Lehman and Pioneer complete managed CPDO

Lehman Brothers, with Dublin-based asset manager Pioneer Investments, has closed its first managed constant proportion debt obligation (CPDO), called Ulisse Capital.

New York-based Moody’s Investors Service has rated €135 million of notes Aaa, which will pay a coupon of 100 basis points above Libor. The deal is thought to be the first managed CPDO transaction to be priced.

Francesco Cuccovillo, Lehman Brothers’ London-based executive director in structured credit trading, said during marketing the first wave of CPDOs that some investors were concerned with relying exclusively upon an equation to determine leverage, rebalancing and other factors. With a managed deal, he claims, “the presence of manager supervision can be a reassurance to those investors”.

CPDOs are typically static structured products that sell protection on the five-year iTraxx and CDX credit default swap (CDS) indexes, making gains by rolling over these positions to the newest versions of the indexes every six months.

Within the Lehman deal, Pioneer Investments will have the ability to dictate the product's overall level of leverage, which will increase to a maximum of 15 times but begin at half this figure. To achieve the highest return when the CDS indexes roll over, the date when the product sells its previous positions and buys into the next version can be shifted by the manager within a set window.

The CPDO’s structure also allows Pioneer Investments to short the five-year, seven-year, and 10-year iTraxx and CDX indexes at its discretion, as well as single names. It is able to minimise the risk of fallen angels – or companies that are dropped from the CDS indexes at their roll date – by shorting individual names prior to their removal.

A number of other banks are currently believed to be working on second-generation CPDO deals including features such as active management and a shorting capability. Earlier this month, Société Générale said it was preparing to launch a static deal with a short index component, called Stelaris.