The Japanese collateralized debt obligation market has stalled this year on the back of chronically tight spreads. In contrast, the number of European deals has rocketed. Moody's Investors Service rated 154 CDOs in Europe during the first half of the year compared with 83 in the same period last year, even though the amount of risk being transferred halved (DW, 8/24).
"With credit-default swap spreads too tight, arrangers have had to try harder to make deals," said Ichinori Kitahara, chief analyst in the structured finance ratings group at Rating and Investment Information in Tokyo. So far this year R&I has rated 14 synthetic collateralized debt transactions for the Japanese market, in comparison to 16 last year. The deals have also been smaller.
The tightness of spreads has also caused CDO structuring houses to move down the credit curve in order to obtain adequate yield. "Arrangers have been selling lower-rated tranches such as BBB or lower, whereas last year they sold more AAA to A tranches," he noted. Another notable change in the makeup of the market is the lack of balance-sheet related synthetic CDOs, which was common last year. Instead, domestic banks have focused more on collateralized loan obligations, of which deals R&I rated have picked up from six to 10 this year.