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Derivatives

Lackluster Interest For U.S. CPDOs

Salespeople at the conference report it has been difficult to attract U.S. investors to constant proportion debt obligations, leaving their firms lagging behind European desks who've been issuing the highly-rated and highly-leveraged deals backed by corporate indices.

Salespeople at the conference report it has been difficult to attract U.S. investors to constant proportion debt obligations, leaving their firms lagging behind European desks who've been issuing the highly-rated and highly-leveraged deals backed by corporate indices. The major stumbling block is many U.S. investors do not have dedicated portfolios for structured products, unlike European and Asian investors who have been investing in equity and credit structured products such as constant proportion portfolio insurance for much longer.

One angle being floated as a possible hook, however, is using the ABX index as the underlying to bring in real-money investors looking to diversify. Structurers have turned to popular asset-backed securities managers to perhaps manage an index roll and pass on that benefit to the massive base of traditional ABS investors searching for highly-rated paper. Portfolio managers believe that CPDOs would ultimately fit into a different area of their portfolio than straight fixed-income.

"I would imagine a CPDO would fit into a structured product portfolio if I had a structured product portfolio at this time," quipped one U.S. money manager.

Managers last week at the conference admitted they were still grappling to understand how the mechanics of the CPDO leverage structure would capture and leverage the ABX roll, as the index has entirely new names after each roll unlike the corporate indices which only lose and replace a handful of names.

Other salespeople said getting U.S. managers on board has been a bit tougher compared to European managers familiar with structured products. London-based Cairn Capital is set to manage a CPDO deal that will be distributed by JP Morgan. (DW 1/19). Barclays Capital and Deutsche Asset Management are also in the market with a managed deal.

"We've all gone on the same meetings with the same people. It will take a big U.S. manager to step up and manage the roll," said one U.S.-based head of structured credit sales at a European bank.

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