For CDO equity investors, the CDO structure provides a leveraged return without some of the severe
adverse consequences of borrowing via repurchase agreements from a bank. CDO equity holders own stock
in a company and are not liable for the losses of that company. Equity’s exposure to the CDO asset
portfolio is, therefore, capped at the cost of equity minus previous equity distributions. Instead of short
term bank financing, financing via the CDO is locked in for the long term at fixed spreads to the London
interbank offered rate (LIBOR).