The action by Gibson Greetings, along with other companies around that time, led to a chorus of calls for the regulation of the over-the-counter derivatives business.
The CPDO structure was developed by ABN Amro, which road-showed its ‘Surf’ product in July this year. CPDOs use dynamic leveraging adapted from constant proportion portfolio insurance techniques but maintain debt obligation characteristics, notably fixed-income bullet cashflows.
The Dutch dealer has worked with both S&P and Moody’s to obtain ratings for its CPDO structures. It’s first Surf deal achieved a AAA rating paying 200 basis points above Libor using a leverage of 15 times. The underlying credit portfolio is actively linked to the on-the-run investment grade iTraxx and DJ CDX indexes.
The transaction has been widely replicated by rival dealers. But a number of parties are concerned that investors do not understand the real risks associated with CPDO structures.