damn...
i have no clue about the above-mentioned instruments... i know derivatives very well.. but no fixed income... i understand the basisc but i cant relate them to a group or something. one party sells a block of loans, payments etc to another one.. and so..
and subprime mortgage... whats the top group of that type?
so can please anybody help me with this?
any good books or papers or websites related to that topic?
would be glad!
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try google and wikipedia, theres a good amount of info on the web
There are a lot of places to get more info about these instruments. Its tough to get a good explaination off of the web itself.
If you're at a bank, you should have access to the rating agency login's and you can read their articles that provide an overview.
If you're still at school, look at online research databases that your library has access too. There are plenty of academic papers that give a breakdown of what these structured investments are.
CDO are basically a pool of debt. The basic principle is to arbitrage the credit risk. Traditionally, the step from BBB to A- is more than enough to compensate for the additional default risk of a BBB rated debt. One main reason for this is money market funds and the rating agencies requirement of higher rated debt. So, CDOs basically buy a lot of lower rated bonds/loans/underlying assets. To pay for this, they issue debt and equity. The debt is usually rated highly AAA, AA, etc and is very cheap for the CDO manager. Then, the manager issues equity as a first loss position. This slice takes difference between the excess interest coming in from the lower rated debt they buy and the lower interest they pay on the debt. This excess spread should cover for the risk of default (by buying a lot of assets, you're hoping the default risk is uncorrelated).
In the market now, these subprime mortgages are defaulting more than expected. (partially due to leineint income verificationd). Some CDOs may not have enough money to cover these loss in the equity portion (called a tranche) and then the debt tranche will have to take a loss to cover for it.
ABS CDOs hold mainly residential mortgage backed securities (2nd lien and junior mezzanine), home equity loans/helocs, and also commercial mortgage backed securities (CRE CDO's have become popular as of late, but I think it was a hiccup). A large majority of CDO's issued between 2000-2006 were backed by these securities. They've really been around since the '80's, and Michael Milken is really the purveyor of this asset group and isn't given enough credit for it. CDS are mainly issued by investment banks who either hold a large position in a bond/stock and are using the swaps as a hedge. They may also just have a primary belief in the market and are taking a position by issuing the CDS. There usually is no actual cash exchange. This is a purely synthetic fund and usually have a reference value of up to 10 billion. To get A ratings, they usually hold Treasury strips as part of the collateral. CLO's are usually either Cash Flow CLO's or Specialty CLO's. Cash Flow CLO's usually hold largely syndicated loans as their assets. These are usually one of the primary instruments in LBO's as they are cheaper to issue and quicker to fund. Specialty CLO's are mainly issued by hedge funds to either fund their own acquisitions or for arb purposes. The assets within them are indeed "special" as they usually involve unusual borrowers who are unlikely to get the money they need from banks due to their credit risk (and use your imagination on this!).
In terms of liabilities, all the products have a structure of seniority. The most senior tranche, let's call it A, will usually have a rate of libor + 50 bps, pretty low compared to what a static fund that mimicked the Dow would've had. Then there are the B, C, and the Equity tranche. The rates of return get higher as the seniority level of the tranche gets lower. The Equity tranche is however only privy to the residuals and is not guaranteed a rate or even a return. The A tranche is usually insured (or "wrapped") and is guaranteed 100% of their principal investment should the fund start to fail its coverage tests. This is also where the waterfall payment structure comes in. If the fund starts to fail its coverage tests, the indenture requires the fund to pay back the A tranche principal before it can pay the lower tranches any interest. Some funds though do not issue the equity tranche but hold ownership of them instead, which gives the fund manager more incentive to ensure that the fund perform well as residual returns can sometimes amount to tens of millions per payment period (sometimes monthly so you can imagine). Investors in these products are restricted to institutional investors with more sophisticated knowledge of the market (garbage really...) and require a minimum investment of 1,000,000 and in denominations of 10,000 thereafter. This isn't standard though as I have seen some that only require 250K.
Fabozzi's book is very informative. It's a bit slow, but very informative.
much thanks to:
papershuffler
and
eric809e
both really helped me a lot with the basic understandings! its nice to see some helpful people around who arent that arrogant and cocky.. lotta ppl are to fine to write for a socalled newbie more than 5 words and instead just: google / search
thx again
with these basics i can get some further informations.
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