1 CDO: Collateralized Debt Obligation The New Choice in Global Reinsurance

2 Contents Why CDOs? What is a CDO Examples and Types of CDOs Advantages & Disadvantages New Solutions Approach Conclusion

3 Why Consider CDOs? Fastest Growing Sector of the Asset Backed Securities Market (ABS) 2nd Largest ABS after Credit Card Receivables Global Issuance over the Last 3 Years: $137 billion per year

4 Growth in CDO Volume

5 Debt Securitization –Pool of Diversified Debt Obligations is Packaged and Sold to the Capital Markets –The CDO Issues Multiple Layers/Tranches of Securities: Senior, Mezzanine, Equity (First Loss) –Payments to CDO Tranches depend on the performance of the Underlying Portfolio of Assets –Underlying Portfolio can be - Real or Synthetic; Actively Managed or Passive What is a CDO?

6 Generic CDO Structure CDO Special Purpose Vehicle (SPV) Subordinated Notes Equity Mezzanine Fixed or Floating Rate Notes Senior Fixed or Floating Rate Notes Diversified Pool of Underlying Assets (Collateral) Collateral Manager

7 Example of CDO Tranching Equity 40M BB 5M BBB 47M AA 49M AAA 370M A High Yield CLO arranged by Bear Sterns. ( Eaton Vance )

8 Example of CDO Tranching Equity 20M BB 5M BBB 15M A 10M AA 22.5M AAA 15M “Super Senior” 912.5M CDO arranged by Bear Sterns where underlying collateral is investment grade. ( Meliorbanca Parthenon I ) Equity to AAA 87.5M BBB 57% AA 4% A 39%

9 Types of CDOs Arbitrage & Off-Balance Sheet –Arbitrage CDO Weighted Average Coupon of Underlying Securities > Weighted Average Coupon of Repackaged Securities –Off-Balance Sheet CDO Financial Institutions can achieve Capital Relief by securitizing balance sheet assets

10 Types of CDO Collateral CDOs Have Been Issued For: –Commercial Loans –Corporate Bonds –ABS –Mortgage Backed Securities –Emerging Market Debt –CDOs of CDOs

11 Who Buys CDOs? Insurance Companies Institutional Investors

12 CDO Advantages Different Tranches allow Investors to customize their Credit Risk exposure Efficient Mechanism for taking Diversified Credit Exposure Attractive Spreads relative to similarly rated Assets

13 CDO vs. Bond Spreads (to the Swap Curve)

14 CDO Downsides Pricing is based on Rating Agency assigned default probabilities – which may not reflect True Underlying Risk Expenses – Origination & Management Fees reduce the economics to Investors

15 Market Yields on Identically Rated Bonds Yields for identically rated securities can vary widely This implies that the Market’s assessment of default probabilities is not uniform across a particular rating category Both the bonds below are rated A2 by Moody’s: