The programme offers investors equity of risk on 0-2.5% of a collateralised debt obligation (CDO). The assets are primarily investment-grade credit default swaps (CDS). The initial portfolio is composed of 80 equally weighted credits. The aim behind the product is to defend the carry typically provided by the equity tranche by managing the portfolio against defaults and credit events.
The seven- and 10-year fund-linked transaction is available in either a funded or unfunded format. The three core products are principal protected notes (PPN), combo notes (with a different mezzanine portfolio) and straight equity-linked notes. The PPN and combo notes can achieve a AAA/AA principal and interest rating with a small guaranteed coupon paid. The structure offers modelled internal rate of return of Libor + 16% on a straight equity transaction and Libor + 200-250 basis points on the PPN and combo structures. The PPNs are guaranteed by Citi.