Structured Credit: BNP Paribas’s second Dynamo

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Innovation and wider investor participation continue apace.

In December, BNP Paribas closed its second Dynamic Proportion Portfolio Notes transaction, which has been given the handy nickname Dynamo. This is an alternative take on the constant proportion portfolio insurance (CPPI) allocation strategy common in the structured products arena and is managed by Crédit Agricole Asset Management.

The collapse in correlation and resultant dislocation in the tranched CDO sector was the story of 2005, but adversity can lead to innovation. The strategy behind Dynamo is to provide enhanced returns to mainstream investors in a low absolute rates and spreads environment. The principal is rated Aaa, but what the structure allows is for a proportion of the portfolio to be dynamically managed by CAAM.

“It makes sense to allow an experienced manager to take advantage of market conditions,” says Stephane Delacote, global head of structured credit trading and arbitrage at BNP Paribas.

The first in the series printed in July was a purely European affair with €525 million sold to institutional investors rather than private banking clients. Hence it was much bigger than the usual CPPI type deal, which had previously been limited to less than €100 million. The follow-up issue was $250 million equivalent sold in euros, yen, and US and Singapore dollars.

Since the first Dynamo in the summer, the concept has been replicated by other managers and arrangers. AXA Investment Managers closed a principal-protected, long/short absolute-return credit note called Synergie structured by ABN Amro in November. AXA was also behind the Ocean programme, which was arranged by Calyon.

BNP Paribas forecasts a Dynamo 3 in 2006, most likely with a new asset manager.