A host of asset managers are either considering or preparing to launch CBOs backed by emerging market debt in order to take advantage of depressed asset prices in this volatile sector.
Massachusetts Mutual Life Insurance, Offit Bank, Standard Asset Management and Harborview Capital Management are all preparing to ramp up portfolios by EM sovereign and corporate debt, sources said. No lead managers were mentioned, which may mean some mandates could still be in the running. Furthermore, it's understood that the various monolines have been receiving preliminary inquiries with regards to the deals.
Uncertainty regarding Argentina has pushed spreads to new highs across the EM geographic spectrum that do not accurately reflect credit risk, and fund managers are eager to capitalize on that arbitrage opportunity. Demand for the EM CBOs is said to exist as a result of the abysmal performance of high-yield CBOs this year.
However, the deals may get held up by the specter of the emerging market crises of 1997/1998, a New York-based CBO investor said. Originators of junk bond CBOs in the late 1990s assumed a default rate of around 2% with a 50% recovery rate in the case of a credit event, but are being faced with default rates of 10%-20% with 0%-20% recovery.
EM sovereign debt performed impeccably in comparison, but portfolio managers looking to sell the bonds through CBOs are running into difficulty. Credit Committees remember the blood bath after Asia and Russia and are uncomfortable taking on more EM exposure ahead of an Argentine default.