basket Swaps
Portfolio Swaps
Multiline Insurance Products: Disappointment and Promise
Lexington (AIG) and Hollywood Funding
Transformers

11: Future Developments in Structured Finance
Playing the Game with BIS II
Trend to Risk Distribution

Acronym Key
Selected Bibliography
Interesting Web Sites

Index