U.S. credit structurers are pitching forward-starting synthetic collateralized debt obligations to pick up spreads in a tight credit spread environment.
The credit curve of a forward-starting five-year structure is steeper than that of a current five-year trade of the same rating because it forecasts an increase in default rates and so pays a higher spread. "It's hard to generalize about the level of pickup," said Oliver Dunsche, director and head of credit derivatives structuring at Barclays Capital in New York. But structurers said a five-year CDO starting two years out can pick up about 15 to 20 basis points spread relative to a similar deal starting immediately, depending on the portfolio.
"They're interesting trades," said one U.S. structurer. "They allow investors to take a view on the timing of defaults and the pricing and risk profile can be attractive for certain managers or investors who want to implement that view." The structures have already seen interest in Europe, where several fund managers have expressed interest, including Solent Capital Partners (DW, 11/11) and Fisher Francis Trees & Watts (DW, 12/9).