Author:Jobst, Andreas A.
Position:Collateralised Loan Obligations (CLOs

(1) The Basle Committee on Banking Supervision (2002) uses the term "special purpose entity (SPE)" to define the functions of a SPV, which is a corporation, trust, or other entity organised for a specific purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPE, and the structure of which is intended to isolate the SPE from the credit risk of an originator or seller of credit exposures. SPEs are commonly used as financing vehicles in which credit exposures are sold to a trust or similar entity in exchange for cash or other assets funded by debt issued by the trust.

(2) See also Turwitt (1999).

(3) See also Kuck (1998).

(4) This possibility of selling securities as structured claims in the form of tranches has been key to the popularity of asset securitisation. If tranches are subordinated, any losses in excess of the lower tranche are absorbed by the subsequent tranche and so on, leaving the most senior tranches only with a remote probability, of being touched by defaults in the underlying asset pool (The Economist, 2002).

(5) See also Leland (1998) and Frankel (1991).

(6) Similarly mezzanine capital, equity finance and corporate bonds are other popular means of external finance with comparable structural properties.

(7) See also Muller-Stewens et al. (1996).

(8) See also Zoller (2001).

(9) This observation relates to a greater range of geographical and industrial diversity.

(10) The first asset-backed securitisation issue in its modern form was completed by Sperry Corporation, which issued computer lease backed notes in 1985 (Kendall, 1996).

(11) See also Bohringer et al. (2001).

(12) The first Pfandbrief instrument was created by the executive order of Frederick the Great of Prussia in 1769 (Skarabot, 2002; Anonymous, 1999).

(13) See also Fabozzi (1997).

(14) See also Deutsche Bank Global Markets Research (2001).

(15) A number of sectors of the economy, such as the automobile, real estate, and credit card lending industries that require large amounts of medium to long-term capital owe their development to the growth of the asset-backed securities market. The average maturity of their loan portfolios closely match the average investment horizon of such structured finance transactions such that issuers can afford to dispense with compensatory provisions for interest rate mismatches, etc.

(16) This aspect warrants particular attention in determining the state-contingent pay-offs of investors in an environment of asymmetric information governing the securitisation of loans and bank assets.

(17) For a detailed definition of traditional and synthetic securitisation structures, please refer to section III.A.a and III.A.b of this paper.

(18) The SPV is bankruptcy remote, as all the total amount of outstanding debt securities is collateralised by third-party guarantees as well as government debt or other highly rated debt securities acquired by the SPV upon receipt of proceeds from securitisation.


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