Ask The Wall Street Insider Guides - Whats the threshold for a CDO to be considered defunct? Was there a certain percentage of the loans backing it that had to be defaulted on for the thing to implode? Each CDO deal is different: collateral quality, capital structure, waterfall structure, and definition of default, so there is no general answer. But there is answer for specific deal. You can find out by reading the Deal Prospectus and running simulation models. Now underlying collateral of a CDO is not mortgages, but Mortgage Backed Securities or other CDOs of MBS...or it can be corporate loans. You can arrive at the answer by running computer models to simulate default of the underlying collateral to see how much that reduces cash-flow. Then based on the language on Prospectus, youd see the define default is triggered. The language of the deal that defines default is critical as some define default aggressively while others conservatively. Also CDOs are different from CDS. CDO is based on securitization technology to aggregate cashflowing assets and create securities from specific seniority of the cashflow. These securities can then be sold to investors of different risk appetite. A CDS is a credit risk transfer mechanism. One party would pay to have the default risk covered. The other party would receive these payments, but would have to make the other party whole if default happens.
Posted on: Sun, 26 Oct 2014 13:28:03 +0000
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