The first constant proportion debt obligations referencing sub investment-grade credits are expected by dealers before month-end. And at the same time rating agency officials in the U.S and Europe said they've been meeting with managers looking to run managed deals. While the latter appears a few more months down the track, the developments underscore the pace of innovation in the nascent market is heating up.
CPDOs offer leveraged exposure to a credit portfolio with rated coupons. The first structure was issued by ABN AMRO (DW, 8/9) and most since have referenced investment-grade credit indices. Details of the new breed of lower-grade deals could not be determined, but to get the exposure dealers will assemble bespoke portfolios of riskier credits. That wasn't a permutation in the cards until now because investors have been focused on understanding the basic structures.
A broader universe of investors is tipped to buy into such deals, which could offer higher coupons than the LIBOR plus 200 basis points offered on investment grade index-linked CPDOs. Rating agency officials said they are currently revaluating the AAA ratings that have been assigned thus far to deals and conceded that perhaps lower ratings may be appropriate when considering the unexplored spread risks involved. Dealers already pitching the deals are promising sweeter yields if that is the case, noted one structurer.
One head of credit strategy at a bulge bracket firm said that he gave three presentations to U.S-based insurance companies just last week. The firms would be investing in credit derivatives for the first time. "These are the same people who told us two years ago we were wasting our time talking to them about credit derivatives," he added.
Demand for the investment-grade version has been strong. ABN AMRO's RECIPES deal, being marketed on both sides of the Atlantic, is said to have been upsized to USD1 billion last week due to real-money accounts buying into the notes for the first time. Lehman Brothers has already printed a deal called Antara, and is marketing another. Merrill Lynch is also reportedly close to printing a deal called REDI.
