Collateralised debt obligation meaning

In legal practice, a collateralised debt obligation (cdo) is a structured finance securitisation in which a special purpose vehicle (SPV) acquires a portfolio of debt (for example corporate loans, bonds or asset-backed securities) and issues tranched notes to investors. Cash flows from the collateral are applied through a contractual waterfall to pay interest and principal, with senior, mezzanine and equity tranches bearing differing credit risk and return. Credit enhancement includes subordination, over-collateralisation, reserve accounts and hedging. The term is descriptive rather than statutory, but in the UK and Ireland CDOs are treated in regulation as securitisations (with due diligence, risk retention, disclosure and transparency obligations under the UK/EU Securitisation Regulation). Variants include cash-flow and synthetic CDOs; collateralised loan obligations (CLOs) and collateralised bond obligations (CBOs) are sub-types. CDOs are typically marketed to professional investors; UK and Irish occupational pension schemes may invest subject to investment rules and trustee duties. Documentation comprises an offering circular/prospectus, trust deed or indenture, security and servicing agreements. Structures are commonly governed by English or Irish law, with Irish SPVs established under section 110 TCA 1997 and listings on Euronext Dublin. Usage and analysis are consistent across England and Wales, Scotland, Northern Ireland and Ireland.