Derivative Fitch criticises first-generation CPDOs

First-generation constant proportion debt obligations (CPDO) do not deserve AA or AAA ratings, according to a report released yesterday by specialist rating agency Derivative Fitch.

The agency, which refuses to rate CPDOs, said they are sensitive to very minor movements in their key risk parameters, namely spread volatility, roll-down benefit and bid offer levels. It also warns that they depend on historical performance data going back only four years in benign conditions, for structures with maturities of 10 years.

“These deals wouldn’t survive in high investment-grade stresses,” said one of the report’s authors, Stefan Bund, London-based head of European structured credit at Derivative Fitch. However, he did welcome CPDOs as an innovation in the structured credit market.

He also said second-generation CPDOs had improved significantly on the weaknesses of the earlier model, including offering more flexible index rolling and name replacement prior to downgrade.