JPMorgan and Cairn Capital are in discussions with investors about their first constant proportion debt obligation. The deal, preliminarily called Cairn CPDO, is a rarity in that it will be managed instead of static although other firms are preparing similar launches. Officials at the firms declined comment on the deal and the potential size could not be ascertained.
CPDOs offer highly levered exposure to a credit portfolio, with a high rating and potential for high returns.
Barclays Capital and Deutsche Asset Management are also in the market with a managed CPDO, which is expected to reference a bespoke portfolio of investment-grade corporate credit-default swaps. Heikki Monkkonen, head of credit correlation products at Barclays in London, declined comment, as did officials at ABN AMRO, Deutsche Bank and Citigroup, who are also said to be working on managed deals.
All CPDO deals issued since ABN introduced the structure last summer have referenced static investment-grade corporate credit derivative indices. CPDOs were the subject of a lot of buzz last fall, with nearly every dealer reportedly working on a deal. But few actually printed and only about USD2 billion has been issued to date.
Managers said that despite the appeal, investors were reluctant to invest because of roll risk (DW, 11/17). "There are significant benefits to managed CPDOs," said Andrew Jackson, credit risk manager at Cairn in London. "A manager alleviates some, if not all, of the concern on static deals."
The first batch of managed CPDOs is likely to come in two varieties: index-based and bespoke. Jackson declined comment on which variety the Cairn deal will be, but market participants expect it to reference the CDX and iTraxx indices and incorporate long/short single-name strategies. In such a deal, the managers would alleviate roll risk by timing execution and also manage single-name risk. Proponents of index-based structures say they provide greater liquidity than those referencing bespoke portfolios.
