Morgan Stanley has just done a synthetic collateralized debt obligation deal in Hong Kong with additional equity derivative exposure, which it believes is a first. "We've added an equity kicker," said Aditya Rana, executive director at Morgan Stanley in Hong Kong. The innovation is that the private deal, a AAA-rated five-year static global CDO, is linked to a basket of Hong Kong shares, to boost yield in the current tight credit environment. If the basket outperforms on average a designated strike price, the investor receives a bonus coupon annually. The underlying CDO rating remains untouched by the bonus coupon, which offers only additional upside.
The firm has closed interest rate-linked CDO deals and also sees potential for commodity-linked structures in the coming months. "We think that branching into other asset classes such as interest rates and equity will gain momentum," added Rana. Market participants noted that including an equity derivative component would not be cost free for investors and that such a feature also adds to the complexity of such deals. "Our sense is that clients feel Asian equity markets are generally hot and are willing to give up a little fixed income coupon to pick up equity upside," Rana responded.
Rival marketers have also been shopping around similar types of structures. "Incorporating equity exposure is a natural extension of this market," said a senior marketer at a European house. "It's a new trend taking place," said Gilbert Ong, associate director in international structured finance at Fitch Ratings in Hong Kong. Ong explained that adding such bonus coupons with exposures to other asset classes allows investors to differentiate their portfolios, which is particularly appealing to holders of multiple synthetic CDO deals.
Rana believes that in addition to Asia, the structure would be of interest to European investors as the continent is more hybrid-friendly than the U.S., where investors tend to separate fixed income and equity.
