New asset classes are continuing to emerge from the collateralized debt obligation market. Vehicles referenced to exposure on municipal bonds and a mix of Tier-1 capital and insurance-related assets are cropping up for the first time and are expected to contribute to the overall CDO market's growth this year, according to market professionals.
Gary Witt, managing director in the CDO group at Moody's Investor Service, pointed to UBS' recent Alpine III sale as an example of the balance sheet transactions large dealers may pursue in the coming months. The deal, which derives its cash flows from synthetic exposure to munis, could be a template for future sales because dealers have significant credit exposure to municipalities from entering into interest-rate swaps with them. "They can buy protection through synthetic municipal CDOs and I expect to see more of this," he said at a recent Bond Market Association CDO conference in New York.
And in an unrelated development, other CDO professionals say trust preferred deals, which have traditionally pooled such securities from either banks or insurance companies, are beginning to feature a mix of underlying collateral. "Lately we are seeing a number of bank deals with 20% insurance buckets, they are kind of a hybrid trust preferred," noted one rating agency analyst. John Schiavetta, managing director in Fitch Ratings' credit products group, said at the conference the development is due to a scarcity of available collateral in the growing market for trust preferred CDOs.