Collateralized Debt Obligations: Structures and Analysis, Second Edition

CHAPTER 23

Quantifying Single-Name Risk Across CDOs

Single-name risk in collateralized debt obligations (CDOs) arises from the presence of the same credit in the portfolios of different CDOs. If the same credit appears in several, or all, of the CDO portfolios an investor owns, there may be an unexpectantly large exposure to that particular credit. In the extreme, if every CDO had the same exact set of underlying credits, there would be no diversification benefit from owning different CDOs. In this chapter, we quantify the extent of collateral overlap among a sample of U.S. collateralized loan obligations (CLOs) and structured finance (SF) CDOs (i.e., CDOs backed by asset-backed securities, commercial mortgage-backed securities, and residential mortgage-backed securities). We then propose a simple and consistent measure of single-name risk applicable across CDO tranches of various seniorities. Finally, we review a more complex, high tech approach to CDO single-name risk.

CLO portfolios, even from CLOs issued in different years, tend to have a lot of underlying borrower names in common, and this is especially the case for CLOs managed by the same manager. In this chapter, we name the most common underlying borrowers among a sample of CLOs.

For SF CDOs, the single name of interest is the originator of the ABS, CMBS, and RMBS assets in the portfolio. Many defaults in structured finance have been originator-driven, related to too-lenient underwriting standards or even to fraud by the ...