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| “The evolution of CPDOs will likely follow what happened to CPPI and CDOs. You start with static deals and then you move to managed transactions. I think that will be the evolution” Andrew Feachem, ABN Amro |
The hype around one of the latest structured credit product innovations is understandable given the substantial advantages that ABN Amro was able to offer investors with its €1 billion print of constant proportional dynamic obligations (CPDO). The deal, called Surf, offered buyers a highly attractive coupon of Libor plus 200 basis points and yet is triple-A rated. It sounds almost too good to be true – maybe it is – but the rating agencies have signed off on this structure, which involves selling protection in the investment-grade iTraxx Europe and Dow Jones US CDX indices. These indices have rallied dramatically in recent weeks, the cause of which is generally attributed to some pre-hedging of future deals. Anecdotal evidence suggests that approximately 10 deals are being prepared, probably for the new year.
It was probably this pre-hedging that resulted in an eight basis points tightening of the iTraxx Series 6 to 22bp during October.