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Structured Finance and Collateralized Debt Obligations: New Developments in Cash and Synthetic Securitization, Second Edition by Janet M. Tavakoli

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CHAPTER 12
Balance-Sheet CLOs and CDOs
Consumer loan securitizations are balance-sheet CDOs. As we saw earlier, the technology for these deals originated in the United States in the 1980s. New product development has centered on applying the lessons learned to nonconsumer loans.
The introduction of synthetics allowed new product development in the dollar market. The introduction of the euro gave an added boost to balance-sheet securitization, since euro-denominated assets found a new, broader investment base than was possible with the currency Tower of Babel that existed pre-1999. A critical mass of technology, assets, and currency acceptability contributed to innovations in the U.S. market and product development in the European market. While new products appeared in 2002, the full menu of the following products is currently in use in the CDO markets.

TRUE SALE (FULLY FUNDED): DELINKED STRUCTURE

The first rated collateralized loan obligation (CLO) backed by U.S. bank loans was brought in 1990. The first deals were arbitrage CLOs and were mainly securitizations of smaller-size loans. The return on the equity tranche is the sole driver of an arbitrage CLO. The collateral manager’s goal is to maximize the return on the equity tranche, the difference between the spread on the investment assets and the deal liabilities (coupons on the non-equity tranches and deal expenses). Arbitrage CLOs sometimes use sponsor collateral. Arbitrage CLOs also commonly use collateral purchased in ...

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