A Collateral Debt Obligation is a financial instrument which sells bonds unlike a mutual fund sells shares. A CDO raises money through the issuance of its own bonds and invests the same in loans, bonds & other assets. CDOs have been around for almost over two and a half decades and are now considered to be an important part of the financial world.
Most CDOs have actively managed portfolios. A manager from a company collects a fee for portfolio management, akin to a mutual fund.
But, a small proportion may have unmanaged and static portfolios like age-old investment trusts. Most of the CDOs have a standard feature called “credit trenching”. This means creating multiple levels of securities according to seniority.
Some possible classes of securities include senior debt, mezzanine debt, subordinated debt, and equity. Every class is responsible for protecting the bigger players’ in the portfolio. The size of the senior debt is set by the sponsor of the CDO who also decides on other classes so that they have lower ratings.
Get all the ingredients together: understanding the Capital Structure
Normally, a CDO may have an underlying portfolio comprising of about 100 corporate bonds each having an average rating of B-plus or above. If by any chance the rating slips, the manager’s powers to manage the portfolio may get curtailed.
There is also the possibility of rating agencies downgrading the securities. Investors always demand better yields with instruments involving bigger risks.
Availability of CDO
Companies have varied reasons for sponsoring or creating CDO’s. These may be created by advisory firms which earn fee-based on the assets it manages. Creation of a CDO would result in an income increase of the firm with the rise in assets under management.
CDOs may also be created by banks in order to eliminate assets from balance sheets. This can be done through the transfer of assets to CDO’s portfolio and is called balance sheet CDO. This helps the bank while calculating its capital requirement.
Diversification is the flavor of the day
Diversification is central to eliminate risks in any financial investment. The statistical analysis called correlation assists professionals in managing diversification through computer simulations. The same technique is employed by rating agencies. These assumptions have a strong impact on the CDO.
Enjoying the multi-layered benefits: types of CDOs
CDOs are backed by mortgage-based securities or sometimes even asset-backed securities. They are known as structured finance CDOs. When backed by an amalgamation of corporate bonds or structured finance CDOs, they derive the name of a multi-sector CDO.
Market value CDOs are formed in such a manner so that asset sale from the portfolio is well equipped to supply the necessary source of funds for repayment of CDO securities.
Credit Default Swaps are sometimes a part of a CDO instead of loans or bonds. Such CDOs are called synthetic CDO and have become quite popular with investors.
The cake’s ready for consumption
The complexity of CDOs is the reason why only banks buy such instruments. They may also be difficult to resell if investors lose confidence in the product. But, one cannot deny that the financial instrument is one of the most interesting concepts introduced in the last three decades, leading to further evolution of finance.
Debt Relief Order Pros and Cons
What is the Debt Relief Order?
It has an acronym of DRO. It is a form of bankruptcy that deals with an alternative that is a quick, cheaper and simplified form of it.
It is basically, an order which a certain individual can apply especially if he or she has trouble paying off his or her debts. It is often the best option to take by persons who are going bankrupt. The idea of it was introduced in the year 2007 in England.
Who can apply?
Persons who can apply for it are those persons with low debt, few assets, no chance of ever paying their debts and have little income to pay their own debts. Other conditions under the persons who are qualified are as follows:
The debtor is not involved in either of the following:
- interim order
- current restrictions in bankruptcy
- current restrictions in debt relief
- not discharged bankrupt
- pending petition in debtor’s bankruptcy
What types of Debts are included under this order?
One should know that in applying for such debt relief order, not all debts are being given the solution. There are only certain debts that the debt relief orders can accommodate which are as follows:
- benefit overpayments
- agreements for buy now pay later things
- conditional agreements for sale
- council tax
- credit cards
1. There is no need for you to settle the debt for courts
When you are qualified to apply for debt relief order or are planning to apply for it, the advantage for it is that you do not have the woes and troubles for a court hearing. You get your debts settled in a couple of months while you agree to the terms and conditions that are specified under debt relief order.
2. You are debt free after a year
You attain debt freedom for a year when you apply for this kind of order. This is good news for persons who have debts for the longest time.
3. You get protection from creditors
Lastly, protection from creditors is also an advantage. Since the debt is paid via debt relief order, the creditors would not be able to have enforced actions on your part.
1. Recorded credit damages
This is one disadvantage of a debt relief order. Despite the fact that you have paid off your debt via this order, you will have a credit record that may last to 6 years the most which mean that in the near future, you might have trouble acquiring a new credit or perhaps opening of a new account. This also will create a bad image on your part.
