Details

<p>Preface xiii</p> <p>About the Authors xxi</p> <p><b>Part One Introduction to Cash CDOs 1</b></p> <p><b>Chapter 1 Cash CDO Basics 3</b></p> <p>Why Study CDOs? 3</p> <p>Understanding CDOs 4</p> <p>Credit Structures 10</p> <p>A CDO Structural Matrix 13</p> <p>CDOs Being Offered Today 14</p> <p>Parties to a CDO 14</p> <p><b>Chapter 2 Cash Flow CDOs 17</b></p> <p>Distribution of Cash Flows 17</p> <p>Restrictions on Management: Safety Nets 20</p> <p>Credit Ratings 23</p> <p>Call Provisions in CDO Transactions 38</p> <p><b>Part Two Loans and CLOs 41</b></p> <p><b>Chapter 3 High-Yield Loans: Structure and Performance 43</b></p> <p>The Loan Market 44</p> <p>The Syndication Process 46</p> <p>Loan Structure and Leaders 48</p> <p>Loan Interest Rates and Upfront Fees 49</p> <p>Loan Credit Quality 51</p> <p>Lender’s Liability 52</p> <p>Overview of Loan Terms 53</p> <p>Loan Terms versus Bond Terms 58</p> <p>A Tale of Two Loans 58</p> <p>The Secondary Market 60</p> <p>Loan Recovery Rates 61</p> <p>Loan Default Rates 63</p> <p>High-Yield Loan CLO versus High-Yield Bond CBO Performance 67</p> <p>Conclusion 74</p> <p><b>Chapter 4 European Bank Loans and Middle Market Loans 75</b></p> <p>European Bank Loans 75</p> <p>Middle Market Loans 91</p> <p>Conclusion 99</p> <p><b>Part Three Structured Finance CDOs and Collateral Review 101</b></p> <p><b>Chapter 5 Review of Structured Finance Collateral: Mortgage-Related Products 103</b></p> <p>Residential Mortgage-Backed Securities 103</p> <p>Commercial Mortgage-Backed Securities 125</p> <p>Real Estate Investment Trust Debt 129</p> <p><b>Chapter 6 Review of Structured Finance Collateral: Nonmortgage ABS 135</b></p> <p>Credit Card Receivable-Backed Securities 135</p> <p>Auto Loan-Backed Securities 137</p> <p>Student Loan-Backed Securities 139</p> <p>SBA Loan-Backed Securities 141</p> <p>Aircraft Lease-Backed Securities 142</p> <p>Franchise Loan-Backed Securities 145</p> <p>Rate Reduction Bonds 148</p> <p><b>Chapter 7 Structured Finance Default and Recovery Rates 153</b></p> <p>Structured Finance versus Corporate Default Rates 154</p> <p>S&P Rating Transition Studies and the Matrix Multiplying Approach 156</p> <p>Results of Multiplying S&P Rating Transition Matrices 158</p> <p>S&P on Structured Finance Loss Given Default 159</p> <p>S&P Constant Annual Default and Recoveries 159</p> <p>Moody’s Material Impairment Study 160</p> <p>Comparing and Reconciling Structured Finance Default Rates 162</p> <p>Moody’s on Structured Finance Historical Loss Rates 164</p> <p>Moody’s Constant Annual Default and Recoveries 166</p> <p>Blending S&P and Moody’s Studies 167</p> <p>Applying CDRs and Recoveries to SF CDOs 167</p> <p>Conclusion 170</p> <p><b>Chapter 8 Structured Finance Cash Flow CDOs 171</b></p> <p>SF CDOs versus High-Yield CDOs 172</p> <p>Rating Agencies on Structured Finance CDOs 174</p> <p>Structured Finance Assets’ Negative Convexity 182</p> <p>Extension Risk 183</p> <p>Conclusion 185</p> <p><b>Part Four Other Types of Cash CDOs 187</b></p> <p><b>Chapter 9 Emerging Market CDOs 189</b></p> <p>EM Sovereign Bond Defaults 190</p> <p>Why the Better Track Record? 