Dealers in Asia are expecting synthetic collateralized loan obligations to take flight on regional loans in the coming months. The higher yields than traditional synthetic CDOs are appealing to investors searching for something more in a market where credit spreads--apart from recent volatility connected to auto downgrades--are relatively tight, they argued. Houses such as ABN AMRO are looking to structure such deals this year, according to officials at the firm.
Sombat Jiwariyavej, assistant v.p. at Moody's Investors Service in Hong Kong, said, "End-users are after yield and have been looking for alternatives to CDOs on liquid tradable credit default-swaps." He added, "They're moving down the credit scale to high yield, emerging markets and other types of exposure such as synthetic loan deals." Moody's is starting to get inquiries about the structures, said Jiwariyavej, but he noted the product is still in its initial development stage.
Credit structurers said clients are also looking at such products as a way to pick up a more diversified range of credit exposure. Investors who have already bought into synthetic CDO deals, which have been gaining momentum in the region in recent years, are particularly interested, according to structurers. "The loan market can offer more diversification," concurred a credit head at a European house, adding, "You can put in less-liquid assets which makes the credit universe much bigger."
"This won't happen overnight, but I expect deals to emerge in the next three months or so," said a credit marketer in Singapore. Hurdles include educating investors about the structures and also getting regulatory approval for investors in the various jurisdictions in the region. Structurers noted that the first issues will likely be a mix of U.S., European and Asian loans while pure Asian deals will emerge over time, given the relatively limited depth of the Asian loan market compared to other regions. "This is a natural progression of the asset class developing in Europe and the U.S. and now emerging in Asia," the marketer continued.