Consulting Corner

CBO Valuation
    By Mickey Storms

Valuing lower rated classes from CBOs can be a difficult process. ABS and MBS collateral may consist of 100 or more bonds, some rate rated BBB or lower. Each bond may have high credit leverage and unique structural characteristics that present formidable valuation problems. Compounding these problems are: (1) the recent poor credit performance and downgrades of many types of ABS and (2) the plethora of triggers, scores, and tests that exist within CBO structures to apportion collateral cash flows amongst the various debt and equity classes issued.

CBO Tests:
Class A OC* Test	Eligibility Criteria and Trading Restrictions
Class B/C OC Test	Weighted Average Life Test
Class A Interest Coverage Test	Securities Sold Test
Class B/C Interest Coverage Test	Weighted Average Coupon Test
Diversity Test	Collateral Debt Securities
Maximum Rating Distribution Test	Minimum WA Recovery Rate Test
Cash	Weighted Average Spread Test
Number of Assets	# of Issuers
Ratings Test
* Over Collateralization

Valuing the lower rated CBO classes requires a mix of market value and cash flow methods.

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