Structured credit innovation of the year: Dynamo – Dynamic Properties Portfolio Notes
BNP Paribas offered a new, institutionally-targeted twist on credit CPPI products.
At a glance:Deal type: Dynamo – Dynamic Proportion Portfolio Notes
Deal size: €525 million Dynamo Series 1; $250 million Dynamo Series 2 in various currencies
Structurer: BNP Paribas
Manager: Crédit Agricole Asset Management
Date: Series 1, July 2005; Series 2, November 2005
If 2004 was the year when structured credit investments came of age, 2005 was the year when these investments discovered new versatility and variety.
Of particular note was the rapid development of constant proportion portfolio insurance (CPPI) techniques in the credit market.
Although collateralized debt obligations are still being printed, the general spread compression in the credit default swap market throughout 2004 made returns harder to generate. In addition, the rapid descent of correlation following the downgrade to junk of General Motors in May 2005 narrowed spreads on mezzanine CDO tranches sharply.
On the one hand, the CDO market squeezed more juice from the orange by developing the CDO-squared and CDO-cubed model.
On the other, the CPPI model delivers principal protection and the possibility of very attractive returns. These instruments take leveraged positions in the CDS market, which may be ramped up if the management strategy performs well, or dissolved if the reference instrument underperforms.