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Derivatives

Calyon Looks To Up The Rated Coupon Ante

The French house is offering a leveraged credit portfolio with an AAA-rated coupon which it is pitching as an improvement on constant proportion debt obligations.

Calyon has structured a leveraged credit portfolio with an AAA-rated coupon which it is pitching as an improvement on constant proportion debt obligations, the buzz structure of the fall.


The French house has decided not to offer CPDOs--which offer AAA-rated coupons paying as much as 200 basis points--because the algorithm increases the exposure to the portfolio when its net-asset-value decreases. Instead, the Calyon structure, dubbed R-Evolution for rating evolution, increases the portfolio leverage when the value rises.


Ally Chow, global head of credit markets, product management and syndicate at Calyon in London, explained R-Evolution carries lower initial and average leverage than CPDOs in the market. This makes it potentially less volatile and there is less credit exposure for the investor. The 10-year R-Evolution notes are initially leveraged eight times, compared with 15 times for a similar CPDO. Seven-year notes are also available with an initial leverage factor of six. "We truly believe it's a better product," said Chow. The 10-year note has an expected return of 180 bps to 200 bps, given spread levels now.


Similar to the CPDOs in the market, R-Evolution references a portfolio split equally between the iTraxx and CDX credit indices, that rolls with each index. The notes will be rated when issued by Moody's Investors Service. Chow said it took two to three months to structure the notes and work with the agency on the rating process. It will close early this month and is being marketed to insurance companies and other financial institutions, along with other clients that have bought constant proportion portfolio insurance structures in the past.

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