CPDOs unwind more hype than substance says Dresdner Kleinwort

The impact of potential CPDO unwinds on spreads has been exaggerated, according to research from Dresdner Kleinwort, which could result in some rally in the indices as the effect of the unwind is better understood.

The report, from Dresdner Kleinwort’s structured credit research, says any CPDO unwinds are unlikely to have a massive impact on index spreads given the overall daily trading volume of the investment grade iTraxx and CDX indices.

The report estimates a flow of €12.5 billion/ $19 billion in each index in the worse case scenario that all CPDOs unwind in the period of a month. Actual index volumes are significantly higher than that, it notes.

The fact that CPDOs are already partially deleveraging would also mitigate any impact. Partial deleveraging is occurring to help manage the CPDO arranger’s gap risk – defined as default loss and spread loss as a proportion of NAV - in a high spread environment. The report estimates that first generation CPDOs are now 8x to 10x leveraged. Maximum leverage has typically been 15x.