This new form of synthetic credit investment carries a full AAA rating from Standard & Poors on both principal and coupon.
It uses elements from both CDO and CPPI technology to produce a new non-principal-protected, fixed-income, credit-investment tool.
The CPDO generates returns through exposure to a portfolio of credit default swaps (CDS) which is linked to highly liquid CDS indices. The size of the portfolio is adjusted dynamically so that the CPDO only uses the leverage it needs in order to make the scheduled principal and interest payments. The structure of the CPDO is designed to have a stable rating with a high likelihood of ôcashing-inö to a risk-free investment that pays the stated coupon and principal at maturity.
"This is the most exciting development in the credit market for several years. The absence of a full rating has made it historically difficult for investors to assess the risks and appropriately place dynamically leveraged credit products into a portfolio. By creating the CPDO with a full rating for the timely payment of both principal and interest we have solved this issue for our institutional
investors and broadened the asset choice available to managers of credit portfolios," says Steve Lobb, global head of credit and alternative derivative marketing at ABN AMRO.
He adds that the new product allows a wide range of investors who are restricted from investing in unrated securities to access credit instruments that use dynamic leverage for the first time.