192</p> <p>CDO Rating Differences: EM versus High Yield 193</p> <p>Conclusion 198</p> <p><b>Chapter 10 Market Value CDOs 201</b></p> <p>Cash Flow versus Market Value Deals 201</p> <p>The Rating Process 202</p> <p>How Advance Rates are Derived 212</p> <p>Conclusion 215</p> <p><b>Part Five Synthetic CDOs 217</b></p> <p><b>Chapter 11 Introduction to Credit Default Swaps and Synthetic CDOs 219</b></p> <p>Credit Default Swaps 219</p> <p>Synthetic CDOs 229</p> <p>Conclusion 239</p> <p><b>Chapter 12 Synthetic Balance Sheet CDOs 241</b></p> <p>Cash CLOs for Balance Sheet Management 241</p> <p>Partially Funded Synthetic CDOs 249</p> <p>Conclusion 253</p> <p><b>Chapter 13 Synthetic Arbitrage CDOs 255</b></p> <p>Full Capital Structure Synthetic Arbitrage CDOs 256</p> <p>Single-Tranche CDOs 260</p> <p>Standard Tranches of CDS Indices 261</p> <p>Conclusion 262</p> <p><b>Chapter 14 A Framework for Evaluating Trades in the Credit Derivatives Market 265</b></p> <p>Assessing Single-Name and CDO Tranched Exposures 266</p> <p>Assessing CDO Equity versus a Basket Swap 274</p> <p>Conclusion 280</p> <p><b>Chapter 15 Structured Finance Credit Default Swaps and Synthetic CDOs 281</b></p> <p>Differences between Corporate and Structured Finance Credit 282</p> <p>Difficulties in SF CDS 284</p> <p>SF CDS Effect on SF CDO Management 294</p> <p>Two New Types of SF CDOs 295</p> <p>Effects of SF CDS on CDO Credit Quality and Spreads 296</p> <p>Conclusion 297</p> <p><b>Part Six Default Correlation 299</b></p> <p><b>Chapter 16 Default Correlation: The Basics 301</b></p> <p>Default Correlation Defined 301</p> <p>Default Probability and Default Correlation 305</p> <p>Conclusion 321</p> <p><b>Chapter 17 Empirical Default Correlations: Problems and Solutions 323</b></p> <p>Empirical Results 323</p> <p>Problems with Historical Default Correlations 327</p> <p>Proposed Solutions 330</p> <p>Conclusion 344</p> <p><b>Part Seven CDO Equity 345</b></p> <p><b>Chapter 18 Why Buy CDO Equity? 347</b></p> <p>Nonrecourse Term Financing 347</p> <p>The Forgiving Nature of CDO Financing 354</p> <p>CDO Options 356</p> <p>CDO Equity as a Defensive Strategy 359</p> <p>Conclusion 360</p> <p><b>Chapter 19 CDO Equity Returns and Return Correlation 361</b></p> <p>Flawed Methodologies 362</p> <p>The Appropriate Lesson from History 365</p> <p>Loan Defaults and Recoveries 367</p> <p>Cash Flow Modeling Defaults and Recoveries 370</p> <p>Structured Finance Defaults and Recoveries 371</p> <p>SF CDO Cash Flow Modeling 372</p> <p>Return Correlation and Nonrecourse Leverage 374</p> <p>Conclusion 378</p> <p><b>Part Eight Other CDO Topics 379</b></p> <p><b>Chapter 20 Analytical Challenges in Secondary CDO Market Trading 381</b></p> <p>Important Developments: Spread Tightening, Increased Activity 382</p> <p>Pitfalls in Secondary CDO Trading 384</p> <p>Eight-Point Checklist in Evaluating a CDO in the Secondary Market 387</p> <p>Prescription for Making Primary Issuances Conducive to Secondary Trading 408</p> <p>Conclusion 409</p> <p><b>Chapter 21 The CDO Arbitrage 411</b></p> <p>Building Blocks 411</p> <p>Impact of CDO Arbitrage on Structure 422</p> <p>Conclusion 425</p> <p><b>Chapter 22 How to Evaluate a CDO and Manage a CDO Portfolio 427</b></p> <p>Incentive Clashes in CDO Structures 427</p> <p>Evaluate Structural Enhancements 428</p> <p>Evaluating the Manager’s Track Record 429</p> <p>Conclusion 434</p> <p><b>Chapter 23 Quantifying Single-Name Risk Across CDOs 435</b></p> <p>Collateral Overlap in U.S. CLOs 436</p> <p>Favorite