Calyon recently closed AUD40 million (USD29.4 million) CPPI-linked notes referenced to two credit indices for the Australian market, which the firm believes is a first. Dubbed Credit SAIL, the notes are referenced to the performance of the Dow Jones CDX and iTraxx Europe and are capital guaranteed through a CPPI strategy. "CDO investors in Australia are looking for diversification," said Pierre Trecourt, executive director and Asia-Pacific head of credit structuring at Calyon in Hong Kong, adding, "Also, CDOs have a limited upside while the potential upside for this product is much higher, given the leverage factor." The six-year notes are leveraged to the indices by over five times.
The reference indices are rolled-over every six month, which Trecourt said is a plus. "Investors will benefit from using on-the-run tranches which will reduce the possibility of default as downgraded names will be removed," he explained. For capital protection, 100% of the initial proceeds are invested into AAA-rated collateral and then returns from the collateral are swapped against positive returns from the index strategy, said Trecourt. Positive returns are paid out semi-annually via coupons as well as from capital appreciation. The deal is being distributed onshore through ANZ.
