Difference between ABS and CDO?
Been doing a ton of research and networking for a securitized products seat this upcoming summer but am getting conflicting reports on what exactly a CDO entails vs. an ABS.
My understanding was that an ABS takes a variety of whole loans - let's say 200 auto loans - and funnels them into a SPV. This SPV issues securities (ABSs) that finance the purchase of these whole loans. The interest and principal payments are then "passed through" (pass through ABS) to investors who purchase the ABSs.
My understanding was also that a CDO was essentially a sub-set / type of ABS, but rather than an ABS which trades uniformly (i.e., all ABS derived from an SPV are the "same" in terms of credit quality, coupon rate, etc.) a CDO is split into tranches (senior, mezz, equity) with various covenents around first loss (equity), overcollateralization, etc.
However, a conversation with a young guy with only some experience in the space (who said he may be wrong) yielded that ABSs are split out into tranches. I thought this was CDO-specific?
Can someone help me demystify ABS vs. CDO?
All types of ABS are usually tranched - RMBS, CMBS, CLO etc will have senior & junior notes. CDO usually refers to an ABS where the underlying collateral is itself ABS securities rather than whole loans.
Not OP, but could you clear-up a distinction for me? Is a receivables securitization ABS vehicle considered a CDO? I always thought the 'D' in CDO implies an underlying debt obligation like a loan, bond, etc. like CLO's are treated. I always thought a CDO is an ABS, but not all ABS are CDO's.
Thanks. Does the same principle apply when talking about the difference between a MBS and a CMO? I.e., MBS is sourced from a tranche within a SPV made up of a variety of mortgage loans, whereas a CMO is made up on a bunch of MBSs and similarly tranched?
I may be wrong, but I believe a CMO is just an RMBS. I don't think a CMO is made up of MBS securities, I think they are just made up of the underlying mortgages. Someone please correct me if I'm wrong.
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