Collateralized debt obligation houses in the U.S. and Europe are turning their attention to single-tranche deals comprised of baskets of single-name credit derivatives referencing asset-backed securities. Morgan Stanley, Lehman Brothers and Wachovia Securities are among the firms to have already issued such deals and many others are getting ready to follow suit.
Jill Zelter, managing director at Fitch Ratings in New York, said it is fielding enquiries to rate single name swaps and credit-linked notes referencing ABS, although added that the interest has thus far been preliminary. The swaps would reference various types of ABS, such as credit cards, home equity loans or residential mortgages, she said.
Swaps on ABS offer huge potential for growth and one player noted that the market could eventually outsize swaps referencing corporate names. It is hoped that these structured deals will enhance liquidity in the underlying derivatives, officials noted. Lack of liquidity in the underlying names is one reason the tranched market has yet to take off, the official said, adding it's like the "chicken or egg situation."
Arturo Cifuentes, head of CDO research at Wachovia in New York, noted that another factor that may have slowed the tranched deals is the complexity of estimating their correlation. The fact that each ABS is individual and there is not a credit curve could also hinder the chances of it becoming as liquid as the corporate market, according to a European CDO manager.
Synthetic CDOs referencing ABS have previously been structured by writing one credit derivative on the whole pool.
