Credit houses are being flooded with orders for substituting default-swap positions in synthetic CDO portfolios in the wake of spread widening. Cedric Podevin, managing director and Asia-Pacific head of credit derivatives structuring at BNP Paribas in Hong Kong, explained, "The recent widening and increase in spread volatility has created opportunities for substitution on bespoke CDO tranches."
Market officials said credit spreads have been widening globally following the downgrade of General Motors Corp. (DW, 5/9). Investors are either looking to protect their portfolios from the potential of downgrades or to pick up extra yield on similarly-rated credits at the current levels via substitution. "We have traded numerous substitutions," said Podevin, explaining negative rating migration on a portfolio means investors tend to substitute for names with equivalent or better rating in order to maintain or improve the rating of the tranche.
