SPV / CDO Tranches - factors that are taken into consideration for risk rating?
I wonder if there are any SPV/CDO experts out there who wouldn’t mind shedding some light on the below :)
Are the tranches in a CDO (Senior, Mezzanine, and Equity) built from the same underlying pool of asset-backed securities (i.e. RMBS)?
I am asking this question because I am trying to understand what differentiates the senior tranche from the equity tranche for example.
Is it the underlying assets, i.e. senior tranche is based on highly rated RMBS and Equity tranche is based on low rated RMBS? And, or
Is it based on only the priority of cash flows, i.e. the senior tranche is paid first and therefore will get a higher rating
Ultimately, what does Moody’s take into account when rating a selection of CDO Notes?