Last week, Delphi Corp, one of the key players in the US auto parts industry, defaulted on its bond payment obligations. The loss from Delphi has adversely impacted at least two CDOs known to Australian investors: Deutsche Bank's Nexus 3 and Macquarie's Generator Income Notes.

As regular DIRECTINVESTING readers will be aware, CDOs rely on the issuer making structured investments in underlying corporate bonds. The mechanism used to make these investments – the credit default swap – is a derivative contract that pays a return to the investor for so long as the underlying corporate bond meets its payment obligations. When one or more of the underlying asse...