Synthetic collateralized debt obligations are getting hotter and more creative, but investor knowledge needs to catch up with the market, said Ira Wagner, senior managing director at Bear Stearns and chairman of the Bond Market Association's CDO committee. Speaking ahead of the BMA's CDO Investors Conference in New York this Thursday, Wagner said synthetics will be a key focal point at the event. "I think there are still a lot of people that need to be educated on synthetics," he said. "There is an opportunity there and the key is education for cash buyers on how those work that is why there is a good amount of time devoted to this topic at the BMA CDO conference." The conference will feature presentations focusing on synthetic basics for cash investors, synthetic corporate CDOs and synthetic ABS CDOs.
Wagner noted, however, that while synthetics have become the hot topic in the market, there has been innovation in other products and structures. "CDOs of REIT securities is a new development," he said. "There are more and more different types of transactions in the corporate loan space middle market deals and deals with mezzanine corporate debt."
Apart from the conference, the BMA is putting out a revised primer that will include synthetics. The BMA recently completed a trustee standardization pamphlet that also will offer recommendations of standardizing data and should be available this week. Another area the BMA has been focused on is its CDO library, which launched last year to mixed reviews (BW, 10/11). It currently has 140 deals in it and Wagner is a supporter. "I think it adds transparency; it allows more dealers to make markets in CDOs that they didn't structure," he explained. "The indenture, swap agreements and trustee reports are posted so you can get the most important transaction information."
Wagner also thought the library has had a positive effect on secondary markets, citing increased liquidity and an increased interest in looking for opportunity in the secondary. "Prices have certainly been bid up and the performance has been very good," he said. "There are active dealers who will buy different tranches of CDOs as principal, whether or not they are the original underwriter. Investors can get a firm bid on any part of the capital structure at this point from multiple dealers."
