Other disclosures to consider include:
- Total amount of assets and obligations of the off-balance-sheet entity, with a de-
scription of the nature of its assets and obligations, and identification of the class
and amount of any debt or equity securities issued by the registrant - The effects of the entity’s termination if it has a finite life or it is reasonably
likely that the registrant’s arrangements with the entity may be discontinued in
the foreseeable future - Amounts receivable or payable, and revenues, expenses, and cash flows result-
ing from the arrangements - Extended payment terms of receivables, loans, and debt securities resulting from
the arrangements, and any uncertainties as to realization, including repayment
that is contingent on the future operations or performance of any party - The amounts and key terms and conditions of purchase and sale agreements be-
tween the registrant and the counterparties in any such arrangements - The amounts of any guarantees, lines of credit, standby letters of credit or com-
mitments or take or pay contracts, throughput contracts or other similar types of
arrangements, including tolling, capacity, or leasing arrangements that could re-
quire the registrant to provide funding of any obligations under the arrange-
ments, including guarantees or repayment of obligors of parties to the arrange-
ments, make whole agreements, or value guarantees.
21.8 VARIATIONS OF SECURITIZATION AND RELATED ACCOUNTING. Struc-
tured products continue to evolve. In the early 1980s, most transactions were collat-
eralized by high-yield bonds and loans. Today, securitized assets include mortgage-
backed securities, asset-backed securities, real estate investment trusts (REITS), and
future cash flows. The following discusses two variations of securitization transac-
tions: collateralized debt obligations and the securitization of future cash flows.
(a) Overview of Collateralized Debt Obligations. One of the structured products
that has been widely used in the market is the collateralized debt obligation (CDO).
CDOs are privately placed securitizations that were created in the late 1980s, which
borrowed their structural template from another structured product—collateral mort-
gage obligations (CMOs). The collateral may include several different types but usu-
ally contains bonds, loans, or/and other assets. These structures may be called CBOs,
collateralized bond obligations; CLOs, collateralized loan obligations; and CFOs,
collateralized fund obligations.
CDOs may be structured as either a Cash Flow CDO or Market Value CDO. Cash
Flow CDO structures use the ongoing cash flow from the underlying collateral pool
to serve as the repayment of interest and principal on the securities. Market Value
CDO structures use ongoing cash flow proceeds from the sale of the underlying col-
lateral to serve as the repayment of interest and principal on the securities.
Cash flow structures are the dominant CDO form in terms of issuance volume.
These are commonly broken down into arbitrage and off-balance-sheet transactions.
Arbitrage structures are the most common cash flow form and capture the positive
spread between a portfolio of high-return, high-risk assets and lower-cost, highly
rated securities (liabilities) issued to purchase the underlying collateral portfolio. The
second cash flow structure—an off-balance-sheet transaction—was created to reduce
21 • 22 ASSET SECURITIZATION