Calyon has structured a leveraged super senior deal in which the underlying portfolio will be chosen by a third-party manager. Until now, reference pools in these trades had been picked by the firm itself, based on traditional CDO selection criteria.
Rayas Richa, co-head of synthetic CDO structuring at Calyon in London, said a manager will help stabilize the market value risk of the trades from the outset and attract cautious investors. He declined to name the manager, but said he chose the company based on its strong trading record in synthetic correlation products.
The manager will select 120 entities which are not expected to drop significantly in present value or default throughout the five-year life of the trade, therefore reducing the risk of hitting imbedded triggers, Richa explained. "We are still getting global market risk, but managing that risk from the start is someone with a strong and informed view on the names," he said. The single tranche CDO features triggers based on a matrix where the trigger level depends on the residual maturity and loss on the portfolio.
Richa said Calyon had not yet decided if the third party who selected the portfolio will go on to manage it throughout the life of the trade, or if the names will be fixed. "It is a possibility we are considering," he said.
Other houses in Europe have begun to add managers to leveraged super senior trades to mitigate the present value risk throughout the entire transaction (DW 8/22).
