TY - JOUR T1 - Hybrid Assets in an ABS CDO JF - The Journal of Structured Finance SP - 8 LP - 19 DO - 10.3905/jsf.2006.661440 VL - 12 IS - 3 AU - Douglas J. Lucas AU - Laurie S. Goodman AU - Frank J. Fabozzi Y1 - 2006/10/31 UR - https://pm-research.com/content/12/3/8.abstract N2 - The term “hybrid” refers to CDO assets being comprised of both ABS credit default swaps (CDS) and asset-backed securities (ABS) cash bonds. This article reviews the advantages of the hybrid ABS CDO structure: increased access to collateral, more diversified portfolios, shorter collateral ramp-up periods, diminishment of available funds cap risk, flexibility to switch from cash to synthetic assets to take advantage of negative or positive basis, and cheap super-senior credit protection. The article then reviews four cash flow challenges faced by structurers of hybrid ABS CDOs. First, hybrid CDOs make CDS protection payments by drawing upon their reserve funds and super senior tranches. Second, during the reinvestment phase of a CDO, CDS amortization can be reinvested in new CDS or used to free up the reserve fund or the unfunded super-senior tranche to allow the purchase of cash ABS. During the CDO's amortization period, ABCDS amortization can be used to amortize the unfunded super-senior tranche or free up the reserve fund to amortize the CDO's cash liabilities. Third, cash asset amortization is first available for unpaid expenses and deferred interest on CDO liabilities. During the reinvestment period, if cash amortization is not used to purchase new cash assets, it must first be used to pay down the funded super-senior tranche and then to increase the reserve fund. Either use allows the CDO to sell additional CDS protection. Finally, in trading CDS, the CDO manager has to choose among termination, assignment, and offset. Offset is more commonly available, but carries with it operational burdens and prepayment or extension risk. TOPICS: Asset-backed securities, credit default swaps, credit risk management ER -