Credit houses in Japan are preparing for a wave of collateralized debt obligation transactions because of an unexpected easing of planned rules on valuing CDO holdings. "This should renew interest in the market and bring in more people from the sidelines," said Brett Clancy, director in credit structuring at IXIS Corporate & Investment Banking in Tokyo. "It could at least double the potential client population."
The initialAccounting Standard Board of Japan proposal would have only CDO transactions rated AA or higher by two agencies as being exempt from a mark-to-market accounting (DW, 2/10). ASBJ Guidance No. 12, however, states that rather than strictly defining a low-risk product as AA or higher, the interpretation of a low-risk product that can be held to maturity and avoid mark-to-market accounting is open to the interpretation of the investor.
"There's a good early buzz around this," said Dean Rostrom, managing director in global CDOs at Deutsche Bank in Tokyo. "The outcome is quite different than the initial proposal."
The liberalization reflects the local will to allow investors to move into instruments offering greater returns than the super-low domestic bond yields. That investor desire has made the Japanese market a prime target for Asia Pacific CDO businesses. Investors that had previously shied away from CDOs due to mark-to-market accounting issues now have greater flexibility in terms of the rules.
Until the final rules, officials explain that, for example, BBB could be set as the rating hurdle. This would open the door wider for the type of deal that can be structured, and bring in yield-hungry clients, such as smaller regional banks. "I'm very bullish, but it may take some time for clients to figure the full effects," added Rostrom.
Dealers expect interest for both domestic and global CDOs, primarily on the investment-grade side, and several houses have already noted a pickup in inquiries for such deals in the last few weeks. "This invites greater choice and flexibility," said Clancy.