Seoul-based Dongbu Insurance Co., with over KRW5.1 trillion (USD4.5 billion) in assets, is considering investing in synthetic collateralized debt obligations for the first time. "We have focused on a lot of structured products and at this stage we believe that credit derivatives are capable of offering high yield with low risk," said Joon Hwan Kee, manager in the international investment department.
Joon said the firm has started discussions with foreign houses about purchasing various tranches of CDOs, ranging from a portion of the equity to a single A tranche. Any CDO investments will likely reference a portfolio of U.S. and European names, though Joon said it's too early to elaborate on the size or makeup of such a deal.
The insurer could take the plunge within a few months, but before it executes it needs clearance from the Bank of Korea, because of the level of credit risk involved. The regulator is unlikely to refuse the insurer permission to invest, but the process can still take several weeks.
"With low domestic returns and interest rates going lower, diversification from the Korean market is key," said a credit head at a bulge bracket house, enthusing that Dongbu is a good example of the growing potential for CDO products in Korea this year. Other prominent insurance companies such as LG Insurance (DW, 4/4) have also been eyeing credit derivatives.
Joon declined to name the international houses the insurance company is speaking to, but noted structure and pricing will be the primary factors in dealing with firms. Some 10-15% of Dongbu's USD3 billion fixed income portfolio contains structured products, including equity and credit-linked notes on domestic names.
