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Fusing cash and synthetic technology

Managed CDOs push structured credit technology in new directions as investors look for enhanced yield.

Managed CDOs from Cheyne Capital Management and Axa Investment Managers have pushed structured credit technology in new directions as investors look for enhanced yield in a tight credit spread environment.

Cheyne Correlation CDO 1 combines cash and synthetic CDO structures. It is a managed cash CDO of static single tranche CDOs.

CDO investors increasingly want a say in the composition of underlying portfolios. On Aria, Simmons & Simmons gave legal advice to arranger CSFB. ?Last year... investors had less time for static deals, because they have no way of preventing losses that arise out of credit events,? says Simmons partner David Roylance.

This explains the growth of private, single tranche CDOs designed for specific investors, who are given substitution rights to manage the underlying portfolios. It is also why the performance of portfolio managers on public deals is closely scrutinised.

In Cheyne Correlation CDO 1, the underlying single tranche CDOs are sold into an SPV, as in a cash deal. But single tranche CDOs are relatively illiquid. If Cheyne cannot easily trade them in or out of the portfolio, it needs another way to manage the credit risk.

?What makes Cheyne unique is that this risk is managed using synthetic CDO technology,? says Roylance.

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