Investment Grade CSO
Product rationale
A High Yield return through short-to-medium term credit exposure on a mezzanine tranche of a globally diversified portfolio of large corporates and financial institutions.
- The current low growth, low inflationary environment favors credit fundamentals, as evidenced by latest rounds of earnings. Additionally, central banks' desire to maintain low interest rates is likely to maintain credit in the "sweet spot".
- Thanks partly to large cash reserves on corporate balance sheets, corporations are expected to have few difficulties servicing their debts resulting in an expectation of default rates falling through most of 2011
- Investment Grade credit spreads currently over-compensate for the credit risk (as measured by historical standards)
Opportunity for the investors
Attractive alternative to a corporate bond portfolio.
- Better diversification – Exposure to a diversified basket of international issuers as Credit Default Swap market is more diversified than corporate bond market
- Structural protection – Protection is provided against first losses in the portfolio (no principal loss is experienced by the investor due to defaults in the underlying basket, up to a pre-defined level that constitutes the subordination of the tranche.
- Higher liquidity – Credit is accessed via credit default swaps, a standardized instrument with higher liquidity than physical bonds
- Higher returns – Higher returns than in similar corporate bond portfolio through external leverage
