The Toa Reinsurance Co., one of Japan's largest reinsurers with over JPY338 billion (USD2.7 billion) in assets, plans to purchase its first synthetic collateralized debt obligation. "We see strong profitability in investing in this product," said Tomonori Ono, assistant manager in the fixed income and loan team in Tokyo. It plans to invest in up to five synthetic structures next year.
It will likely invest in the AAA rated tranche, "the higher the rating, the better," said Ono. He added that the reinsurer will start off small, around USD10 million, but will increase its investments as it gains experience. It plans to make its first investment in six months. He declined to estimate the potential size of its portfolio.
The reinsurer is preparing to make its first investment in CDOs because they are becoming more accessible, as more firms are offering the products, and have recently become available solely referenced to Japanese credits. "We're now studying the risk," said Ono. It will make its decision based on price as well as diversity among industry groups. He continued that the firm has invested in credit-linked notes as well as sold protection via credit-default swaps. Ono noted that the firm is in discussions with several global firms as potential counterparties but declined to name them.
A head of credit derivatives in Tokyo, said "this is another sign in the market that synthetic CDOs are playing an increasingly important role in the Asian credit market." "CDOs are definitely the hot product in Japan this year," noted another credit structurer in Tokyo.
