To date, most CDOs issued in Australia have given exposure to underlying credits that are rated above investment grade. Sometimes a small component of selected names which are just below investment grade are included. This will increasingly come under pressure in the search for yield. CDOs with higher levels of structuring have been emerging as a way of building protection around lower-rated portfolios, or as a way of boosting yields for higher quality portfolios. Look out in 2006 for a new wave of capital protected CDOs offering exposure to unrated corporate bonds or secured loan receivables.

For investors who want to remain focused on higher quality p...