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Derivatives

Constant Proportion Debt Obligations Arrive In U.S.

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A handful of firms are starting to market constant proportion debt obligations in the U.S.

A handful of firms are starting to market constant proportion debt obligations in the U.S.

Agencies have just started receiving inquiries and market participants expect an explosion as structurers and investors become more comfortable with the product. Barclays Capital is among the firms marketing deals in the U.S., but officials declined comment.

CPDOs offer investors leveraged exposure to a credit portfolio, commonly investment-grade credit derivative indices. Much like constant proportion portfolio insurance, assets are regularly reallocated between the leveraged portfolio and a safe investment such as a zero-coupon bond. But in a CPDO, the aim is to ensure payment of a fixed coupon rather than full return of capital. The structures offer high ratings and high spreads. Most deals are rated AA or AAA and pay 100 to 200 basis points.

Notes from these engineered portfolios were introduced in Europe and Asia by ABN AMRO over the summer (DW, 8/9). "The laboratory for synthetics has always been Europe," said Yuri Yoshizawa, managing director at Moody's in New York, explaining the time lag.

Market participants said that despite strong current demand for CPDOs, placement could become a problem if twists are not introduced. "The formulas for leverage are different, but the structures and spirit are exactly the same," said one European analyst. All of the deals rated so far have been static, but analysts said managed deals are starting to hit the pipeline in Europe and deals linked to the synthetic asset-backed securities index ABX have been proposed in the U.S.

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