Sunday, October 19, 2008

Requiem for the CPDO

(FT Alphaville) The first ever Constant Proportion Debt Obligations (AKA: AAA superbonds, holy grails of structured finance, hydras, unsinkable instruments) have hit their cash-out triggers.

ABN’s SURF CPDO bonds died painfully in their sleep earlier this week.

(Although noteholders officially have 10 cents on the dollar at cash-out, after medical fees unwind fees, the patient will be better left for dead.)

In memoriam, SURF.

From Bloomberg:

Oct. 13 (Bloomberg) — ABN Amro Holding NV had the ratings on three constant proportion debt obligation funds totaling $305 million cut to D by Standard & Poor’s as the transactions were forced to unwind.

The CPDOs, funds that use credit-default swaps to bet on company creditworthiness, were downgraded because of “spread widening and increasing volatility” in the credit derivatives market, the New York-based ratings company said today. The CPDOs’ net asset value fell below 10 percent of investors’ original capital, a trigger that forced them to unwind, S&P said.

The CPDOs were sold through Chess II Ltd. and Castle Finance 1 Ltd. and totaled $130 million and 200 million Swiss francs ($175 million).

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

No flowers.

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