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Derivatives

SME Loan-Linked CDOs Expected To Take Flight In Asia

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Synthetic collateralized debt obligations referenced to loans to small and medium-size enterprises are likely to take off in Asia within the next year.

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Synthetic collateralized debt obligations referenced to loans to small and medium-size enterprises are likely to take off in Asia within the next year. David Crammond, Asia-Pacific head of structured credit sales at ABN AMRO in Singapore, expects the instruments to gain traction within the next 12 months as an alternative to the traditional synthetic investment grade single-tranche CDOs that have dominated the market recently. "About 75% of names in single A rated CDOs are the same out here," said Crammond, noting that investors are looking for a greater range of credits for their portfolios. Crammond added that it plans to structure a CDO referenced to SME loans, but declined to elaborate on the firm's plans.

Crammond continued that a main hurdle for such a product was that most SME loans are unrated. He noted, however, that a majority of major banks have been mapping their own internal rating systems in line with the rating agencies, therefore allowing for non-rated loans to receive a designated rating, given the soundness of the credit.

"This could be the Holy Grail for banks--they would love to securitize their SME loans," said Ben McCarthy, senior director and head of Asia-Pacific structured finance at Fitch Ratings in Hong Kong. But, he warned, "A big issue for us is if the performance data is there," explaining that historic data, internal rating scales, and models regarding future performance will all need to be addressed. Structurers expect underlying portfolios from the more mature financial markets in Asia, likely starting with Hong Kong, Singapore and Australia to be used first. CDO portfolio size could range from USD500 million to USD1 billion in the region.

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