Jurisdiction(s):
European Union

Collateralised debt obligations: structuring, SPVs, tranching, portfolio management, hedging, and key legal, regulatory and tax issues

Published by a LexisNexis EU Law expert

Practice notes

What is a CDO? Core concepts

Collateralised debt obligations (CDOs) are sophisticated, high-value arrangements that span multiple parties, heavy documentation and, commonly, more than one jurisdiction. In a typical CDO, an orphan shell entity — a special purpose vehicle (SPV) set up by the investment bank structuring the deal — issues newly minted structured finance instruments, being debt securities in the form of bonds or notes, referred to in this Practice Note as 'CDO securities', which are:

split into several classes or tranches with differing size, credit ratings and priority of payment (categorised as senior, mezzanine or subordinated); and
backed — that is, funded by and secured over — a diversified portfolio of financial assets acquired by the SPV, typically comprising commercial loans, corporate bonds and/or structured finance securities (including asset-backed securities, mortgage-backed securities and CDO securities issued by other SPVs).

For background on SPVs, see Practice Note: The insolvency remote SPV in structured finance. The newly issued CDO securities can be calibrated to deliver a risk/return profile aligned to the credit risk of selected portions of the underlying pool, so as to suit particular investors. The SPV will purchase the assets in the open market or...

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Web page updated on 21/05/2026

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