Lehman Brothers is considering offering novel single tranche collateralized debt obligations that would include interest rate derivatives to offer investors a higher yield and different payout profiles to a traditional credit-only deal.Frank Iacono, senior v.p. in New York, said one of the drivers behind developing the products is the steep interest rate yield-curve. Tight credit spreads have also encouraged the firm to look at alternative strategies to pump up yields, he told delegates at an Information Management Network credit derivatives conference in New York last week.
Structures Lehman is evaluating include callable fixed-rate single tranche CDOs as well as inverse floating rate CDO tranches, Iacono said. Fixed-rate structures would be designed to attract investors preferring the security of a fixed coupon. Inverse floaters, meanwhile, would allow investors to take a view on rates remaining low while also receiving attractive returns in the low interest-rate environment. These techniques are already well established in the interest-rate market, he added.
Nik Khakee, director at Standard & Poor's in New York, said introducing the interest-rate component in a structured credit product is interesting because credit derivatives have traditionally been used to offer pure credit exposure. Khakee has not yet seen any proposals to rate any such deals.
Lehman's idea is part of a wider industry trend to chase yields because credit spreads have tightened so much over the last year, noted conference attendees. Other strategies gaining momentum include marketing options on single tranche deals, constant maturity default swaps and equity default swaps.
