The launch of credit derivative product companies in the New Year is expected to shift the demand for synthetic risk up the capital structure. CDPCs are permanent capital vehicles and similar to monoline insurers. They are expected to be a permanent buyer of risk--seller of protection--at all tranche levels, but especially senior.
Strategists are also tipping the vehicles to sell senior protection beyond five-year maturities, where spreads have already been compressed by leveraged super senior issuance. The seven-year part of the curve is currently trading cheap to the more popular five-year tenor and is due for a rally, said Ashish Shah credit strategist atLehman Brothers in New York.
"So far, senior tranches in the longer maturities have displayed their usual sticky nature," said Shah, explaining, "They have been trading in a range for the past three months despite the aggressive tightening of the underlying indices." Goldman Sachs is said to have just printed a synthetic CDO that sells seven-year investment grade protection at the senior level. Goldman officials did not comment by press time.
