Unfunded structures

There are two types of CDO liability structures utilized in synthetic transactions completely unfunded structures that use portfolio swaps exclusively to transfer the entire credit risk of the reference portfolio to investors and partially funded structures which transfer only the highest credit risk segment of the portfolio. 

On the liability side, the structure will have tranches whose allocations of income and loss are predefined. From most junior to most senior, the tranches include equity, mezzanine, senior, and super-senior. Equity, or first loss, is analogous to the equity in a company s balance sheet, and represents the residual interest remaining after other liabilities are paid off. The mezzanine, or middle tier of risk, typically represents low-rated tranches all the way up to AA risk. Senior usually refers to AA and AAA risk. Super-senior represents a level of risk that is deeply subordinated (usually by at least 10%) to AAA, and as its name implies is regarded as extremely safe. In a structure that is not uncommon, we will assume all of the liability tranches are unfunded except for the equity. ... 

Just as structures are termed synthetic if the assets are CDSs instead of cash instruments, so they are unfunded if the liabilities are swaps but funded to the extent the liabilities are in note form. 

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