Getting investors into the comfort zone

Equity tranches of collateralised debt obligations (CDOs) have always been the most difficult part of the capital structure for arrangers to sell. Apart from a select group of ultra-sophisticated investors, few are equipped or able to take on equity risk. But arrangers are hoping that will change. A significant number of equity-related products are expected to appear this year and, because most investors aren't willing to take equity risk in its usual format, a number of basic – and more innovative – products have appeared.

"It's clear that the junior tranches of investment-grade CDOs offer a lot of value to investors, but the problem is that in its natural form there are very few buyers of equity," says Nitin Prabhu, co-head of credit structuring at Deutsche Bank in London. "The key is to repackage it in a form that makes it accessible to investors so they can access that value."

To date, equity has been packaged in a few different ways – most commonly in the form of combination notes and capital-guaranteed