Japanese clients are starting to shift back to domestic synthetic CDO deals because of concerns over ratings downgrades in global portfolios. "Japanese investors are starting to worry about the stability of global credits," said Yusuke Seki, senior v.p. in structured finance at Moody's Investors Service in Tokyo, noting downgrades have been filtering into the market. "Some investment banks in Tokyo are struggling to sell global synthetic CDOs," he added.
CDOs comprised of overseas names have been popular over the last few years and make up the majority of the market due to more attractive yields but that yield boost has been shrinking this year. As a result, domestic investors have been more willing to look at locally-generated deals referenced to more familiar names. "Year on year we've seen a good increase in interest," Seki continued.
Domestic CDOs are primarily static single-tranche deals rated AA to AAA, though callability is starting to emerge (DW, 8/21).