Collateralized Bond Obligation
A collateralized bond obligation (CBO) is a asset-backed security that is secured as a structured financial product by a pool of corporate bonds. Typically, the construction enables the CBO to receive a good rating (" investment grade" ) by being secured by high-risk corporate bonds ( high-yield bonds, also known as junk bonds). The good rating of the CBO results from the structuring and risk diversification of corporate bonds ( granularity ).
Basics
The Collateralized Bond Obligation (CBO) is a subtype of the Collateralized Debt Obligation (CDO). The CBOs are issued by special-purpose vehicles whose assets consist predominantly or entirely of junk bonds. The general conditions for CBOs are the transferability of junk bonds, the generation of regular and allocatable cash flow and historical performance data. The good rating of the CBOs results from the diversification (spread) of junk bonds and the overcollateralization (well over 100%) through them.
risk
The risk of CBOs is that, despite the high granularity, the junk bonds show a positive correlation with one another. If, for example, there are economic crises, the badly rated corporate bonds are hit by an above-average risk of recession from their issuers. A large part of the corporate bonds in the pool is included because junk bonds are more vulnerable to crises than bonds from good borrowers. The corporate crises of the securities provided as cover can take on proportions that even compensate for the positive effect of overcollateralization. In the USA, the junk bond market went through several crises, which can have a negative impact on the collateral and market liquidity of the CBOs.
criticism
The media and academics blame the complexity of CBO products, the lack of transparency of the products, the failure of the rating agencies to correctly evaluate these instruments and the lack of supervision by government bodies for the financial upheavals of the financial crisis from 2007 onwards.
Individual evidence
- ↑ Glenn Yago, Susanne Trimbath: Beyond Junk Bonds: Expanding High Yield Markets , 2003, p. 114 .
- ↑ Hans-Werner Sinn : Der Kasino-Kapitalismus , Econ-Verlag, 2009, ISBN 978-3-430-20084-4 , p. 308.