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credit derivatives, Bankrupt, Collateral debt obligation, week 11 -…
credit derivatives
The use of CDS
speculation
short credit- buyer buy CDS because of speculation
long credit (seller) earn spread- seller is comfortable with creditworthiness of reference entity
hedging
CPS spread as a way to measure default probability
CDS :
Bankrupt
differences between liquidation and reorganization
reorganization
debtor can negotiate with creditors to alter the terms and conditions of loan
creditor still retain ownership over the assets
liquidation
assets of debtor must sold off assets
creditors do not possess any asset and longer
signal of default
reorganization
restructuring of debt obilgations
liquidation
more severe financial situation
Collateral debt obligation
two main types of CDOs
ABS CDOs (securities on securities)
definition:
The collateral is composed of securities, themselves issued by securitization
use of ABS CDOs: reduce prepayment risk
credit analysis of the ABS CDO;
CLOs( collateralized loan obligations)
Arbitrage CLO
interest rates on leveraged loans are higher than the weighted average interest rate o the CLO notes
Balance sheet CLO
banks keep leveraged loans on their balance or SME loan
CDO:
securitization transactions in which the collateral consist of debt instruments such as commercial loans or asset-backed securities
week 11