Credit structurers in Asia have noted an upswing in interest for equity tranches in synthetic CDO transactions as valuations have become relatively more attractive. "The game will be equity--that's where the value is," said Aditya Rana, executive director at Morgan Stanley in Hong Kong.
Such transactions will be linked primarily to synthetic CDOs on U.S. and European names and will be principal-protected, given the heightened risk of investing in the equity portion, which takes the first losses of any defaults in a portfolio. "This will be a major focus for us," said a marketing head at a European house, explaining that with credit spreads expected to remain range-bound or slightly wider, clients are looking for value within the capital structure. Officials noted that even with principal protection, such deals can offer more than 6% per annum.
The current tightness in spreads and strong appetite last year for leveraged super-senior tranches has driven value out of such deals, also shifting appetite towards equity, officials noted (DW, 10/7). One marketing head at a bulge bracket house said that for such super-senior deals to make sense the deals need to be leveraged more than 15 times, which has prompted many clients to look for alternatives.
