Constant Proportion Debt Obligation

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A Constant Proportion Debt Obligation (or CPDO) is a debt issuing SPV backed by an investment in an index of debt securities (commonly CDX or ITRAXX but in theory could be deal specific, such as a bespoke index of sovereign debt) similar to a CDO. The investment index is periodically rolled, whereby the SPV must buy protection on the old index, and sell protection on the new index. In doing so it incurs rollover risk, in that the leaving index may by priced much wider than the new index. The structure then allows for continually adjustment of leverage such that the asset and liability spreads stay match. In general this involves increasing leverage as when losses are taken, similar to a martingale strategy.

The first CPDO deal was issued in 2006 by ABN-AMRO and was rated AAA/Aaa despite paying Libor plus 200bp. Many analysts were initially sceptical of the rating assigned, particularly since the deal contained a majority of market risk (spread risk) rather than credit risk - an area not normally covered by rating agencies. A few months later, Moody's release a comment to the effect that, while they still stand by their original rating, they acknowledge that the rating is highly volatile compared to other triple-A rated instruments.^{[citation needed]} They also indicated that future deals would be highly unlikely to achieve the same rating with the same spread. Indeed the second CPDO, by Calyon appears to be a more conservative structure and was offered at AAA/Aaa with a much lower spread.