Constant proportional debt obigation (CPDO or SURF)

A form of structured credit investment using elements from both CDO and CPPI technology to produce a non principal-protected fixed income credit investment tool. The CPDO issued by a financial institution basically collects investors' cash, leverages it up and uses the proceeds to write credit default swaps (instruments offering protection against default). In effect it is a bet based on present day market assumptions on whether a basket of corporate bonds will default.
It comprises of exposure to a credit index portfolio and a cash deposit. The portfolio aims to generate sufficient returns to enable the coupon payments to be made. The target size of the portfolio is set such that the present value of the expected income from the portfolio is linked to the difference between the present value of the coupons and principal due under the note and note's present net asset value. Once the current note present net asset value equals the present value of the payments due under the note, the credit index portfolio is to be unwound and no further credit exposure taken.ABN AMRO issued a 10-year note constructed from the DJ CDX index and iTRAXX index (made up of investment grade bonds), leveraged up by about 15 times. This CPDO generates returns through exposure to a portfolio of credit default swaps (CDS) which is linked to highly liquid CDS indices. The indices used in the CPDO are revised every six months to remove troubled companies. The size of the portfolio is adjusted dynamically so that the CPDO only uses the leverage it needs in order to make the scheduled principal and interest payments. The structure is designed to have a full rating for the timely payment of both principal and interest and so a high likelihood of a risk-free investment.
ABN AMRO realised an "AAA" rating (both Standard and Poor's and Moody's) . The structure is attractive for investors who require high certainty of principal and coupon payments, or who wish to diversify their structured credit portfolio and are looking for liquidity.The rating is subject to many subjective assumptions on the part of the rating agencies and in turn vulnerable to quicker downgrades than normal AAA ratings. As the principal is not protected whileboth leverage and vulnerability to a unexpected widening of credit spreads are high, it remains to be seen whether the AAA ratings together with a spread of 200 basis points over LIBOR are justified.