Structured Finance Cash Flow CDOs
Structured finance CDO (SF CDO) deals have become an increasingly important part of a fast growing market. In 2005, SF CDOs comprised 41% of the $200 billion cash CDO origination. The deals are of two varieties—mezzanine structured finance paper (16% of total 2005 CDO origination) and high-grade structured finance deals (25% of total 2005 origination). Mezzanine deals employ primarily BBB and A rated collateral, while high-grade deals use mostly AA and AAA collateral. SF CDO deals have used almost the entire spectrum of structured finance products discussed in Chapters 5 and 6. The deals that contain large amounts of mortgage-related collateral tend to rely more heavily on subprime mortgages rather than prime and Alt A structures, as there is considerably more negative convexity in the latter.
In this chapter, we look at structured finance cash flow CDOs. Many investors consider structured finance cash flow CDOs to be very different from high-yield cash flow CDOs. In fact the cash flows deals are structured very similarly to corporate counterparts. We first look at the similarities and differences between cash flow deals backed by structured finance assets versus those supported by high-yield corporate assets. We showed in Chapter 7 that the default and recovery experience of the underlying structured finance collateral has been more favorable than its corporate counterpart. We will argue that by using the same criteria to rate all types ...