While the wave of downgrades that toppled a number of CDOs in 2002 should ripple into 2003, appetite is strong, and investors are still willing to test the new renditions of synthetic structures.

According to market reports, synthetic deals dominated CDO issuance in Europe throughout 2002. "As a response to the fragility that earlier synthetic CDOs have shown in the face of investment grade deterioration, and in the face of waning investor demand, a new generation of structures is emerging with features designed to make them more robust in the current environment," reported Dresdner Kleinwort Wasserstein in its special report on the sector.

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