January 30, 2024

What is the Most Common Structure for a CMO?

A CMO is a top-level executive responsible for developing and implementing a company’s product marketing strategies. They have extensive knowledge of brand management, sales, and customer service and understand how to leverage the most effective marketing tactics for their companies. Often, they are able to drive growth and increase revenue through innovative strategies.

Finding a CMO with the right blend of skillsets can be a challenge, especially in an organization that is growing rapidly. Many firms turn to third-party CMO services providers to fill the role, but it is important for a company to find one that can deliver value while minimizing costs.

In the most basic form of a CMO structure, known as a sequential pay CMO, investors receive interest payments in each tranche but principal payments are made to only the senior tranche until it is completely retired. Senior tranches typically have higher bond credit ratings, so they appeal to risk-averse investors.

CMOs can be structured in a variety of ways to reapportion risk among tranches and offer different levels of return for investors. Some structures also include provisions for addressing potential issues with mortgage backed securities, such as under collateralization. Under collateralization occurs when the principal amount of underlying mortgages falls below the principal amount of the CMO, leading to losses for investors. CMOs can be structured to mitigate this issue by establishing credit enhancement facilities, such as reserve funds or overcollateralization. CMOs can also use tranching to reduce prepayment risk and avoid potential loss from changes in the average life or prepayment rate of the underlying mortgages by utilizing tranches with different durations or planned amortization classes.

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