collateralised debt obligations

collateralised debt obligations (CDO)

International

Structured finance instruments (being debt securities (debt security) in the form of bonds or notes) which are divided into several classes or "tranches" of varying size, credit rating and priority ranking, issued by a special purpose vehicle (SPV) and 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. The SPV will purchase the assets in the open market or directly from the balance sheet of the collateral manager or arranging bank. It will fund this purchase with the proceeds arising from the issue of its CDO securities.

A CDO transaction is essentially a form of securitisation of certain financial assets.

A transaction collateralised primarily by a portfolio of loans is a collateralised loan obligation (CLO); one backed by bonds is a collateralised bond obligation (CBO); and one backed by both loans and bonds is a collateralised debt obligation (CDO).

+ collateralized debt obligation (CDO)

USA

A type of debt security backed by a group (or pool) of fixed income assets (ranging from mortgage-backed securities to corporate bonds sold in the market). To maximize the range of investors to whom they can be sold, the securities are divided into different classes. These typically consist of senior and subordinated tranches (often including an equity tranche at the most junior level) that have differing priorities (priority) regarding payment of principal and interest, differing maturities and differing interest rates. The tranches are generally rated by a credit rating agency. The more senior tranches have the right to priority of payment over more junior tranches, but the more junior tranches carry a higher rate of interest, as they are riskier assets.

Glossary

asset-backed security (ABS)

collateralized loan obligation (CLO)

commercial mortgage-backed security (CMBS)

residential mortgage-backed security (RMBS)

securitization

special purpose entity (SPE)

special purpose vehicle (SPV)