It's as if the holidays have come early for CDOs, with market constituents reporting outstanding levels of issuance both domestically and globally - and the year still has over a month to go.
Merrill Lynch data shows that U.S. cash CDOs are 90% ahead of last year's pace, recording a volume of $70.4 billion year-to-date. Merrill's Director Lang Gibson, in his most recent research report, noted that high-yield CLOs were the largest single subsector, growing 103% in 2004 to $23.7 billion in new issuance to date. Senior structured finance CBOs have grown 341% to $19.8 billion, said Gibson's Nov. 10 report, but by Merrill's count U.S. funded synthetic volume is down 54% for the year, presumably due to an absence of U.S. balance sheet deals and historically tight spreads this year.
The latest round of data from ratings agencies is in sync with the brokerage's CDO group.
Moody's Investors Service rated 59 U.S. CDOs during 3Q04, a 44% rise from 44 deals rated in 3Q 2003. In all, Moody's rated $23 billion of U.S. CDOs last quarter, 51% higher than the $15.3 billion seen in 3Q03. The rating agency thinks it is likely that annual growth for 2004 will exceed 25%, measured by number of transactions, and 30% by transaction volume. Furthermore, arbitrage remained the primary motivation for deals last quarter, as 52 out of 59 CDO transactions rated by Moody's were issued for arbitrage purposes.
Yet just two TruPS-backed CDOs were seen last quarter, compared to an average of five TruPS-backed CDOs per quarter since the start of 2003.
"While we expect to continue seeing TruPS CDOs over the next few years, this sector is unlikely to contribute to market growth," said Jeremy Gluck, a senior vice president with Moody's.
Globally, the trend is also up for CDO new issuance. Standard & Poor's rated 418 European CDOs to date, compared to 225 in all of 2003. In the U.S., the rating agency rated 290 CDOs year-to-date, compared to 181 for all of last year.
S&P Managing Director Richard Gugliada stated that investors, comforted by improving credit prospects, fewer downgrades and more upgrades, have returned to the market. Liability spreads have also tightened. "These factors all demonstrate strong confidence in the global economy," Gugliada said. "Increasing global issuance and strengthening transaction performance are trends we expect to continue through 2005; there will be far more upgrades than downgrades."
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