Synthetic restructuring a question of price
Restructuring of synthetic structures basically boils down to shedding all or part of the exposure in order to increase the likelihood of return.
According to Soren Willemann and Matthew Leeming, analysts at Barclays Capital, investors that want to unwind synthetic CDO portfolios face essentially three options. They can unwind the structure and use the proceeds to add subordination to the remaining investment, sell the principal-only part of the CDO and use the proceeds to increase the interest-only coupon (or the reverse) or sell the CDO and use the proceeds to buy index products with the same notional exposure.
The first option entails sacrificing some upside for a higher likelihood of final repayment. Selling the principal-only part would make sense when defaults will be back-loaded so coupons will still be paid for some time before subordination is eroded. Selling the interest-only piece makes sense for investors who are prepared to give up coupon payments in order to make the repayment of principal more likely. The arguments for switching out of a bespoke CDO tranche into an iTraxx product are well rehearsed and include better liquidity and lower default risk.