Collateralised Debt Obligations (CDO's)

Collateralised Debt Obligations (CDO's) are asset-backed securities on a diversified pool of financial assets (eg. High Yield Bonds, Leveraged Loans, Emerging Markets Debt). They issue multiple classes of notes (or tranches) with the purpose of allocating credit risk and expected return (ie. Interest income and principal repayments) according to the risk-return preference of investors.

CDO's are funded by the issuance of several tranches of debt in the capital markets, ranging from senior notes rated AAA through to unrated tranches referred to as 'subordinated' notes or 'equity'.

CDO's are named according to their underlying collateral, eg. Collateralised Loan Obligation (CLO) for Leveraged Loans, Collateralised Bond Obligation (CBO) for bonds, Collateralised Fund Obligation (CFO) for fund of Hedge Funds, Collateralised Private Equity Obligation (CPO) for Private Equity, Collateralised Structured Obligation (CSO) for structured credit exposure.

Major Buyers of CDO's
CDO's have been one of the fastest growing segments of the fixed income market, reflecting a growing investor search for higher relative returns in a low interest rate environment. The investor base is global and with diverse interest across the rating spectrum. At the senior note level, buyers include overcollateralised special purpose vehicles, banks and insurance companies. The equity buyers include insurance companies, pension funds, foundations and endowments, Hedge Funds, high net-worth individuals and speciality funds.