Deerfield Capital Management is structuring a USD1 billion private synthetic collateralized debt obligation, which will be one of the first synthetic CDOs not to include restructuring as a credit event. One CDO investor expects CDOs without the restructuring trigger to move into the mainstream in the U.S. over the coming year.
Paula Horn, managing director of investment grade corporates in Chicago, said clients, such as insurance companies, are driving demand for CDOs without the restructuring trigger. The private transaction means the deal will be structured without a rating. However, Horn said that because investors are increasingly skittish they are looking at market prices rather than ratings as being the main, if not sole, signal of corporate default probability.
Several firms are pitching these deals as a response to insurance companies' worries about the restructuring clause, but none have yet hit the market, noted the investor. Once one or two deals have been successfully completed the pace is expected to pick up. If U.S. regulators do not insist on restructuring protection for regulatory capital relief the market is likely to move even quicker, said a CDO banker.
Aside from the absence of the restructuring credit trigger, the managed CDO will in other respects mirror a traditional deal, said Horn. The reference portfolio will consist of around 120 credits diversified across industries, but will consist of mainly U.S. companies because liquidity is highest for default swaps without the restructuring trigger in that region. Horn said the coupon would be in line with the current pricing environment, but declined further comment.
