Credit Suisse First Boston is marketing an innovative repackaging of single-tranche CDOs in a deal called Cheyne Correlation CDO I. While the portfolio will be static, once ramped up, Cheyne Capital will be able to short the underlying credits as a way to manage the portfolio.

"The main innovation in this transaction is in the way the portfolio is hedged," said Marc Freydefont, a vice president and senior credit officer at Moody's Investors Service. "While the portfolio of single-tranche CDOs is static, the manager can dynamically short certain of the underlying credits with single-name credit default swaps."

The $300 million deal will comprise about 15 existing ST CDOs, which were previously custom-tailored for the investors who bought them. It's likely that Cheyne will have one or more new-issue ST CDOs structured to complement the portfolio it accumulates.

Cheyne will be a four-year arbitrage fully funded cashflow CDO, and the ST CDOs - referencing corporate credits - are also fully funded. According to a source familiar with the deal, some of the ST CDOs picked up by Cheyne may have suffered ratings migration to the point where they are no longer appropriate for the initial investor's portfolio. Apparently, the secondary market for ST CDOs is virtually nonexistent, so this transaction may provide a boon of liquidity.

Cheyne will be 50% ramped up at pricing. The five classes of notes are U.S. dollar-denominated. According to a Moody's presale report, the deal is expected to close by the end of the month.

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