Synthetic balance sheet collateralized loan obligations referencing emerging market corporate debt are expected to take off in coming months to satisfy both growing investor appetite and new regulatory challenges. No deals have been priced yet but several will come out by the end of the year.
The incentive for banks is Basel II, which takes effect January 1. In anticipation of more burdensome capital requirements for leveraged loans rated BB and below, banks have started stepping up balance sheet CLO issuance (DW, 8/25). These deals provide capital relief by allowing banks to transfer lower-rated risk exposure off their balance sheets. The incentive for investors is exposure to emerging markets, particularly in Eastern European countries such as Russia and Poland, which are gaining favor for rising credit quality and good returns.
Synthetic emerging market CLOs are especially attractive to investors because they can have higher ratings than sovereign bonds and cash CLOs. Lars Jebjerg, director in the collateralized debt obligation group at Fitch Ratings in London, said the synthetic emerging market CLOs in the pipeline reference mid-sized companies based in Eastern Europe and range from investment grade to AAA.
Synthetic CDOs containing baskets for emerging market credit are also gaining ground in Asia (DW, 5/26).