By Janet M. Tavakoli
"Collateralized Debt tasks and established Finance presents a state of the art examine the exploding CDO and based credits items industry. monetary specialist Janet Tavakoli - writer of the generally renowned credits Derivatives and artificial constructions - examines various securitization themes by no means prior to noticeable in print, together with the large raise within the CDO arbitrage created by means of synthetics; the tranches most in danger from this new know-how; dumping securitizations on financial institution stability sheets; the abuse of offshore automobiles by means of businesses corresponding to Enron; and securitizations made attainable by means of new securitization concepts and the creation of the Euro."--BOOK JACKET. Read more...
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Extra resources for Collateralized debt obligations and structured finance : new developments in cash and synthetic securitization
Market value structures meet principal (if applicable) and interest liabilities by generating cash from trading assets and from interest on invested assets. If a collateral pool consists of defaulted bonds or loans, the market value structure is usually used, because these assets do not generate predictable cash ﬂow streams, but have signiﬁcant market value upside potential. Managers who have good track records trading investment grade debt and high yield debt often prefer market value deals. Market value deal managers trade actively and aggressively and usually employ leverage.
It is a theme that gets replayed with variations many times over the course of the coming years. Let’s take a moment to dissect some of the components. We’ll see these ideas again in various forms 34 COLLATERALIZED DEBT OBLIGATIONS AND STRUCTURED FINANCE in other structures. Today we still combine high cash ﬂow equity with zero coupon bonds in principal-protected structures. Suppose for a moment that Travelers had owned high coupon premium bonds that had no prepayment risk and no credit risk. The duration of those bonds would initially be shorter than current coupon bonds in the market due to their high coupons.
Popular forms of credit enhancement include the following: Initial overcollateralization. Subordination in the form of an equity piece. Junior lenders to the securitization vehicle. Credit wraps. Surety bonds. Government guarantees. Reserve accounts of excess coupon spread not required for immediate payment of liabilities. Reserve accounts of excess cash. Credit derivatives. Cash ﬂow diversion once prespeciﬁed conditions or triggers are met. Conduits may employ letters of credit (LOCs) and liquidity lines to ensure cash ﬂow requirements, and may also add a clawback LOC to protect against payments being reclassiﬁed as preferential in the event of bankruptcy.