Collateralized Debt Obligations difference, balance, between, respect, please

FVPV

Can anyone please clarify the difference between an arbitrage transaction and a balance sheet transaction with respect to CDOs? I’ve read the definitions in the book but they don’t seem very clear… Thanks!

eoin

For a balance sheet CDO, the company already has a loan on their balance sheet and wants to remove their exposure.  Whether they make a positive spread isn’t the objective; the objective is to remove the loan exposure.
For an arbitrage CDO, the company doesn’t have an existing loan, but believes it can lend money at a higher rate than it will have to pay on the CDO.  The objective is to make a positive spread.

ohai

OK, but how exactly is the loan removed from the company’s balance sheet… I’m assuming the company here is the one pooling the loans together to make the CDO, so does that mean if it sells the CDO to someone else, it has effectively removed the loans from its balance sheet?
The arbitrage CDO makes sense. Thanks for the explanation.

DarienHacker

Thanks for the input, I think I understand it now.