BoA: single-tranche CDOs compensate well for their risks
The additional spread available from single-tranche collateralised debt obligations (CDO) – compared to other portfolio credit products - more than compensates investors for the particular risks associated with tranched products, claims Bank of America (BoA).
Gibson and Lee point to relative illiquidity and lack of pricing transparency, and recent poor performance by CDOs, as among the major risks responsible for the high compensation available to investors in single-tranche deals.
However, Gibson and Lee contend that each of these factors is now being countered by changes in the market. Investors concerned about illiquidity can chose tranched index products. Similarly, those investors that are concerned about transparency can use the latest generation of forward-looking credit portfolio models to get a more objective sense of the risk-return profile. Finally, single-tranche CDO rating and price performance have rallied since October 2002, according to BoA.
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