Welcome to the major leagues of debt. Collateralized debt obligations, almost always referred to as a CDOs, are horrendously complicated deals that often leave anyone without a MBA wondering what was put into these CDOs.

The first thing to understand about bonds, (aka debt) is that bonds are often backed by something else. Think about your home mortgage. If you don't pay your mortgage, the bank can take the house. You end up homeless, and the bank sells the house to pay off the rest of that mortgage. There is something "backing" that mortgage; something lender can fall back on, if you don't pay your bills like a good human being. That's called collateral.

CDOs are one flavor of an entire sector of investing called structured finance, and they are also backed. CDOs, in the simplest concept, are just bonds backed by something else. In most cases, a CDO is backed by a collection of various types of debt. CDOs can be home mortgages, or other types of debt like credit cards, auto loans, and personal loans. Most of these types of debt are usually considered a bit more risky and they don't have the backing that a home loan does. So, if you think it through, you can imagine that CDOs are usually considered a risky investment.

To take a step further, understand that CDOs have multiple flavors within each CDO. These flavors are called tranches. If you've taken French, you might recognize the word, it means "slice" or "portion." Each slice of that CDO you invest in is a little different and carries different amounts of risk.

You could invest in the lowest risk tranche of the CDO, which would provide you lower risk. But, you don't get a good return on that investment. Or, you can be the heroic adventurer of bonds and invest in the lowest-grade tranche of the CDO. You'll make an amazing return, but if the economy even looks at you wrong, you might lose the entire investment.

CDOs aren¿t easy, and are almost always invested in by mutual funds, insurance companies and hedge funds. As an individual investor, you will probably not come across a CDO you can participate in.

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Tuesday, July 08, 2008

Anheuser Sues InBev, Calls Bid "Illegal"

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Anheuser-Busch sued InBev on Tuesday, hours after the Belgian-Brazilian brewer filed more papers that could lead to a hostile takeover attempt.

The two beer giants have been battling for weeks over InBev's $46 billion bid to acquire the St. Louis-based brewer of Budweiser. Anheuser rejected InBev's bid, saying it significantly undervalues the company.

The saga continued on Tuesday when Anheuser filed suit in U.S. District Court in the Eastern District of Missouri, claiming the takeover bid is an "illegal plan and scheme" to acquire the company "at a bargain price." InBev's offer places a $65-a-share price tag on Anheuser.

In the suit, Anheuser is seeking to put on hold any hostile takeover attempt until "numerous false and misleading statements" are clarified, according to Dow Jones Newswires.

Specifically, Anheuser questioned the financing that InBev says it has already secured for the mega deal. "No group of lenders would unconditionally agree to loan InBev the $40 billion it will need" given the fragile state of the credit markets, the suit alleged, according to Dow Jones.

Also, Anheuser said that InBev has hidden the fact it does business in Cuba, something that could have an impact on the company's takeover attempt. InBev has already faced significant political opposition from local and national lawmakers.

Earlier in the day, InBev, which makes Beck's and Stella Artois, wrote a letter to Anheuser requesting the company set a "record date" to determine which shareholders can vote on a potential hostile takeover attempt, regulatory filings show.

On Monday InBev filed a preliminary proposal with the Securities and Exchange Commission that would set up a vote by Anheuser shareholders to oust the current board of directors.