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Credit derivative product companies: A new twist on an old game

Are the much-hyped credit derivative product companies now lining up to launch relying on an arbitrage that is dangerously close to disappearing?

Those that claim there is nothing new in structured finance might have a point. The much-hyped credit derivative product companies (CDPCs) now queuing up to launch look very like classic derivative guarantee companies of old, and indeed are basically synthetic SIVs. Primus Financial Products and Athilon Capital Corp, the only two such firms in the market so far, sell credit protection on investment-grade reference obligations and highly rated synthetic CDO tranches respectively in an unfunded swap format.

Rumours are rife that more than a dozen firms are now hoping to join their ranks, among them banks and hedge funds. Deerfield Capital Management and Aladdin Capital Management are understood to have CDPCs in the pipeline and bank-sponsored vehicles are expected from Deutsche Bank and Bank of Montreal. Bear Stearns Asset Management is believed to be planning a vehicle that will focus on selling protection on ABS; another standalone company, Channel, will concentrate on super-senior credit tranches.

Unlike the original derivative guarantee companies, protection will not be sold via a credit sales agreement (CSA). “CSA forms would force CDPCs to mark to market, which they don’t want to do,” explains Olivier Renault, head of quantitative credit strategy research at Citigroup.

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