This document provides an overview of collateralized debt obligations (CDOs) and the CDO market. It describes the structure and performance of different types of CDOs, including CLOs, CBOs, and ABS CDOs. The CDO market grew dramatically between 2000 and 2007 but has since experienced distress, particularly in ABS CDOs due to poor performance of underlying residential mortgage-backed securities.

1. Confidential KENSINGTON BLAKE CAPITAL
Kensington Blake Capital, LLC
CDO Overview
April 2009

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Important Notice
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CDO Overview
 Description of Collateralized Debt Obligations (“CDOs”):
 CDOs are special purpose entities that issue debt and equity backed by a variety of asset classes including the following:
• Investment Grade or High Yield Bonds (CBOs);
• Senior Secured Leveraged Loans (CLOs);
• Emerging Market Debt (EM CBOs);
• RMBS (ABS CDOs);
• CDOs (CDO^2s);
• Bank Trust Preferred Securities (TRUPs);
• Credit Default Swaps referencing corporate debt or structured securities (CSOs); or
• Market Value CDOs (MV CDOs) where the underlying assets could include High Yield Bonds, Leveraged Loans, Mezzanine
Debt, or Special Situation investments.
 Most CDOs are actively managed by a portfolio manager specializing in one or a multiple of asset classes above.
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CDO Structure
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 A portfolio manager is responsible for selecting and monitoring the underlying collateral in CDOs (i.e., leverage loans) for the life of the
transaction (i.e., 12-15 years in CLOs).
 The portfolio composition is subject to restrictions (minimum diversity requirements, maximum industry exposure, maximum issuer
concentrations, rating quality, etc).
 The transaction may be called by a majority of equity (the “Preference Shares”) holders, subject to certain restrictions.
 The interest earned on the underlying collateral is used first to pay the coupons due to the Notes with the residual interest paid to the
Equity.
 Principal proceeds are reinvested for the first 5 years and then used to pay down the Notes in order of seniority.
 Performance triggers (Overcollateralization and Interest Coverage tests) if breached will divert interest and principal from the subordinated
tranches to pay down the senior notes until the triggers pass.
 In an Event of Default (i.e., Overcollateralization ratio on senior notes falls below 100%) the collateral may be liquidated subject to certain
criteria (i.e., proceeds must be sufficient repay all the Notes in full).
Junior
(Mezzanine)
Notes
Junior
(Mezzanine)
Notes
High Yield
Bonds
High Yield
Bonds
Senior NotesSenior Notes
Leveraged
Loans
Leveraged
Loans
Investment Grade
Bonds
Investment Grade
Bonds
Structured
Products
Structured
Products
or
or
or
CDO
Underlying Collateral
Cash Flows
Investment
Proceeds
Preference
Shares
Preference
Shares
Principal +
Coupon
Proceeds
Excess
Cash Flows
Underlying Collateral Securities

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Growth of CDO Market
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Source: Citigroup Research (*Projected)
Securities Industry and Financial Markets Association, Global CDO Market Issuance Data
 CDO Market Overview
 The CDO market has grown dramatically over the last few years fueled by a benign credit environment and the search for
yield in an alternative asset class.
 In earlier years, the CDO market was dominated by CBOs and CLOs.
 Beginning in 2001, CBO transactions performed poorly due to weak structures and high yield bond default rates exceeding
12% (transactions assumed default rates of 2-3% per annum) and low recovery rates averaging 10-20% (transactions
assumed 30-40%). As a result, many transactions were downgraded and CBOs are no longer a major asset class.
 During this same period, CLOs performed much better when default rates on leveraged loans peaked at 8% due to active
portfolio management and high recovery rates on leveraged loans (70-80%). Few transaction were ever downgraded.
 The majority of the issuance in 2006/7 was dominated by ABS CDOs.
 There is a tremendous amount of distress in ABS CDOs due to poor performance of the underlying RMBS.
CDO Issuance Volume 2000-2007 ($’s in Billions)
$400
$318
$188
$109
$54
$53$54
$68
$-
$100
$200
$300
$400
2000 2001 2002 2003 2004 2005 2006 2007

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Growth of CDO Market
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Source: Morgan Stanley

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Growth of CDO Market
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Growth of CDO Market
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Growth of CDO Market
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Growth of CDO Market
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CDO Performance
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CLO Spreads
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ABS CDO Structure
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 Representative ABS CDO Structure
 In the above example, this transaction is defined as a Mezzanine ABS CDO (the average rating of the underlying RMBS
securities is BBB). In a High Grade ABS CDO the average rating of the underlying RMBS securities is AA.
 The transaction may include as many as 150 different securities including other ABS CDOs selected by a portfolio manager.
 Reinvestment Period is 3-5 years with a legal final of up to 35 years.
 The transaction may be called by the equity holders, subject to restrictions and may be subject to a mandatory auction
beginning in year 8.
 If performance triggers are breached interest and principal are diverted from the BBB’s and equity to pay down the senior
notes.
 In an Event of Default, the transaction may be liquidated or may become static (minimal trading allowed).
Representative ABS CDO Structure*
Source: Deutsche Bank
Tranche Thickness Loss Support Tranche Thickness Loss Support
AAA 80% 20% AAA 80% 20%
AA 5% 15% AA 5% 15%
A 6% 9% BBB 6% 9%
BBB+ 2% 7% O/C (Equity) 2% 7%
BBB 1% 6%
BBB- 1% 5%
BB 1% 4%
O/C (Equity) 4% 0%
* There are many kinds of CDOs; approximately 54% of CDOs issued since
2000 are largely backed by subprime RMBS.
Subprime Mortgage Backed Security Trust Structure
~100 subprime RMBS,
mostly rated BBB or BBB-
CDO3
…
ABS CDO Collateral Pool
"Diversified" pool of
ABS CDO Capital Structure
CDO2

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ABS CDO Performance
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