Variations on credit constant proportion portfolio insurance structures are expected to flood the market in the coming months. Dealers say as traditional credit investors become more comfortable with this form of capital protection (see story, page 6) they will tweak components such as underlyings and maturities to meet specific return targets, whether this be higher-grade assets with lower returns or equity-like risk with souped-up returns. "This shows CPPI has really arrived in credit and is becoming almost mainstream," said one synthetic structurer.
One head of synthetic structuring at a European house said he is close to launching a managed CPPI credit fund which will look to access value in credit correlation, but declined to give further details. A rival dealer said his firm is investigating using CPPI on the iTraxx SDI-75, the sterling CDS index launched in last year (DW, 11/23).
Until recently, credit CPPI had predominately referenced either investment-grade single-name credit-default swaps or the iTraxx Europe and managed deals have included the option to go long or short reference entities. But as spreads in corporate CDS continue to tighten--the iTraxx Europe was trading at almost record tights of 27 basis points Wednesday--focus is turning to finding value in correlation products and asset classes such as asset-backed securities, by attaching CPPI wrappers to such funds.
Early forays in this area include the Royal Bank of Scotland's C-SHELLS, which are CPPI notes referencing the U.S. synthetic ABS index suite ABX.HE (DW, 3/3), and SG Corporate & Investment Banking's exotic capital protected notes which include synthetic CDOs and index tranches in the underlying portfolio (DW, 3/3).
