Integrating credit derivatives and securitisation technology: the collateralised synthetic obligation

By Moorad Choudhry

This chapter is an analysis of the synthetic collateralised debt obligation (CDO), or collateralised synthetic obligation (CSO). We focus on the key drivers of this type of instrument, from an issuer and investor point of view, before assessing the mechanics of the structures themselves. The latter takes the form of a case study-type review of selected innovative transactions. Finally, we propose a new structure that combines the advantages of existing deal types to date, which presents features of interest for a wide group of investors and issuers alike. We begin with a brief introduction to the concept of the CDO, a progressive development of well-established securitisation techniques.

SECURITISATION AND THE CDO

A cashflow CDO is a structure represented by an issue of the notes with interest and principal payments linked to the performance of the underlying assets of the vehicle. These underlying assets act as the collateral for the issued notes, hence the name. There are many similarities between CDOs and the asset-backed securities (ABS) that pre-dated them. The key difference between CDOs and other ABS and multi-asset repackaged securities is that the collateral pool is usua

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