Also referred to as CDOs. Structured finance instruments (being debt securities (www.practicallaw.com/0-207-6955) in the form of bonds (www.practicallaw.com/0-107-6503) or notes) which are divided into several classes or tranches (www.practicallaw.com/5-500-1365) of varying size, credit rating and priority ranking, issued by a special purpose vehicle (www.practicallaw.com/4-107-7534) (SPV) and backed, that is, funded by and secured over a diverse portfolio of financial assets (typically consisting of commercial loans, corporate bonds and/or structured finance securities (including asset-backed securities (www.practicallaw.com/7-385-1838), mortgage-backed securities (www.practicallaw.com/3-385-1859) and CDO securities issued by other SPVs)) acquired by the SPV. The SPV will purchase the assets in the open market or directly from the balance sheet of the collateral manager or arranging bank. It will fund this purchase with the proceeds arising from the issue of its CDO securities.
A CDO transaction is essentially a form of securitisation (www.practicallaw.com/3-107-7233) of certain financial assets.
A transaction collateralised primarily by a portfolio of loans is a collateralised loan obligation (www.practicallaw.com/7-385-1862) (CLO); one backed by bonds is a collateralised bond obligation (www.practicallaw.com/2-385-1478) (CBO); and one backed by both loans and bonds is a collateralised debt obligation (CDO).