CLO Credits 437</p> <p>Collateral Overlap in U.S. Structured Finance CDOs 439</p> <p>Single-Name Risk and Tranche Protections 441</p> <p>Excess Overcollateralization and Excess Overcollateralization Delta 443</p> <p>Monte Carlo Simulation of Single Credit Risk 446</p> <p>Comparing the Two Approaches 449</p> <p>Conclusion 450</p> <p><b>Chapter 24 CDO Rating Experience 453</b></p> <p>CDO Rating Downgrade Data 454</p> <p>CDO and Tranche Rating Downgrade Frequency 456</p> <p>CDO Downgrade Patterns 458</p> <p>Why Downgrade Patterns? 460</p> <p>Downgrade Severity 462</p> <p>Downgrades of Aaa CDO Tranches 464</p> <p>Extreme Rating Downgrades 464</p> <p>CDO Defaults and Near Defaults 469</p> <p>Conclusion 473</p> <p>Index 477</p>

<p><b>DOUGLAS J. LUCAS</b> is Executive Director and Head of CDO Research at UBS. He is also Chairman of The Bond Market Association's CDO Research Committee and ranked top three in CDO research in the <i>Institutional Investor's</i> fixed income analyst survey. Lucas has been involved in the CDO market for nearly two decades, having developed Moody's rating methodology for CDOs in 1989. <p><b>LAURIE S. GOODMAN, P<small>H</small>D,</b> is Managing Director and co-Head of Global Fixed Income Research at UBS. She manages U.S. Securitized Products and Treasury/Agency/Derivatives Research. Goodman has worked on Wall Street for over twenty years and is well regarded by the investor community, having won more #1 slots on the <i>Institutional Investor</i> All-American Fixed Income Team than any other analyst. <p><b>FRANK J. FABOZZI, P<small>H</small>D, CFA, CPA,</b> is an Adjunct Professor of Finance and Becton Fellow at Yale University's School of Management and a Fellow of the International Center for Finance. Fabozzi is the Editor of the <i>Journal of Portfolio Management.</i>

<p><b>Collateralized Debt Obligations<br> SECOND EDITION</b> <p>Since the publication of the first edition of <i>Collateralized Debt Obligations,</i> the CDO market has seen tremendous growth. In fact, as of 2005, $1.1 trillion of CDOs were outstanding—making them the fastest-growing investment vehicle of the last decade. <p>To help you keep up with the expanding CDO market and its various instruments, Douglas Lucas, Laurie Goodman, and Frank Fabozzi have collaborated to bring you a fully revised and up-to-date <i>Second Edition</i> of <i>Collateralized Debt Obligations</i>. Written in a clear and accessible style, this book is a valuable guide that provides you with critical information regarding the evolving nature of the CDO market. <p>Filled with in-depth insights gleaned from years of investment and credit experience, <i>Collateralized Debt Obligations, Second Edition</i> examines a wide range of issues, including: <ul> <li>Cash CDOs</li> <li>Loans and CLOs</li> <li>Structured finance CDOs and collateral review</li> <li>Emerging market and market value CDOs</li> <li>Synthetic CDOs</li> <li>Default correlation</li> <li>CDO equity</li> <li>CDO arbitrage</li> <li>And much more</li> </ul> <p>CDOs offer exciting opportunities for those who understand their complexities. With <i>Collateralized Debt Obligations, Second Edition</i> as your guide, you can begin to understand and take advantage of this dynamic market and its products.

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