Chatter on the Street about the growing popularity of synthetic forward-starting collateralized debt obligations has yet to materialize into public deals being printed. Credit players say many institutional investors who have only recently starting taking views on credit defaults and correlation are not yet sophisticated enough to also take views on the timing of defaults, so dealers are holding off to gauge appetite. "They [investors] like the idea of locking in spreads and the boosted returns, but they need educating," said one structurer in London.
Forward-starting CDOs have set tongues wagging on both sides of the Atlantic because the credit curve of the structure is steeper, and therefore pays a higher spread, than that of a current transaction of the same rating (DW, 1/27). One strategist said when the direction of the credit cycle becomes clear, meaning the market will be clearer on the timing of defaults, investors may then begin to see the value of the structure.
