Single-tranche CDO
complex derivative financial security
Single-tranche CDO or bespoke CDO is an extension of full capital structure synthetic CDO deals, which are a form of collateralized debt obligation. These are bespoke transactions where the bank and the investor work closely to achieve a specific target.
In a bespoke portfolio transaction, the investor chooses or agrees to the list of reference entities, the rating of the tranche, maturity of the transaction, coupon type (fixed or floating), subordination level, type of collateral assets used etc. Typically the objective is to create a debt instrument where the return is significantly higher than comparably rated bonds. In a nutshell, a single-tranche CDO is a CDO where the arranging bank does not simultaneously place the entirety of the capital structure. These CDOs are also called arbitrage CDOs because the arranging bank seeks to pay a lower return than the return available from hedging the single-tranche exposure.
Full-capital-structure CDOs
In a full capital structure transaction, the total nominal of the notes issued equals to the total nominal of the underlying portfolio. Therefore, the full capital structure transaction requires all of the tranches being placed with investors.
Full-capital-structure deal example
Consider a US$1,000,000,000 portfolio consisting of 100 entities. Furthermore, consider an SPV which has no assets or liabilities to start with.
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