Synthetic CDO Issuance Down Sharply in Q1

Issuance of synthetic collateralized debt obligations totalled just $47 billion in the first quarter, about one tenth of that seen in the first quarter of 2007, according to CreditSights.

In its first half review of the sector, CreditSights notes that protection selling on index tranches has barely changed during the credit crisis from a notional perspective, “though the decline in delta relative to notional suggests that activity has been concentrated in the higher-rated tranches. ”

The Cash flow CDOs that are being launched increasingly appear to be designed to help banks clean up their balance sheets rather than attempts to arbitrage the agency ratings.

 

Until the commencement of the subprime crisis last year, it was frequently suggested that CDOs and other structured products would make a sustained spread widening nigh on impossible, CreditSights says. “Any widening, it was claimed, would rapidly be exploited by a wave of CDO issuance. The most important driver of this stabilisation was synthetic CDOs - specifically the idea that bespoke single-tranche deals could be placed with investors without the need to fill the entire capital structure and this protection selling would push spreads lower.”

Such arguments have been demolished by the events in the past 12 months with both synthetic and cash flow CDO issuance falling like a rock owing to a slew of economic, ratings, and funding concerns.

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