Synthetic collateralized debt obligations with callable features are taking off in Asia as investors look toward longer-dated deals. The callability is making investors more comfortable in venturing out past the normal five year limits. "As clients are extending into seven and 10-year trades this is a way to reducing the full maturity risk," explained a credit head at a U.S. house in Hong Kong.
The shift is being driven by investors seeking additional returns farther along the curve than the traditional five-year single-tranche deals. "The bottom line for a lot of clients is they can pick up some extra yield," said a senior credit marketer at a bulge bracket bank.
Also, firms are better able to meet the appetite for callability because they are more confident in their modeling and hedging ability. Previously firms were structuring deals with hefty margins to compensate for rough models and the pricing dissuaded investors. Improved models have allowed firms to offer more attractive prices.
Among the deals is a Morgan Stanley nine-year Australian dollar-denominated synthetic CDO that is callable after three-years and is managed by Singapore's UOB Asset Management--totaling AUD75 million (USD57.4 million) in notes. Last week the deal, which is still being finalized, was assigned AAA and AA- for two classes of notes by Standard & Poor's. It references 125 global credits. Robert Breden, head of Asian investment grade trading and structuring at Morgan Stanley in Hong Kong, could not be reached by press time.
Such deals are also filtering into the Japanese market, where CDO issuance on domestic corporate default-swaps has been limited in recent years due to the persistence of tight spreads. "We're starting to see callable and forward-starting features in CDOs as investors need to hit yield targets," said Ichinori Kitahara, chief analyst structured finance ratings division at Ratings and Investment Information in Tokyo.