This is a little complex, so pour yourself a cup of coffee and take a comfy seat.
A CDO is basically an arrangement that works as follows : an issuer (I) takes a pile of debt of various entities (D1...Dn) in set ammounts (Q1...Qn) and piles it all together. The pile is then tranched, which means say that 25% of it goes to class A, which gets pA, 35% goes to class B, which gets pB and the remainder 40% goes to class C, which gets pC. The catch is that with respect to capital, class A gets paid first. If and only if there's anything left, class B gets paid. If after all B is satisfied there's anything left over, class C gets paid. The counter-catch is that pC is significantly above pA.
Now let's work this out with an example.
MPEx takes in 1000 BTC of debt from entity D1, which pays a weekly 15% ; 500 BTC of debt from entity D2, which pays a weekly 12% ; 1500 BTC of debt from entity D3, which pays 11.5% and 2000 BTC debt from entity D4, which pays 10%, and bundles it all into a CDO. The total weekly revenue of this CDO is 1000×.15+500×.12+1500×.115+2000×.1 = 582.5 BTC, and the total capital in the CDO is 5000 BTC.
The CDO is now tranched, as follows : 1250 shares class A, which pay 7% per month, 1750 shares class B, which pay 11% per month, and 2000 shares class C, which pay 15.125%.
In the event all four entities remain solvent, the class C realises a 15.125% interest, which is superior both in ammount and as principal to the 1k @15% available from entity D1.
In the event any entity goes bankrupt, the CDO plays out as follows :
class A is due 1250 in principal and 87.5 interest = 1337.5 BTC.
class B is due 1750 in principal and 192.5 interest = 1942.5 BTC
class C is due 2000 in principal and 302.5 interest = 2302.5 BTC.
Should entity D2 have gone bankrupt, the total value of the CDO is now 1150 + 0 + 1672.5 + 2200 = 5022.5. This means that class A receives its 1337.5 BTC in full, and there's 3685 left over. Class B receives its 1942.5 BTC in full, and there's 1752.5 left over, so class C realises a 24% theoretical loss or 13% practical loss (principal only).
Should entities D2 and D4 have gone bankrupt, the total value of the CDO remains 1150 + 0 + 1672.5 + 0 = 2822.5 BTC, thus class A receives its 1337.5 in full, class B receives 1485 on its 1942.5 claim and class C realises a 100% loss.
The advantages of the CDO are then apparent : class A obtains excellent security (it loses no money even if half the debtors default) for a small interest, whereas class C obtains better interest than available in the market, in exchange for footing the risk.
Obviously, the actual % wouldn't be the ones quoted, this was just a numeric example.
So now, given that MPEx is considering creating a CDO of this sort, which lenders here would be interested to participate ? (Obviously people with a track record, good ratings etc).
Thanks for reading !
Disclaimer:
This disclaimer does not cover misuse, accident, lightning, flood, tornado, tsunami, volcanic eruption, earthquake, hurricanes and other Acts of God, neglect, damage from improper reading, incorrect line voltage, improper or unauthorized use, broken antenna or marred cabinet, missing or altered serial numbers, removal of tag, electromagnetic radiation from nuclear blasts, sonic boom, crash, ship sinking or taking on water, motor vehicle crashing, dropping the item, falling rocks, leaky roof, broken glass, mud slides, forest fire, or projectile (which can include, but not be limited to, arrows, bullets, shot, BB’s, paintball, shrapnel, lasers, napalm, torpedoes, or emissions of X-rays, Alpha, Beta and Gamma rays, knives, stones, etc.).
No license, express or implied, by estoppel or otherwise, to any Intellectual property rights are granted herein.
MPOE disclaims all liability, including liability for infringement of any proprietary rights, relating to use of information in this specification. MPOE does not warrant or represent that such use will not infringe such rights. In fact, that’s a very strong possibility.
Nothing in this document constitutes a guarantee, warranty, or license, express or implied. MPOE disclaims all liability for all such guaranties, warranties, and licenses, including but not limited to: fitness for a particular purpose; merchantability; non-infringement of intellectual property or other rights of any third party or of MPOE; indemnity; and all others. The reader is advised that third parties may have intellectual property rights that may be relevant to this document and the technologies discussed herein, and is advised to seek the advice of competent legal counsel, without obligation to MPOE. In other words, get your own #$^%#$ lawyer before you hurt yourself.
These materials are provided by MPOE as a service to his friends and/or customers and may be used for informational purposes only. Single copies may be distributed at will since it is unlikely that MPOE created this material independently as he has no creative skill.What's a CDO?