On the Design of Collateralized Debt Obligation-Transactions. Working Paper

Abstract

Preliminary draft The strong growth in collateralized debt obligation transactions raises the question how these transactions are designed. The originator designs the transaction so as to maximize her benefit subject to requirements imposed by investors and rating agencies. We analyse a set of European transactions and find that the asset pool quality, measured by the weighted average default probability and the diversity score of the pool, plays a predominant role for the transaction design. Characteristics of the originator play a small role. A lower asset pool quality induces the originator to take a higher First Loss Position and renders a synthetic transaction less attractive. In these transactions the senior, least information sensitive tranche is not sold. The size of this tranche tends to decline with asset pool quality. Both, the weighted average default probability and the diversity score of the pool appear to positively affect the number of tranches and the credit spread of the lowest rated tranche