Turf wars at firms with newly merged structuring desks are impeding the development of collateralized debt obligations referenced to equity-default swaps. Market players say bankers are mired in disputes over whether the equity or credit trading book gets the profit for the hybrid deals, and are not pitching the trades. Dealers had blamed poor ratings for holding back these structures (DW, 2/15/04), but even though Credit Suisse First Boston is now marketing a pure EDS CDO with an AAA-rated tranche, dealers say the internal obstacles to structuring these products mean most houses are unlikely to follow suit.
Several firms on the street have merged their credit and equity groups with the aim of structuring more deals like EDS CDOs (DW, 2/28). But officials at firms that have structured these CDOs said interest in the products has fizzled because equity and credit products are still traded by different divisions within these houses, despite merger claims.
One structurer who had worked at a firm with combined credit and equity desks putting together these deals agreed that there is a tug-of-war going on at firms. Not only is there debate over which group books the profit, but the co-heads of the merged desks also battle over who leads the deal, he added.
An official at one of the firms said he expects at least three years to pass before firms have fully merged their credit and equity groups and investors turn to CDS traders for an EDS price. Tolga Uzuner, a director in fixed income at CSFB in London, said the market will develop if the banks can pull together. "If there is ever true integration, the EDS product will become just as liquid as the credit-default swap product and the buy-side will have just as much interest," he said.
Equity-default swaps boil down to deep out-of-the-money put options with a strike at 70% or 80% of the stock price. Although they are an equity product, equity dealers are more familiar with managing at-the-money instruments. Loic Fery, managing director and head of global credit structuring with Calyon in London, noted credit traders may be better suited to handle EDS, because the out-of-the-money strike is similar to the default risk credit desks are used to hedging.
