Constant proportion debt obligations are being snagged by the rating agencies. Moody's Investors Service and Standard and Poor's have issued methodology opinions leaving firms conceding that with current spreads on the referenced indices a CPDO could not be offered with a spread of 200 points over LIBOR on the triple-A rated coupon. Up until now that benchmark has been seen as the minimum target to entice investors.
Only a handful of CPDOs--which offer leveraged exposure to a credit portfolio, commonly investment-grade credit derivative indices--have been rated by at least two of the agencies, reflecting the heavy flow of proposals from issuers and questions from triple-A investors. At least 10 have now had their ratings pushed back till January.
"If investors want multi-rated deals they will have to accept 100-150 basis points," said one dealer.
The newly-released rating agency matrices establish a linear relationship between the trading levels for the corporate credit derivative indices and the maximum coupon spread that would garner a triple-A rating. As a result, most structurers said they are looking at twists that might gain back some of the spread and the real money clients who were ready to do business. "We have talked to two managers who want to manage deals, who could also at the same time do some index arbitrage, pairing various maturities and doing some trades with the underlying single names as well," said one dealer.
Most market participants believe that European arrangers are also finding new types of buyers--namely retail investors--who will accept lower coupons or different terms. Other proposals include step-up coupons, lower initial leverage, lightly managed structures allowing some credit selection or the latitude to wait on, or even skip an index roll. Some proposals have automatic cleanouts at certain ratings thresholds, offer lower coupons and lower total leverage, and have tighter stop-loss measures.
