The global Collateralized Debt Obligation Market is expected to increase in the future and has been predicted to rise significantly in the next 5 years.
Collateralized debt obligations are a type of structured credit product that is used to create tiered cash flows from mortgages and other types of debt obligations, in order to make the overall cost of lending cheaper for the aggregate economy.
The increased integration of financial markets and the collateralization of derivatives are the major factors driving this market. Due to the advances in technology, the overall collateral management rate has increased. This has helped the participants to reduce counterparty risks and funding costs.
These factors will further drive the market. In such type of schemes, investors in lower tier tranches are only getting paid if there is enough money to pay the investors in the higher tier. Also, any fear in the secondary market can result in a near standstill in trading and create a liquidity problem for the investor.
Following are the top companies that are the major players in the Collateralized Debt Obligation Market:
Citigroup, Credit Suisse, Morgan Stanley, J.P. Morgan, Wells Fargo, Bank of America, BNP Paribas, Natixis, Goldman Sachs, GreensLedge, Deutsche Bank, Barclays, Jefferies, MUFG, RBC Capital, UBS.
Collateralized Debt Obligations are split into Collateralized loan obligations (CLOs), Collateralized bond obligations (CBOs), Collateralized synthetic obligations (CSOs), Structured finance CDOs (SFCDOs).
Based on the end users/applications, most of the Collateralized Debt Obligation structures initiate of the United States, Europe, China, Japan, Southeast Asia, India, Central & South America.
We are one of the very few players in the market that can structure and set CLO’s, CBO’s, CSO’s and SFCDO’s facilities on behalf of clients.
What is Warehousing:
Warehousing is an intermediate step in a collateralized debt obligation (CDO) transaction that involves purchases of loans or bonds that will serve as collateral in a contemplated CDO transaction. The warehousing period typically last three months and it comes to an end upon closing of the CDO transaction.
BREAKING DOWN Warehousing:
A CDO is a structured financial product that pools together cash flow-generating assets and repackages this asset pool into discrete tranches that can be sold to investors. The pooled assets, comprising mortgages, bond and loans, are debt obligations that serve as collateral — hence the name collateralized debt obligation. The tranches of a CDO vary substantially with their risk profile. Senior tranches are relatively safer because they have first priority on the collateral in the event of a default. The senior tranches are rated higher by credit rating agencies but yield less, while the junior tranches receive lower credit ratings and offer greater yields.
An investment bank carries out the warehousing of the assets in preparation of launching a CDO into the market. The assets are stored in a warehouse account until the target amount is reached, at which point the assets are transferred to the corporation or trust established for the CDO. The process of warehousing exposes the bank to capital risk because the assets sit on its books. The bank may or may not hedge this risk.
The benefit of having such a facility is that you can fund your own acquisitions and set your own terms in relation to the assets that form part of the pooled assets that underpin the facility.
Standby Letters of Credit (SBLC):
Furthermore, we can arrange and structure Standby Letters of Credit (SBLC) in support of any facility. The reason for a standby letter of credit is to provide primary or secondary additional security for a facility.
Commonly referred to as Mt760 the nominated bank issues a MT760 payment guarantee. Mt760’s are used as collateral for the credit enhancement process.
In most simple of explanations, we would set a facility secured by a Standby Letter of Credit, drawdown on the facility, use the funds to invest in assets and then switch the security of the facility with the acquired assets.
It is important that the acquired assets are income producing. This income will be used to service the debt, or the weighted average of the pooled assets combined generate enough income to service the debt.
Further considerations, a facility of the nature will be structured offshore. The facility will be either bet set in the United Sated or England. Most facilities will be in US Dollars and any drawdowns will be subject to exchange rate fluctuations.
The exchange rate risk is reduced by anticipating the drawdown of the facility and then taking out future options. Generally forward exchange cover falls into three categories which are Fully Optional, Partially Optional and Fixed contracts. If we structure a facility on your behalf, we would insist that the exchange rate risk is covered by taking out currency options.
If you are a large business or institution who has significant borrowings. If you are tired in dealing with multiple lenders and all of which are in the habit of cross collateralizing your assets and borrowings this is the alternative. A one stop facility that provides you with the freedom to grow your business and provided you with the agility to respond to opportunities immediately.
Large funding packages can take weeks or months to set with traditional lenders, in most cases funding can be set in a matter of days.
The ability to contract and settle in very short timeframes puts you in control at the negotiation table.
Complex finance structures are what we do best!
We were approached by client who needed access to a Line of Credit.
Among his assets he had an operating hotel. The hotel consisted of 406 rooms. The hotel was valued as a going concern, it had some leverage to increase the exposure but was not enough to support the client’s requirements.
After consultation a strategic decision was taken to strata title the asset and sell the rooms (now units) to investors. The uplift in value came since the asset was no longer valued as a going concern but rather a strata title (each unit was valued individually together with the common property).
That was not the only challenge. In order to sell the units to investors they would need to offer a finance package to the buyers of each unit. As the units (rooms) were below 35m2 none of the traditional lenders were able to fund the loans due to mortgage insurance policies. We took it to the next level and created a finance product they could offer to the end-users (the end-user finance product was rolled out to several brokers for distribution).
The uplift in value of the asset was increased from $80,000,000.00 to $120,000,000.00.
Once we received the increased valuation, we set Term Loan of $75,000,000.00 and a Line of Credit for $20,000,000.00 (total facilities of $95,000,000.00 against a valuation of $120,000,000.00).
The income from the asset’s operations were more than adequate to cover the interest repayments on both the Term loan and line of Credit.
We were able to assist the client in stripping the equity out of the asset so he could apply it to his next venture.
We created finance and real-estate opportunities for finance brokers and real estate agents.
The income from the asset retuned enough to service the debt obligations but importantly also returned income to the end-users. They received this in addition to the capital appreciation of the asset they had invested into. The income return was approximately 50% of the net interest on the end-user loan geared at 80% of the Loan to Value Ratio of the unit.
We look forward of being of further assistance.
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