An increasing number of synthetic CDOs are expected to issue combination notes, as investors search for new ways to mitigate risk while maintaining yield. For example, the notes combine triple-A tranches and equity tranches, in order to give an investor the best of both ends of the capital spectrum.
Up until now, the market has primarily seen combo notes issued in the cash CDO sector. Lately, however, synthetic CDOs backed by high-grade corporate bonds have issued the notes, and an increasing number of synthetic ABS CDOs are expected to follow suit, Fitch Ratings said last week. "So far the majority of the structures seen by Fitch are a combination of synthetic CDOs referencing high-grade corporates, but we have recently begun to see structures referencing ABS," the rating agency said last week when it released guidelines for rating synthetic combo notes.