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Vanilla Structures To Make Comeback

05 May 2005

Dealers and investors may return to vanilla credit structures if credit-default swaps continue to widen.

Dealers and investors may return to vanilla credit structures if credit-default swaps continue to widen. Over the last year, tightening spreads have led dealers to pitch exotic structures, such as collateralized debt obligations squared, in order to boost returns. But spread widening, prompted by fears of a General Motors downgrade, will boost yields on plain vanilla CDOs.

If spreads continue to widen, investor interest will turn back to simple structures, according to John Lovisolo, a managing director and head of structured credit product sales at Barclays Capital in New York. Michael Gerity, a senior director with Fitch Ratings in New York, agreed, adding he has had calls from counterparties looking to revive simple deals they put on hold when spreads pulled in. In a widening spread environment, those deals start to make sense again, he said. Yet structurers will seek new ways to enhance yield if spreads narrow back in, Lovisolo said.

05 May 2005