The following types of CDOs are rather common:
- Investment grade CDOs (synthetic)
- Collateralized loan obligations/Synthetic balance sheet CLOs
- High-yield CBOs/Emerging market CBOs
A typical feature of collateralized loan obligations (CLOs) is that all loan collateral is typically in a senior and secured position in the borrower’s capital structure. Various covenants also serve to enhance the secured nature of loans. Loans are typically issued as floating rate instruments and have shorter average lives than high-yield CBOs. The single most important differentiating factor between loans and high-yield bonds is the senior secured nature of the loans (much higher recoveries and actually lower default probability). It shows the leveraged loan spreads.
Adjusting CDS spreads and loans in the investment grade universe for risk (default and recovery rate) and reward (loan pricing) shows that the CDS loan basis should be rather positive.