TAILIEUCHUNG - Collateralized Debt Obligations structures and analysis by Laurie S Goodman and Frank J Fabozzi2
7-Market Value CDOs Page 173 Monday, August 12, 2002 9:32 AMCHAPTER7Market Value CDOss explained in Chapter 1, there are cash flow and collateralized debt obligations. Many investors at the senior and mezzanine tranches of CDOs. Their concern is that this deal structure manager the same latitude to manage a portfolio as fund manager. That view is wrong. It is based on a misconception about how market value CDOs are really structured and the protection they provide investorsWhile market value deals are a distinct minority of CDOs,.they are the structure of choice for certain types of collateral,.where the cash flows are not predictable. It is very difficult unpredictable cash flows within the confines of a structure. Moreover, market value structures may to managers and equity buyers who like the flexibility inherent in these deals. Finally, transactions also facilitate the purchase of assets beyond the life of the transaction, because the associated with the forced sale of these assets consideredThis chapter provides an overview of the cash flow and market value structures. It also examines the mechanics of market value CDOs, focusing on rates (., the percentage of a particular asset be issued as rated debt)—the key to protecting the Value CDOs Page 174 Monday, August 12, 2002 9:32 AM174COLLATERALIZED DEBT OBLIGATIONS: STRUCTURES AND ANALYSISholders. Then we look at some volatility numbers, how conservative the advance rates used by the rating agencies FLOW VERSUS MARKET VALUE flow deals are dependent on the ability of the generate sufficient current cash flow to pay interest on rated notes issued by the CDO. The ratings on the effect of collateral defaults and recoveries on of timely interest and principal payments from . The manager focuses on controlling defaults . Overcollateralization, as measured on the basis par value of the portfolio, provides important for the bondholders. If overcollateralization not met, then cash flow is diverted from mezzanine classes to pay down senior notes, or cash trapped in a reserve account. There are no forced value transactions depend upon the ability of manager to maintain and improve the market value collateral. Funds to be used for liability principal payments are obtained from liquidating the collateral. payments can be made from collateral , as well as collateral liquidation proceeds. based on collateral price volatility, liquidity, and . The manager focuses on maximizing total return volatilityMarket overcollateralization tests are conducted regularly. These require that the market value of assets the advance rates (discussed later) must be greater than to debt outstanding. If that is not the case, and liability redemptions may be required to bring overcollateralization ratios back into compliance. Market have diversity, concentration and other portfolio constraints, albeit less than cash flow transactions. For example,.7-Market Value CDOs Page 175 Monday, August 12, 2002 9:32 AMMarket Value CDOs175in a cash flow transaction if there is a constraint that the may not hold more than $20 million par value in industry, then if $15 million is currently in and the manager would like to invest in $10 in that industry, that cannot be done. The manager invest in an additional $5 million. In contrast, in a market value transaction, the same ma
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