Expectations of increasingly high leveraged buyout risk and continued low default risk in the European credit market are expected to fuel product innovation in 2007.
Citigroup came out front with a credit swaption designed to protect bond holders from spread widening due to a takeover bid or an increase in the reference entity's debt, rather than against default. "It is unlikely an LBO and default will happen at the same time," saidMichael Sandigursky, v.p. in quantitative credit strategy at Citi in London.
Citi is thought to be the only bank offering leverage-event protection, but analysts at other houses said they expect to see more efforts in 2007. Jeff Meli, director and head of U.S. credit strategy at Barclays Capital in New York, said it is too soon to tell what form innovation will take, but predicted, "Products linked to LBOs will be popular next year."
