A lively debate is taking place in the marketplace over the merits and risks of investment-grade average collateralized debt obligations (IG CDOs). Critics argue the following: investment-grade CDOs are too highly levered; investment-grade credits experience rapid credit deterioration; investment-grade CDO managers pick the yieldiest credits for any given rating category; and investment-grade CDOs are credit "barbells."

Salomon Smith Barney strongly disagrees with all four points. We believe that the credit tranches (i.e., equity and second loss tranches) issued by investment-grade CDOs offer significant unrealized value, a view that we expound upon in our recent report "Investment Grade CDOs." In short, we consider IG CDO equity and triple-B tranches cheap.

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