Leveraged loans are expected to become the next collateral type in line for growth within the synthetic arena. Despite the increasingly wide use of synthetics within ABS CDO structures, pure synthetic deals are not expected to overtake cash and hybrid deals as the most commonly issued structure, according to a Fitch Ratings report released last week.
Capital flows within the ABS CDS market increased dramatically following the International Swaps and Derivatives Association's release of a standard template to use when executing synthetic transactions last year. The start-up of indices referencing baskets of home equity ABS, and subsequently commercial mortgages, is expected to prompt even more development within the sector - so much so that some market participants have estimated that synthetic CDO issuance will overtake the cash market. Quick ramp-up times and a wider selection of collateral are among a number of reasons why CDO managers have turned to the synthetic market to either create hybrid cash and synthetic CDO structures or ramp fully synthetic deals. However, synthetics are not likely to become the majority of issuance within the entire ABS CDO market, Fitch analysts wrote last week.