Structurers are looking at tranched constant proportion debt obligation structures in the junior mezzanine part of the credit stack. The idea is being prompted in response to greater rating agency scrutiny on CPDOs given how tight spreads have come in on the early deals.
One structure being talked about would lever the CDX and itraxx 15 times and the standardized three-seven percent tranches three times. The advantage of those underlying is if you have the index you can hedge any single name defaults, according to structurers working the deals.
The deals would force future protection selling pressure in the tranches. That has correlation dealers looking at their books to determine the impact on their positions so they are not caught off guard.
