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Structured credit: Banks rush to print CPDOs

Few would have predicted that credit spreads could get any tighter but CPDOs further underpin the market’s strength.

Andrew Feachem, ABN Amro
“The evolution of CPDOs will likely follow what happened to CPPI and CDOs. You start with static deals and then you move to managed transactions. I think that will be the evolution”
Andrew Feachem, ABN Amro

The hype around one of the latest structured credit product innovations is understandable given the substantial advantages that ABN Amro was able to offer investors with its €1 billion print of constant proportional dynamic obligations (CPDO). The deal, called Surf, offered buyers a highly attractive coupon of Libor plus 200 basis points and yet is triple-A rated. It sounds almost too good to be true – maybe it is – but the rating agencies have signed off on this structure, which involves selling protection in the investment-grade iTraxx Europe and Dow Jones US CDX indices. These indices have rallied dramatically in recent weeks, the cause of which is generally attributed to some pre-hedging of future deals. Anecdotal evidence suggests that approximately 10 deals are being prepared, probably for the new year.

It was probably this pre-hedging that resulted in an eight basis points tightening of the iTraxx Series 6 to 22bp during October.

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