CPDOs

Abstract

The intent of this analysis is to evaluate CPDOs (Constant Proportion Debt Obligations, which also appear under other names, with slightly varying structures), a new, promising structured product, with respect to their return and risk, based on various credit spread and Libor scenarios, and taking into account fees, expenses, and expected credit losses. The author evaluates the product from a standpoint of a long-term investor, such as a pension fund, which would hold it to maturity. He creates a distribution of annualized 10-year returns, based on 358 Libor/spread scenarios. Hypothetical strategies of investing in single-quality corporate bond indices (Aaa to Ba) are modeled, using the same scenarios and reasonable assumptions for expenses and fees. The resulting bond return distributions serve as benchmarks, to which the CPDOs' return distribution is compared, in order to find their place in the risk-return spectrum, and see whether they similar to Aaa or a lower credit quality.