After months of pitching complex structures to squeeze spreads from near all-time tights, structurers are reverting to simple structures focusing more on credit fundamentals. They have started seeing strong investor interest for simple twists on credit-linked notes. "There is a move away from complicated structures," said one structurer. "In the current environment, simple structures tend to win out."
Officials at Barclays Capital in New York last month printed a zero-coupon note with levered exposure to credit indices. In this trade, mark-to-market gains fluctuate inversely with market spreads and investors benefit from general market widening. Barclays officials said they have seen growing interest in the trade since the first one printed and other firms appear set to follow. "This is definitely being marketed," said one structurer at a U.S. bank. "With spreads so tight, it's easy to sell the idea of spreads widening." The investment-grade CDX index last week traded at 34 basis points.
Twists on credit-linked notes to express more nuanced spread-widening views are also proving popular with real money investors. "Everyone agrees spreads are tight," one official said. "But a lot of players don't see a catalyst for [market] spreads going wider." Inflation-linked notes with levered exposure to a basket of sector-specific credits--typically housing, auto and leveraged-buyout candidates--benefit from sector spreads widening. Step-up collateralized debt obligation notes linked to credit indices participate in any kind of spread widening without taking specific views. Barclays officials said these trades have not yet printed, but are in the pipeline and have been getting a lot of interest.
Officials said the simple credit-linked notes are part of a broader theme of investors focusing on credit fundamentals. "There is a reluctance to get more spreads from overly complicated structures," said one structurer. "There's a general move toward more selectivity about the credit people invest in. This is manifest in the selection of high-quality managers or taking specific views if investors are bearish on particular sectors or on the magnitude and widening of the market."
