Investors are piling into structures that will guard against what they see as the imminent turn in the credit cycle. This was the buzz among structured credit officials at IMN's 10th Annual Investor's And Issuer's Summit On Global ABS in Barcelona last week. Delegates said in the past month there has been a lot of interest in structures that protect capital invested, such as credit constant proportion portfolio insurance, are linked to low volatility assets like European loans or feature highly managed credit-default swap corporate portfolios.
While there was no consensus among crystal ball gazers as to when the cycle will turn, the rise in global equity volatility over the past month has prompted chatter credit will follow suit. While strategists pointed out credit fundamentals have not changed, the uncertainty is affecting both investment strategies and the price of protection on the CDS indices. On day two of the conference, spreads on iTraxx Europe and the North American CDX reached 12-month wides of 35 basis points and 45 bps respectively, noted Loic Fery, global head of structured credit and CDOs at Calyon in London, when moderating a panel on the synthetic market.
"Anything with low marked-to-market volatility is an easy sell right now," one London-based synthetic credit structurer said to DW. He highlighted the recent issuance of a number of mammoth synthetic securitizations of European loans; viewed as a safe asset class. These include BNP Paribas' USD12 billion Global Liberté V and a GBP3.4 billion (USD6.4 billion) transaction from The Royal Bank of Scotland. "If the cycle is changing, people will be more comfortable with ABS," agreed Guy Cornelius, managing director in fixed income, rates and currency sales at UBS in London.
Another dealer noted market nervousness about the credit cycle has sharpened appetite for credit CPPI. He predicted it will emerge as an asset class in its own right on the back of rating agencies starting to rate both the principal and coupon components of these structures (see story, page 8). The life-span of long-only static deals is also tipped to come to an end. "In a cycle that is expected to turn, alpha generation rather than leveraged beta makes the short more important," said Declan Tiernan, a structured credit marketer at Deutsche Bank in London.
