Synthetic collateralized debt obligation managers, including AXA Investment Managers and Prudential M&G, are looking at launching 10-year deals when the liquidity and economics in the long-end of the credit derivatives market improves. Laurent Gueunier, head of investment grade CDOs at AXA in Paris, said there is a demand for such deals from pension funds and even banks and corporates with long-term liabilities.
Gueunier thinks, however, it is too early to launch a deal because of the lack of liquidity in 10-year credit-default swaps. The credit swap curve is kept artificially low at the 10-year end because of the dominance of sellers of protection over buyers. The good news, noted Gueunier, is, "The 10-year CDS liquidity is improving." Anne Wrobel, director at Financial Security Assurance in London, said the flat swap curve means investors are not compensated enough for taking the extra risk, especially bearing in mind that a 10-year deal could easily go through two credit cycles.
Another problem with longer duration synthetic CDOs, according to Wrobel, is the increased mark-to-market volatility. Although the FSA has closed a 10-year static synthetic investment-grade CDO, Wrobel doubts it will do many more because of the potential mark-to-market volatility of these instruments.
Alexander Batchvarov, head of structured finance research at Merrill Lynch in London, thinks the market for long-dated CDOs will increase, but he predicts this growth will be patchy. "There is a pocket of investors for 10 or even 15-year [CDOs], but it depends on market conditions," he added.
