A raft of collateralized commodity obligations are being marketed, according to Street officials who say as many as eight to10 transactions are being touted.
The underlying portfolios for the CCOs comprise half credit-default swaps on corporate bonds and half commodity trigger swaps--which are out-of-the-money put options on individual commodities. The structure allows managers to layer in a higher yielding asset class with a negative correlation to credit.
At least one arranger is issuing its deal to delta hedge its cash commodities positions, by using commodity correlation swaps, according to rating agency officials. Correlation swaps are already standard for equity-linked products.
Increasing demand from retail and high-net-worth investors for access to commodities has left desks with a buildup of exposures to correlated moves in commodities. Commodity correlation swaps have appeared as a way to offload this exposure to hedge funds. Because dealers have sold baskets of commodity options in such big sizes to retail over the last two years, especially in Asia, some hedge funds are prepared to take the view commodity correlation is overvalued.
The use of trigger swaps in CDOs was pioneered by Barclays Capital two years ago and Calyon last year came to market with a hybrid deal dubbed Alchemy (DW, 6/2), but no other firms are known to have issued similar deals until now.
