The exploding use of credit derivatives and collateralized debt obligations (CDOs) has transformed the world of credit creating a trillion dollar market almost overnight, as well as innumerable investment and career opportunities. Authors Arvind Rajan, Glen McDermott, and Ratul Roy are seasoned financial professionals who have extensive experience in this field, and with The Structured Credit Handbook, they look to share their in–depth insights with you.
This practical guide is organized into three comprehensive sections reflecting the natural divisions within the credit marketplace. And each section is comprised of informative chapters devoted to specific products.
- Part One describes and analyzes single name credit derivatives (such as credit default swaps and default swaptions) as well as indexes (such as default swap indexes)
- Part Two covers portfolio credit derivatives, with chapters devoted to single–tranche CDOs, correlation market technicals, CDO–squareds, and credit CPPI
- Part Three is devoted to cash CDOs, and includes chapters on collateralized loan obligations (CLOs), asset–backed CDOs, CDO equity, and commercial real estate CDOs
Illustrated with examples throughout, and written in a straightforward and accessible style, The Structured Credit Handbook explains the structure, cash flow characteristics, market application, and investment considerations associated with each product. And with a rich set of case studies highlighting each product, you′ll discover how to effectively implement each one in today′s dynamic marketplace as an investment, hedging vehicle, risk transfer tool, and much more.
About the Authors.
About the Contributors.
Introduction: A Roadmap of the New World of Structured Credit.
How Structured Credit Completes Markets.
Improved Liquidity, Transparency, and Customizability.
Growth of Structured Credit Markets.
Core Uses of Structured Credit.
Who Should Read This Book?
How This Book Is Organized.
PART ONE: Index and Single–Name Products.
CHAPTER 1: A Primer on Credit Default Swaps (Arvind Rajan).
The Market for Credit Default Swaps.
Transaction Terminology and Mechanics.
Prerequisites for Credit Derivatives Transactions.
Some Uses of Default Swaps.
Case Study: Relative Value Cashing In on the Curve Steepness in Telecoms.
Appendix: Equivalence of a Bond Spread and Default Swap Premium.
CHAPTER 2: Credit Default Swaptions (Arvind Rajan and Terry Benzschawel).
Credit Swaption Payoffs in Default.
Case Study: Are Tight Spreads Giving You Butterflies?
CHAPTER 3: Constant Maturity Credit Default Swaps (Olivier Renault and Ratul Roy).
Basics of CMCDSs.
Behavior of CMCDSs.
Trading Strategies with CMCDSs.
Case Study: Taking Curve Views with CMCDSs.
Appendix: Computing the Participation Rate.
CHAPTER 4: Credit Derivatives Indexes (Jure Skarabot and Gaurav Bansal).
Family of Credit Derivatives Indexes.
Structure of the CDX/iTraxx Index Family.
Administration of Indexes.
Basket of Credit Default Swaps.
Up–Front and Running Payments.
What Happens in Case of a Credit Event?
Settlement Process after Credit Event.
Recent Defaults in CDX Indexes.
Index versus Intrinsics.
Investment Strategies with Credit Derivatives Indexes.
Case Study: DJ CDX HY and DJ CDX EM Conversion of Price Level into a Spread Level.
Case Study: Using iTraxx to Replicate Bond Portfolios.
Appendix: Description of the Roll Process.
CHAPTER 5: The Added Dimensions of Credit A Guide to Relative Value Trading (Matt King and Michael Sandigursky).
Overview of Curve Trades.
Putting on a Curve Trade.
iTraxx Credit Indexes.
PART TWO: Portfolio Credit Derivatives.
CHAPTER 6: Single–Tranche CDOs (Jure Skarabot, Ratul Roy, and Ji–Hoon Ryu).
Overview of Single–Tranche CDOs.
Case Study: Dispersion Trades and Tranches.
Case Study: Attractions of Hedged Mezzanines.
CHAPTER 7: Trading Credit Tranches: Taking Default Correlation out of the Black Box (Ratul Roy).
The Credit Tranche Market.
Skew in Default Correlation.
