Introduction to Securitization

TERMINOLOGY: CDO, CBO, CLO

The term CDO owes its origin to the collateralized mortgage obligation ⁴⁸ (CMO) market where RMBS transactions migrated from a pure pass-through form to use the bond or obligations form, backed or collateralized by a pool of mortgages. When banks used the same device to securitize pools of corporate loans, the natural term to use was collateralized loan obligations or CLOs.

The term CLO is restricted to a pool of straight loans. However, quite often, corporate exposures are held in the form of bonds. Hence, collateralized bond obligations (CBOs) would refer to securitization of a pool of corporate bonds. More likely than not, a securitization of corporate exposures would include both loans and bonds—hence, the term CDO was more appropriate. A CDO is a generic name for collateralized loan obligations and collateralized bond obligations.

Over a period of time, the CDO technology has continued to proliferate, and lots of collateral types have come up using the same essential structuring principles: Hence, in the marketplace, one may hear many similar sounding terms referring to the collateral type that has gone into making a CDO or CDO-like structure:

• Collateralized synthetic obligations (CSOs). A CDO that consists of a synthetic asset pool.

• Collateralized fund obligations (CFOs). A CDO-like structure that acquires investments in hedge funds or private equity funds

• Collateralized commodity obligations (CCOs). A structure that acquires exposures ...