Could someone humor me by going over this one more time? Here are the notes I have, but it’s still not clicking the way I want it to: The key difference between a cash and synthetic CDO is: instead of selling the reference portfolio (loans), the originator (bank) purchases credit protection with credit default swaps (CDS) Cash CDO: the notes issued by the CDO are collateralized by a portfolio of cash assets, with payments to note-holders made from the interest and principal flows of the collateral pool. Synthetic CDO: no transfer of securities takes place, with the underlying reference pool of assets remaining on the balance sheet of the originator. Synthetic CDO’s collateral pool consists of credit derivatives. For originators … Synthetic CDOs allow bank originators to ensure that client relationships are not jeopardized through the sale of loans in the secondary market. They’re also helpful in securitizing multi-jurisdictional portfolios or loans made in countries where the local legal framework does not allow for the transfer or true sale of assets, or where local tax laws make a so-called ‘true sale’ uneconomic. For investors … The opportunity to gain access to a highly diversified portfolio of ‘pure’ credits is attractive. Synthetic CDOs allow investors to make a ‘pure play’ investment in credit because the structures split the credit risk component of a reference asset and other risks associated with the asset, including interest rate risk, prepayment risk and currency risk.
too confusing and way over board on some issues i think.
"The key difference between a cash and synthetic CDO is: instead of selling the reference portfolio (loans), the originator (bank) purchases credit protection with credit default swaps (CDS) " Yup. "Cash CDO: the notes issued by the CDO are collateralized by a portfolio of cash assets, with payments to note-holders made from the interest and principal flows of the collateral pool. Synthetic CDO: no transfer of securities takes place, with the underlying reference pool of assets remaining on the balance sheet of the originator. Synthetic CDO’s collateral pool consists of credit derivatives. " Yup. “For originators … Synthetic CDOs allow bank originators to ensure that client relationships are not jeopardized through the sale of loans in the secondary market. They’re also helpful in securitizing multi-jurisdictional portfolios or loans made in countries where the local legal framework does not allow for the transfer or true sale of assets, or where local tax laws make a so-called ‘true sale’ uneconomic. For investors … The opportunity to gain access to a highly diversified portfolio of ‘pure’ credits is attractive. Synthetic CDOs allow investors to make a ‘pure play’ investment in credit because the structures split the credit risk component of a reference asset and other risks associated with the asset, including interest rate risk, prepayment risk and currency risk.” Again, yup. Where exactly is your confusion? Although in all honestly the fact that the top of the capital structure for a SCDO is unfunded is a pretty big point that you’re missing. Other than that I think you’ve got the gist of it.