Trading Opportunities for Investors.
Conclusion and Future Agenda.
Case Study: Curve Trades in Tranche Markets.
CHAPTER 8: Understanding CDO–Squareds (Ratul Roy and Matt King).
CDOs versus CDO2.
Value of CDO2s Derives Broadly from Inner CDOs.
CDO2 versus Inner CDO.
Like Mezzanine, but with Tails.
CDO2 versus Master CDO.
Economic Value versus Rating Quality.
Uses of CDO2: Long, Short, and Correlation!
Structures: Good, Bad, and Ugly.
How Managers Can Add Value.
Case Study: Term Sheet.
CHAPTER 9: CPPI: Leveraging and Deleveraging Credit (Olivier Renault).
Case Study: Performance Comparison of Strategies.
Appendix: Our Methodology.
PART THREE: Collateralized Debt Obligations.
CHAPTER 10: Collateralized Loan Obligations (Glen McDermott, William E. Deitrick, Alexei Kroujiline, and Robert Mandery).
Leveraged Loan Market Overview.
Pro Rata Loans.
European Leveraged Loans.
European Mezzanine Bank Loans.
Collateralized Loan Obligations.
Middle–Market CLO Handbook.
Appendix A: Middle–Market Loan Characteristics.
Appendix B: The Basic CLO Structure.
Case Study: CDO Combination Securities Tailoring Risk/Return Profiles.
CHAPTER 11: ABS CDOs (Ratul Roy and Glen McDermott).
Overview of the Structured Finance Market.
Major Characteristics of Structured Finance Securities.
CDOs of Structured Finance Securities.
Case Study: Relative Value in High–Grade Structured Finance CDOs.
Case Study: Untangling Mezzanine and High–Grade Structured Finance CDOs.
Appendix: Rating Transition Matrices of Common Structured Finance Collateral.
CHAPTER 12: CDO Equity (Glen McDermott and Alexei Kroujiline).
Cash Flow CDO Income Notes.
Case Study: Diversifying Credit Risk Using a CDO Equity Fund.
CHAPTER 13: Commercial Real Estate CDOs (Darrell Wheeler and Ratul Roy).
CRE CDOs by the Numbers.
Building Blocks of a CRE CDO.
CRE CDO Managers and Sponsors.
CRE CDO Investors: A Diverse Group.
Key Events in the CRE CDO Market.
Investor Analysis of CRE CDOs.
Additional Suggested Collateral Analysis.
Appendix: List of CRE CDOs.
ARVIND RAJAN, PHD, is a Managing Director at Citigroup, where he engages in proprietary trading of credit, structured credit, and emerging markets. He was previously co–head of U.S. Fixed Income Strategy (2004 2005) and global head of Structured Credit Research and Strategy (2003 2005). Rajan was twice ranked first and once second in the All–America Fixed Income Research poll by Institutional Investor magazine. He has more than two decades of experience in modeling and quantitative analysis.
GLEN MCDERMOTT, JD, is a Director in the Structured Credit Sales Group at Citigroup Global Markets. Previously, McDermott was a highly ranked research analyst and global head of CDO Research and Strategy at Citigroup for five years (2000 2005). Prior to joining Citigroup, McDermott worked for six years (1994 2000) at Standard & Poor′s Ratings Services where he analyzed many structured finance asset classes. McDermott′s work has been published in numerous scholarly journals, and he is also a contributor to the Salomon Smith Barney Guide to Mortgage–Backed and Asset–Backed Securities, also published by Wiley.
RATUL ROY is Head of CDO Strategy for Citigroup Global Markets. Before taking on his current role in 2005, Roy was head of European CDO Strategy a position he occupied in 2003 after spending the prior seven years in structuring or analyzing CDOs and other structured credit products. This included positions in UBS Capital Markets (1995 1997), Chase Manhattan Bank (1997 1999), Standard & Poor′s (1999 2000), and finally, as a cash CDO structurer in Citigroup′s London office (2000 2003). Roy holds a PhD in chemical engineering from Cambridge University, England.