Barclays Capital estimates $3 billion of constant proportion debt obligations (CPDOs) are at imminent risk of being unwound.This refers to CPDOs issued between July and September, with exposures to 45-50 financial names. Barclays Capital said these CPDOs have had significant mark-to-market losses and could unwind if spreads widen more than five basis points. This could have a knock-on effect, with spreads widening on the underlying 10-year credit default swap contracts, according to a report released by the bank.
Some signs of unwinding are already occurring. On November 23, ratings agency Moody’s downgraded a €11.5 million series of UBS CPDOs nine notches, from Ba2 to C. This was because the CPDOs hit their cash-out trigger, causing the deal to unwind, and resulting in an approximate 90% loss for investors.
Moody’s has also put five more series of UBS CPDOs, worth €340 million, under review for a possible downgrade. The rating agency said this is in response to the continuing spread widening and volatility of the financial names underlying these instruments, which is negatively affecting their net asset values.
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