Structuring by seniority

CDOs use classical securitisation methodology to provide senior creditors with greater protection and allow subordinated investors to lever up their investments

A common characteristic of all securisations, including CDO collateralisations, is so-called tranching – the structuring of the product into a number of different classes of notes ranked by the seniority of investors’ claims on the instrument’s assets and cashflows. As with any business, alongside the ‘owners’ (the holders of the equity tranche), a CDO has creditors with varying degrees of seniority. The more senior the creditor, the less risky the investment and hence the less they will be paid