Asian CDOs to maintain growth

The synthetic collateralised debt obligation (CDO) market in Asia will remain strong this year, say analysts. But further innovations are likely to emerge as participants gain maturity, taking CDO technology to the next level.

Single-tranche transactions accounted for most of the deals in 2003, and are likely to remain popular this year. They are “easier to structure and arrange and are tailor-made to the needs of the investor”, explains Jerome Cheng, a Hong Kong-based senior analyst at ratings agency Moody’s Investors Service.

At Standard & Poor’s, director Diane Lam says the number of deals it analysed in Asia last year was double that of 2002. Synthetic CDOs are “still a very good sector for Asia”, she says, adding that “the types of enquiries are getting more sophisticated”.

While most transactions structured in Asia so far have been referenced to corporate names, upcoming deals will probably include different types of assets. Moody’s Cheng says the most notable hybrid deal of 2003 had an underlying portfolio comprising credit default swaps on corporate names and cash securities, including asset-backed securities. The Singapore branch of German lender Bayerische Hypo- und Vereinsbank (HVB) structured the deal, called Artemus, and issued four classes of rated notes worth $180 million, with HVB Asset Management Asia acting as collateral manager.

This year, Cheng reckons that “instead of cash bonds, transactions may have credit default swaps over ABS bonds and CDO notes as collateral as well”.

Meanwhile, analysts say the spotlight will move from Hong Kong and Singapore to China and Taiwan. There is interest from several Chinese entities following the launch of three deals in 2003 – two with Agricultural Bank of China acting as portfolio manager, and one for China Insurance International Holdings Company. In Taiwan, there’s been interest from potential collateral managers to structure synthetic CDOs. MT