Collateralised debt obligation (Insolvency) meaning

In practice, a collateralised debt obligation (CDO) is a structured finance instrument in which a special purpose vehicle (SPV) issues tranched notes backed by a pool of debts (for example, corporate bonds, loans and tranches of other securitisations such as RMBS and CMBS), with cashflows allocated through a contractual waterfall. CDO is a market term rather than a statutory definition in the UK or Ireland. These structures are governed by the transaction documents, general insolvency and security law, and securitisation regulation (the UK onshored Securitisation Regulation; the EU Securitisation Regulation in Ireland). Key features include: senior, mezzanine and equity/subordinated tranches; security over the collateral in favour of a security trustee; limited recourse and non‑petition provisions; and either “cash” structures (owning the assets) or “synthetic” structures using credit default swaps. In an issuer insolvency, practical issues include enforcing the security over the collateral, recognising subordination and payment priorities under the waterfall, and the extent to which limited recourse provisions operate, all subject to applicable insolvency law. Insolvency of underlying obligors may trigger credit events, losses, valuation adjustments and shortfalls to junior tranches. Usage is broadly consistent across England & Wales, Scotland, Northern Ireland and Ireland, though security creation and enforcement routes (for example,...