ABN AMRO Asset Management is looking into purchasing and selling credit derivatives next year to tailor its exposure to specific credits for its EUR850 million (USD749 million) European corporate bond fund. An official in Amsterdam said the fund, which holds about 150 investment-grade credits, has been in discussions with Merrill Lynch to determine whether it makes sense to use single-name default swaps. ABN uses a Merrill index for the fund, which is why it is talking to the dealer and not its in-house bank. However, it would be open to talking to other potential counterparties as well, according to the official. The asset management company would use default swaps to gain or reduce exposure to specific credits at specific maturities, which is currently difficult in what he called the relatively sparse European cash bond market.
"We don't want to be the pioneers, but it is something we would like to see if we can start using [credit derivatives]," the official said. ABN AMRO Asset Management is interested in default swaps because the products are becoming increasingly more refined and offer investors more flexibility than the cash market. Still, he acknowledged, it is "a bit of a chicken or the egg" scenario, given that the basis risk between default swaps and the cash market may decrease as liquidity in the synthetic market improves. He declined to speculate how much of the fund could be invested in synthetic assets.
For now, however, the fund manager deems the default swap market too illiquid and transaction costs are too steep. It plans to hold off using synthetics until the new year, though the official estimated the fund could decide to use credit derivatives as early as the next couple months. "In principal we are very much in favor of using these instruments, because we try to have very active policies, but we have been doing an initial probing of the market and decided it is not liquid enough yet," he said. Further queries were referred to Frank Achterstraat, Amsterdam-based portfolio manager for the fund, who declined comment.
