Eric Slighton, head of Asia-Pacific credit derivatives at Barclays in Hong Kong, said the structure adds an asset class with positive yields and negative correlation with credit. The firm's commodity division has started structuring pure collateralized commodity portfolios with the default-swap concept in Europe and given the current level of credit spreads it is a useful tool to boost the yields in a CDO. "Even incorporating a small portion of AA and AAA-rated commodity-default swaps significantly improves the credit portfolio," he noted.
The firm expects to close its first hybrid CDOs of credit and commodities early next year. For such transactions roughly 5-10% of the overall portfolio will include a commodity-default swap portion, likely made up of such underlying as energy, precious metals and base metals. Slighton added the firm will focus on selling mezzanine and senior pieces of portfolio where there is some cushioning against losses within the tranche.
"People are getting more and more creative," said a derivatives head at a rival bulge bracket firm, noting while this is the first he has heard of the idea, it does make sense given the higher profile the commodity markets have been receiving this year. Shinichi Takeda, analyst in the structured finance group at Moody's Investors Service in Tokyo, said there could be good interest in such a product next year if credit spreads remain tight.
As for first targeting the Asian market with this CDO structure, Slighton responded, "This is inherently a product which should have global appeal. However, portfolio managers in Asia have less rigidly defined guidelines and may take a look at a wider array of asset classes."
