Synthetic collateralized debt obligations have borrowed a lot of technology from their cash equivalents, but there is still more to learn, according to conference attendees.
Pat Gallaway, manager at INVESCO, said synthetic deals have started using the Weighted Average Rating Factor (WARF) test and the Interest Rates Coverage test, which are historically cash market risk indicators. In addition, Robert Flowers, executive v.p. at PPM America, said over-collateralization (OC) triggers, which allow for the reinvestment of gains back into the collateral, instead of being diverted to the equity tranches, are also increasingly being accepted in synthetic deals.
There are still more techniques the synthetic structurers could adopt, argued Russell Hurst, managing director at Banc One Capital Markets, such as the resecuritization and repackaging of ABS securities.
