Issuance of synthetic collateralized debt obligations is tipped to balloon in Europe in the coming weeks as recent spread widening in the CDS index markets means structured deals can now meet target return levels. Credit pundits say dealers are also likely to squeeze in new issues before the European summer lull--likely to come earlier this year because of the World Cup.
Last week there was a noticeable pick-up in issuance of bespoke CDOs--either portfolios of credit-default swaps or tranches--as well as standardized index portfolios, and levels are expected to rise. "[The market is] definitely busier now than this time last year, when people were scratching their heads about correlation, Ford and [General Motors]," said Rob Pomphrett, head of the structured product syndicate at RBC Capital Markets in London. "With spreads widening, there has been a real boom," he added.
Although bespoke deals are sold on a private basis, issuance levels can be monitored by following spreads on the CDS indices and index tranches. Dealers hedge their long protection exposure, which is leveraged, by selling protection in huge quantities using the indices. This pressure, called the structured bid, in turn causes spreads to tighten. This happened earlier this week when iTraxx Europe drew in (see story, page 10). While that tightening is an indication of increased activity, on the whole spreads have widened. Protection on the 3-6% slice of the iTraxx Europe mushroomed to 68 bps from 44 bps in early May.
In addition, the market expects to see more balance sheet CDOs in the coming weeks, as a dealers look to square up books before a regulatory capital reporting deadline June 30. These reports are integral, officials say, because they will be the first to influence what regulatory capital a firm must pay under the Capital Requirements Directive, which comes into force in January next year. Deals already launched include BNP Paribas' managed corporate synthetic Omega Series 25 and Deutsche Bank's synthetic CLO London Wall 2006-1.
