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CDOs

Original objective to remove assets from balance sheet

And achieve capital relief

Basic Mechanics

Set up Special Purpose Vehicle (SPV)

Independent, non-consolidated, bankruptcy-remote

Sole purpose to handle income stream from assets

i.e. receive funds and distribute to note holders

SPV holds assets and issues notes backed by these assets

Notes (CDOs) structured in Tranches

First Tranche = Senior Tranche = AAA

Mezzanine Tranche(s) <AAA but Investment Grade

Lowest Tranche = “Equity”, bears first loss

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