Hi,Has someone some information about the CPDO behaviour in the actual crisis. It seems this product are sensitive to volatility ?Has someone some clues about the pricing ?Regards,

These are some quotes that I happened to read in Derivatives Week this morning - "Several estimates pegged the average NAVs of the first CPDOs at around 94%."One structurer explained that in order for the deals to hit their estimated cash-in dates their structures needed to hit a NAV of 110% within the first few years, adding:"Because the widening wasn't due to a realised default, those structures can re-leverage with higher spreads in a couple of years and eventually pull to par with a higher coupon"

CPDO's seem to encapsulate some of the things going "wrong". Being from the equity side, i barely understand what they are, or why the exist. However, they are another AAA rated product which is now trading for 70c in the dollar (NAV or bids - should there be a difference?) ... wheras is all the backtests they seem to have AAA rated principal & interest.This is another issue touched upon before -- the sample size of many back-tests, especially for the newest/most complex products makes it difficult to justify throwing heaps of highly leveraged money to earn an extra few bps.Full bbg story below, but this line (slightly out of context) does sound a bit scary To make up for losses, CPDOs would typically increase their borrowing.I am out of my field here and would welcome any insights on the recent dynamics of this (sub) sector of the credit market (Updates share prices in the fifth paragraph.)By John Glover and Shannon D. Harrington Aug. 14 (Bloomberg) -- Moody's Investors Service and Standard & Poor's, the arbiters of creditworthiness, are losingtheir credibility in the fastest growing part of the bond market. The New York-based ratings firms last month gave a new breed of credit derivatives triple-A ratings, indicating theywere as safe as U.S. Treasuries. Now, investors are being offered as little as 70 cents on the dollar for the constantproportion debt obligations, securities that use credit-default swaps to speculate that companies with investment-grade ratingswill be able to repay their debt. ``The rating doesn't tell me anything,'' said Bas Kragten, who helps manage the equivalent of about $380 billion as head ofasset-backed securities at ING Investment Management in The Hague. ``The chance that a CPDO won't be triple-A tomorrow is alot greater than it is for the government of Germany.'' The legacy built by John Moody and Henry Varnum Poor a century or moreago is being tarnished by losses on securities linked to everything from subprime mortgages that the firms failed to downgrade before it was too late to high-yield, high- risk loans. Bonds backed by mortgages to people with poor credit fell by more than50 cents on the dollar in June before the companies started to slash their ratings. Moody's Corp. shares have fallen 28 percent this year, while McGraw-Hill Cos., the parent of S&P, has declined 24percent. The firms say they determine the risk of default rather than prices. Highest Ratings Ratings are ``a measure of risk on a buy-and-hold basis and say nothing about the pricing volatility of an investment,''said Gareth Levington, a senior analyst at Moody's in London. ``The market level isn't hugely relevant for the rating.'' S&P's rankings ``are appropriate for existing CPDO structures,'' S&P spokeswoman Felicity Albert in London said. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specificevents like changes in the weather or interest rates. The rating firms help borrowers structure debt securities in a way that will get the highest possible credit rankingswhile allowing managers of the securities the most profit, according to Charles Calomiris, the Henry Kaufman professor offinancial institutions at New York's Columbia University. Moody's earned $884 million last year, or 43 percent oftotal revenue, from rating so-called structured notes, according to Neil Godsey, an equity analyst at Friedman, Billings, RamseyGroup Inc. in Arlington, Virginia. That's more than triple the$274 million generated in 2001. `Crossed the Line' Ratings firms ``used to be seen as good, objective folks dressed in white, who you could count on to give reliableopinions,'' said Christopher Whalen, an analyst at Institutional Risk Analytics, a research firm in Hawthorne, California, thatwrites software for auditors to determine if banks are accurately valuing their assets. ``But when they got involved instructuring and pricing these deals, I think they crossed the line. They have lost a lot of credibility.'' CPDOs were first created last year by banks ranging from Amsterdam-based ABN Amro Holding NV, the largest Dutch lender,to New York-based Lehman Brothers Holdings Inc. HSBC Holdings Plc in London and Dresdner Kleinwort in Frankfurt also soldCPDOs. Banks created at least $4 billion of CPDOs, promising annual interest of as much as 2 percentage points above money-market rates -- a ``holy grail'' for investors, Bear Stearns Cos. strategist Victor Consoli said in a November conferencecall. Selling Insurance CPDOs sell credit-default swaps, contracts that would pay a buyer face value for bonds if the company that issued the debtcan't meet interest payments or otherwise defaults. CPDOs provide insurance on a basket of 250 companies, borrowing up to15 times their initial capital, boosting their investments to as much as $60 billion. Moody's and S&P assign their top credit ratings to the securities because of rules designed to ensure they never haveto pay a claim. CPDOs only hold swaps on companies with investment-grade ratings. The first CPDO, ABN Amro's 100 million euros ($136 million) of AAA 10-year ``Surf'' notes, paid about 5.3 percent in annualinterest when they were sold a year ago, or about 1.50 percentage points more than floating-rate notes sold byGerman state lender KfW Group with the same ratings. Now, investors are finding just how risky CPDOs can be as the cost of protection against default rises, causing existingcontracts held by the securities to become less valuable. The iTraxx Europe Index of swaps on 125 companies increased to asmuch as 70 basis points in July from below 20 basis points in June as corporate credit markets slumped, data compiled byBloomberg show. A basis point is 0.01 percentage point. Prices Tumble CPDO prices probably dropped between 19 percent and 33 percent, Banc of America Securities LLC credit strategistJeffrey Rosenberg said in a July 30 report. ``Something that's triple-A clearly shouldn't be this volatile,'' David Watts, an analyst at bond research firmCreditSights Inc. in London, said. ABN Amro's Surf CPDOs fell to as little as 70.2 cents from almost 104 cents on June 6, and were quoted at 76.73 centsyesterday, prices on Bloomberg show. An equivalent price decline on government notes would push the yield as high as11.7 percent. The increase in credit-default swap indexes means investors can expect to earn a higher premium for providing debt insuranceas soon as new indexes are created in September. To make up for losses, CPDOs would typically increase their borrowing. ABN Amro's CPDOs are ``behaving well in difficult market conditions,'' said Steve Lobb, global head of structured creditat ABN Amro in London.TextText

The idea of the CPDO is that when the NAV of your fund gets high enough, you cash out into a risk-free bond. The problem is that as credit conditions worsen, the NAV of your fund drops. This means that in order for you to achieve your target of closing out your CDS positions and receiving risk-free cash-flows, you need to increase your NAV. The way you do this is by increasing leverage i.e. selling more protection.