2. Narrow scope of usage
It provides a narrow scope of usage when it is stipulated that persons who can file DRO are those who are almost in the field of bankruptcy. Generally, those who have their own debts which are not included in this order are not able to benefit from it. They are not able to be free from debt and they have to get another option for the solution of such debt.
3 Pros and 2 Cons of Seeing A Debt Counselor
If you are considering meeting with a debt counselor, it is important to make an informed decision. Debt counselors help people consolidate debt and arrange payments that eliminate debt over a period of time. Knowing the pros and cons of debt counseling and debt consolidation can help you decide if it is right for you.
This article focuses on the main pros and cons. For a longer list of advantages and disadvantages, check out AC Waring & Associates Inc, where they provide more details.
1. Create a Plan
Debt counselors can help you create a plan to repay your debt in a timely manner. As counsellors, they are experts at budgeting and can help you learn to manage your own budget. This will give you budgeting skills that will last throughout your life, not just while you repay debts.
The plan put together by debt counselors also often allows clients to pay their debts much faster than they would on their own which means they can get out of debt quickly and move on with other financial goals like purchasing a home, helping kids pay for college, saving for retirement and traveling.
2. Avoid Bankruptcy
While bankruptcy is a good solution for some, other people may want to explore different options. Bankruptcy can prevent foreclosures and repossessions and stop harassing calls from creditors. However, it will affect your credit rating and ability to get loans in the future.
If you are concerned about the long term consequences of bankruptcy or feel a moral obligation to repay your debts, counseling is a good alternative.
3. Negotiate With Creditors
Debt counselors can negotiate for better terms with creditors. They may be able to talk creditors into reducing the interest rate or get them to settle for less money if you make a lump sum payment.
Since they have the expertise and a professional relationship with creditors, these counselors are often able to negotiate better repayment terms for clients.
1. Payments May Increase
Debt counselors are skilled professionals, not magicians, so sacrifices must still be made if you want to successfully eliminate debt quickly. Sometimes consolidating your debt means increasing your monthly payments.
Make sure that this will work with your budget so you don’t put yourself in a position where you can’t meet your commitments.
2. Credit Rating May be Affected
If you are choosing debt counseling as an alternative to bankruptcy, you should be aware that it can still have a negative effect on your credit rating. Debt counseling doesn’t provide the same protections as bankruptcy, so choose a solution that is best for you.
Do your research before you sign up for debt counseling. Whether you are working with an attorney or an agency, make sure they have your best interest in mind.
Ask for references, and be wary of someone who pressures you into a decision. The services offered by debt counselors can be incredibly beneficial, just do your homework first so you get the most out of your time and money.
6 Common Debt Myths Debunked
There are so many sorts and forms of debt that it can be hard to know where to start. However, one thing that we know for certain is that though most of us don’t like being in debt, not all debt is necessarily bad. So, let’s take look at the most common misconceptions to do with debt.
Debt as a Tool
Debt can be a great tool to help you in other areas and one of the most prominent is to use debt to help you build a better credit rating.
Credit cards can really help you to build a positive credit history and improve your credit score. In time you will be able to get better, more competitive deals and so save on debt.
Minimum is Fine
Yes, you can get away with paying the minimum amount on credit card bills for a period, but when the period of low interest is up you will find yourself in interest filled water.
Credit card companies keep these minimums low so you will end up continuing until the period no interest runs up, and then you end up paying far higher fees. Try and pay off more than the minimum as it saves you thousands in interest in the long run.
Credit Card Non Payment = Jail
This is not true if you don’t pay off your credit card you will not receive a jail term. However, it’s not all roses and you will most likely be issued with a County Court Judgement against you, where the debt is collected from your wages or worse again, you may receive a charging order. These orders involve you having to sell your home and the creditor taking their share.
You’d know about PPI
There are a large number of people out there, who were actually sold PPI or payment protection insurance wrongly and also without their realization. So, many people continue through life without realizing they have a PPI claim. It is best to check your loan or credit contract to see if you did, before dismissing it.
Banks Ignore Debt Issues
If you end up in trouble financially and can’t meet your repayments, contact the back as soon as you can. In most cases, they will lower the interest, or freeze the interest on repayments. This allows you some leeway and time to catch up. So, if in trouble, contact your creditor.
Bankrupt for Life
If you end up in dire straits financially then you may file for bankruptcy. In such a case you will be known as an undischarged bankrupt and this will last for a year.
After this, you will be no longer bankrupt, though the fact you filed will appear on your credit file for 6 years and this will affect your ability to get credit. However, after that period there will be no note of it.
Debt and finance can be a quite complex area and one that confuses a lot of people, however, in many cases, things are not nearly as bad as they seem and you will be able to find a positive.