Western Assets Arbitrage Harvard Case Solution & Analysis


The Lehman Brothers had been one of leading investment banks in 2006.That had been famous for its diversified and customized products in the market. However, it had also been issuing CDO’s in the market. Whereas, the CDO’s Refers to the collateralized debt obligation (CDO). This is a process by which banks can sell their senior secured loans to the pool of investors in the market with the help of the investment bank.

On the other hand, the Western Asset Management is the investment advisor that is contacted by the group of commercial banks to sell senior secured bank loans, and high-yield corporate and government bonds to lower their capital requirements, and remover burden from Balance Sheet, and free up some capital for the additional lending in the market.Western Assets approached the Lehman Brothers for the issuance of the CDO’s to the pool of investors.

Jason Keyes the managing director of the Lehman Brothers who has been a fast friend of the Michael Stone a senior collateral manager of the Western Assets Management Company (Western Assets), and while discussing the deal of the CDO’s, the Keyes identified the potential opportunity in the deal.

However, Jenny Kim, an associate at the Lehman Brothers has been using various methods to evaluate the opportunity that had already been identified by the managing director of the Lehman Brothers. However, it is important to know that how this deal could be a potential opportunity, and how Kim presents her facts, figures, and finding through quantitative analysis of the deal.”

Western Assets Arbitrage Harvard Case Solution & Analysis

Structure of the Collateralized Debt Obligation

Collateralized debt obligation known as CDO is a corporate entity that isstructured to hold the assets as the collateral and sell packages of the cash flows to the investors in the market. Meanwhile, CDO is the process by which the banks and other institutions hold the portfolio of the fixed income securities. Since these banks institutions tend to sell these securities to lower the burden on balance sheets. Meanwhile, the long-term investments of the companies, such as banks long-term loans, and mortgage-backed loans and other assets that corporations and banks want to remove from the balance sheet can be securitized.

Indeed, the securities include the High-Yield Bonds, mortgage-backed securities, loans, other CDO’s. However, the securities are then processed by the investment banks that underwrites the securities in the market. On the other side, the Special Purpose Vehicle (SPV) is the middle company established by the investment bank that purchases the portfolio of the fixed-income securities and sells to CDO’s securities to the investors.

However, the CDO’s are securities since they are assets backed securities. Similarly, the SPV companies create value because they issue the securities in the market as CDOs not specifically providing details about the assets backed and their ratings. i.e.  BBB rate sub-grade investment bonds which can be labeled as A-rated through repackaging it by issuing CDOs to the pool of investors.

Similarly, SPV creates value by purchasing aportfolio of assets from the banks, and repacking it, and then issuing mortgage-backed securities to pool of investors with high rated securities than they were originally purchased..................

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