Firms looking to set up credit derivative product companies are being slowed down by tough rating agency scrutiny. The agencies are asking more questions because firms are looking to employ complex business models. CDPCs have so far been mostly long-only protection sellers.
Some of the new crop have written more flexible strategies into their business models, including large mandates for shorting. This has caused headaches for both the rating agencies and the companies that expected to be up and running months ago.
Bank of Montreal-backed Pallium is looking to take a multi-strategy approach, taking both cash and derivatives credit-risk exposures. Others will focus on CDS on asset-backed securities in single-name and tranche formats, while still other vehicles are tipped to look exclusively to sell protection on synthetic CDOs.
Bear Stearns Asset Management, Deutsche Bank and Lehman Brothers are set to roll out CDPCs, but have been held back due to questions from rating agencies concerning capital models. Before granting a AAA rating, management is expected to create a capital model to determine that the capital adequacy of the company is sufficient to meet its rated liabilities. The capital model will simulate loss payments on the CDS portfolio, among other risks, and project the future cash flows of the company, another area that is difficult to model given the unknown growth in the reference market.
To date, Athilon Asset Acceptance and Primus Financial Products have launched, and Deerfield Financial Products received a preliminary AAA rating from Moody's Investor Service and Standard & Poor's over the summer. Officials at rating agencies could not be reached.
