Principal protected securities are "an old trick" that has reappeared in more and more deals over the past few months, according to Arturo Cifuentes, managing director at CDO collateral manager Triton Partners. However, with U.S. Treasury bonds trading at high dollar prices, protection has a high cost attached to it, said a CDO analyst with a leading underwriter.
The old trick is a derivative in which an investor buys a note consisting of CDO equity and a five- to 10-year zero coupon Treasury bond. At maturity, the investor will recoup principal plus the upside, if any, on the equity piece. Jeffrey Stern, a securitization attorney with Thacher Proffitt & Wood, said principal-protected securities allow investors barred from investing in non-rated securities—typically insurance companies in the U.S. or European investors—to tap into this potentially highly rewarding market, as principal-protected securities are rated.
