Thursday, November 5, 2009

Citigroup boost for CDOs

Posted in the Financial Times by Anousha Sakoui:

One of the first emerging market collateralised debt obligations since the credit crunch began is being prepared by bankers at Citigroup in a further sign of thawing in debt markets.

The plans for the new CDO, giving investors exposure to emerging market credit and foreign exchange risk, is all the more notable because these highly structured products were at the heart of the financial crisis and had been expected by many analysts to be consigned to the past.

Bankers have kick-started plans to sell $150m of new notes, with Denmark’s Sydbank acting as a portfolio manager, which could be launched next year, subject to a credit rating process.

“The market for CDOs was dead but now investor interest is slowly being revived, provided they are shown the right structure,” says Philip Blackwood, emerging market fixed-income managing director at Sydbank. “Demand for these types of emerging market currency products is definitely there.”

There have only been three CDO deals in Europe this year compared to 37 last year. However, many of the CDOs created since the credit crunch began are believed to have been private bespoke trades, unlike this proposed transaction, which will be targeted at traditional CDO investors. The deal will also be one of the first CDOs linked to emerging markets and one of the first to use leverage since the credit crunch took hold.

The transaction is all the more significant for being at the more innovative end of the structured products space. In 2007, Citi rolled out the first “Evolution” CDO – a basket of loan notes linked to different emerging market currencies. It was the first CDO to offer investors the opportunity to bet on both emerging market credit risk and foreign exchange risk.

CDOs became increasingly complex towards the height of the credit boom and investors were left nursing losses when the credit crisis hit, as many of these products unwound or suffered a series of downgrades. Unlike many CDO investors, all the Evolution noteholders were repaid in full.

“This shows that if CDOs are structured properly, with good collateral in a managed portfolio, they can perform well even through one of the worst shocks in the history of the financial system,” says Kristian Mengel, EM structurer at Citi.

However, while the potential deal is seen as a positive market development in the drive for more securitisation – adding to new issues of bonds backed by mortgages in the UK for companies such as Tesco and Lloyds Banking Group – analysts are still reticent to call it a sign of the reopening of primary CDO markets.

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