CDO Performance Unplugged

Abstract

The CDO market has historically been plagued by a lack of pricing transparency. The birth of a new secondary market offers an opportunity to take a first look at real price performance. In this article, the authors estimate performance focusing on a universe of over 100 senior notes. They find that senior notes have lost 1.3% (above Libor) since inception. Leveraged-loan-backed deals were the best performers, down only 0.1%, while high yield senior notes were down 2.4%. They note that bullish investors may find value in many AA-rated notes in the secondary market, while bearish investors should take comfort in shorting AAAs (through total return swaps) at levels near par. They also note that a more balanced position is to get long AAs and short AAAs.