CPDO: Endgame

The end of some of the CPDOs nears. I did hint earlier that a yield of Libor + 200 implied that they were not AAA securities, and indeed it turns out that, once again, straightforward beta rather than alpha was the cause of the return. Anyway, Bloomberg reports:

ABN Amro Holding NV clients face 90 percent losses on two credit derivative products totaling 120 million euros ($176 million), according to Moody's Investors Service.

The so-called constant proportion debt obligations have seen their net asset value fall to 10 percent, meaning they will have to unwind, or ``cash-out,'' Moody's said in an e-mailed statement today.

Leveraging up as spreads widened didn't turn out to be such a good idea after all then. Of course, investors in the ABN product were unlucky with the size of the moves experienced:

Credit-default swaps on the Markit iTraxx Financial index of 25 European banks and insurers soared to a high of 84 basis points this week on concern credit rating downgrades at bond insurers including Ambac Financial Group Inc. and MBIA Inc. will cause bank losses to surge. The index traded as low as 20 basis points in November.

Still, given that a number of commentators thought the CPDO was a really bad idea when it launched (see for instance here or here), you can't say no one said I told you so.

Finally, perhaps in the bolting the door after the horse has run away category, I leave you with a link to a paper on Rating Criteria for CPDO Structures. It may be that this is of purely historical interest.