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