Issuance of constant proportion debt obligations is expected by some officials to pickup in the first quarter of next year and credit derivative market participants forecast the product to stick.
CPDOs--which were introduced by ABN AMRO over the summer (DW, 8/11)--offer highly levered exposure to investment-grade credit derivative indices with the promise of high spreads and high ratings. Ratings agencies report a pipeline of about 10 to 20 deals for the first quarter.
Next year's deals are expected to include all kinds of bells and whistles for greater flexibility. Long-short index, tranche or single-name plays, and equity only and curve strategies are tipped to appear. The structure is also expected to be adapted to other asset classes, such as asset-backed securities and leveraged loan indices. Dealers are looking at alternatives to the first batch of CPDOs, offering lower or step-up/step-down coupons or longer maturities in case spreads remain tight. Managers also are gearing up to get in on the action. Bank-manager pairings could not be determined, but all major players reportedly are in discussions and managed deals are expected early in the first quarter.
"CPDOs revealed the demand for rated coupons and investor willingness to trade off principal protection for them," said Matthew Wiesner, structured credit strategist at RBS in London. "I think we're going to see [constant proportion portfolio insurance] strategies that seek to benefit from that demand." Calyon tested this last month by adapting CPPI leverage mechanics in a CPDO framework (DW, 12/1).
