The ranks of firms looking to set up limited purpose companies to act as counterparties in credit default swaps are swelling. Deutsche Bank is among those readying a credit derivative product company and the rating agencies have eight to 13 proposed DPCs looking to get a rating.
The moves are being driven by the explosion of CDO transactions and the need for Street firms to offload the risk from their balance sheets. Moody's Investors Service has seen 12-13 proposals in the past six months, according to Yvonne Fu, managing director in the CDO group. Fitch Ratings is also currently seeing eight to 10 proposals, up from four to five at the end of last year, according to Alan Dunetz, senior director in the credit products group.
To date, only Athilon Asset Acceptance and Primus Financial Products have been players in the field, although Deerfield Financial Products recently received a preliminary triple-A rating from Moody's and Standard & Poor's. Nik Khakee, director at S&P, did not return a call and John Brinckerhoff, managing director of portfolio management at Deerfield, declined comment.
The trio will be joined in the third quarter by a CDPC sponsored by Deutsche Bank, according to an official close to the matter. The company will initially act as a counterparty on synthetic tranches of CDOs, later branching out to other structured products, excluding single-name transactions. The Deutsche Bank operation will be headed by Matthew Cooleen, who recently left his post as president and ceo of MML Assurance (SN, 3/6). The company's new chief is also looking to bring on a team of risk professionals, quantitative analysts and structurers, the official said. He declined to name professionals under consideration for the slots or estimate the size of the group to be hired.
Despite the swollen pipeline, at least one of the established players didn't feel an immediate threat. "There's numerous barriers to entry outside the obvious one of securing a triple-A rating," said Patrick Gonzalez, Athilon coo, declining to elaborate on what those barriers are. He referred to a Moody's report that noted rating these companies takes years rather than months.
But Dunetz disagreed. "The review process for a well thought-out proposal can be completed within four to six months. This timeframe has improved from a year ago as various modelling and criteria issues have been ironed out," he said, noting such reviews previously took closer to one year.
