Asset-Backed Securities vs. Collateralized Debt Obligations
- Elisa Kendall
The diagram shown above was created for discussion purposes by John Gemski.
Both ABS and CDO are based on a pool of debt instruments. The difference being that the ABS is directly tradable while the CDO is tradable as Tranches. Typically there are 3 Tranches differentiated by credit rating (risk) with:
- Senior Tranche – ratings AAA through A
- Mezzanine Tranche – ratings BBB
- Junior Tranche – less than BBB
Note that this is similar to a stock where stocks are typically sold be class.
To create a collateralized debt obligation (CDO), investment banks gather cash flow-generating assets—such as mortgages, bonds, and other types of debt—and repackage them into discrete classes, or tranches based on the level of credit risk assumed by the investor. These tranches of securities become the final investment products, bonds, whose names can reflect their specific underlying assets. (Investopedia)
For more info see https://www.assignmentpoint.com/business/finance/collateralized-debt-obligation-cdo.html
In follow- up to John's email, Jeff Braswell provided the following diagram, created with Bob Mark of the LEI Private Sector Preparatory Group (PSPG) that was used for demonstrated legal entity relationships involved in structured products.
