Investment banks with long positions in collateralized debt obligations on their balance sheets are repackaging them and will sell them privately in an effort to minimize exposure to underlying corporate risk. "Every active credit derivatives house is looking to [repackage CDOs for the private market]," says Chris Carman, head of synthetic securitization at Citigroup in London. He says Citigroup has successfully completed a private CDO repackaging.
Investment banks can repackage CDOs on a tranche-by-tranche basis and add subordination and leverage to make the risk more appealing to investors. While there is no typical investor for this kind of deal, Carman says those looking for single-A paper with maximum yield are usually the buyers. Still, the market for repacked CDOs is small. However, long CDO positions are unlikely to cause too much pain. "It's not as bad as some people say, but it could be painful for trading desks," notes Carman. If a bank fails to sell a repacked deal privately, it can always buy protection on each underlying credit in the CDO, but that is an extremely expensive option, he notes.