Credit derivatives professionals expect new issues of synthetic collateralized debt obligations referenced to asset-backed securities to skyrocket this year with several firms, including BNP Paribas and Banc of America Securities planning their first deals in the U.S. Yuri Yoshizawa, v.p. and senior credit officer at Moody's Investors Service in New York, said it is getting enquiries from almost every CDO house as credit arbitrage opportunities in the investment-grade arena shrink. Last year Moody's rated three synthetic ABS deals compared with 45 cash deals, and based on enquiries seen so far this year Yoshizawa predicts that proportion will dramatically increase. One official estimated about a quarter of ABS CDOs this year will be synthetic. Robert Smith, v.p. at ACE Guaranty in New York, said it would consider participating in such deals, noting that as a new type of risk ABS offers diversification.
BNP plans to offer its first series of CDOs referencing U.S. asset backeds this year, which will be similar to a European series, dubbed Iliad, according to Sean Rice, director in credit structuring and marketing at BNP Paribas in New York. The most recent issue of Iliad, which closed last November, is referenced to a EUR2 billion (USD2.15 billion) portfolio of Aaa rated ABS securities and Aa2 or above rated bonds, according to a report by Moody's. Rice declined to detail the impending U.S. transaction ahead of its launch. BofA is also developing its first U.S. deal, likely to hit the market this year, said officials in New York, declining further comment.
Rice said while most of the synthetic deals referenced to ABS already brought to market in the U.S. have been balance sheet transactions, securitization houses are now looking to the asset class as a means to up their investment returns. By referencing Aaa rated risk, the product also appeals to more risk adverse investors, he said. Yoshizawa thinks the recent decline in corporate arbitrage opportunities is responsible for the increased interest in new CDO strategies.
Deutsche Bank issued a USD9 billion hybrid CDO of ABS in the U.S. in December called Rhombus and plans more. Stephen King, v.p. in the securitized products group in New York, said the deal was a hybrid of cash and synthetic techniques and it will continue to adapt such features to future deals, but declined to talk about specific transactions.
