After record breaking growth last year, the collateralized debt obligation market is expected to stabilize a bit in 2007, according to a Moody's Investors Service report issued last week. Last year CDO volume grew by 90%, but it may only grow by about 15-20% this year. Growth is expected from collateralized loan obligations, hybrid CDOs and structured finance resecuritizations.
Moody's rated 630 transactions for 2006, of which, including those executed synthetically and in cash form, over 70% were CLOs, resecuritized CDOs and hybrid CDOs. The ratings agency pointed to hybrid CDOs as the big story saying it rated just nine of these products in 2005, and 75 in 2006, 37 of those in the fourth quarter.
The forward calendar suggests there may be signs of an inflection point, according to the report, 2006 U.S. CDO Review & Outlook 2007: Growth, Redefined. The agency cites the number of CLOs it rates as an example. The number per quarter it has rated appears to have stabilized over the last three quarters. However, it says rated product volume varies, with an $18 billion increase between the third and fourth quarter for hybrid CDOs, which seems unrelated to the $1.7 billion decrease in volume of rated synthetics excluding resecuritizations over the same time period.
The other point it takes note of is credit quality. The growth of these structures has taken place during a strong credit cycle and low default rates. It says current macroeconomic indicators have been "fuzzy," offering limited guidance as to demand or supply factors for the year and mixed signals regarding consumer confidence. Also, inflation predictions keep bouncing around. Moody's said that given the number of conflicting indictors and the high threshold for continuing a constant rate of growth, projections for this year are difficult.