What a difference a year makes, particularly regarding structured finance. After cycling through a record wave of downgrades in 2002, the CDO market has finally begun to show some ratings stability.

On the new issue side, however, it looks like supply will fall short of 2002, despite an overall increase in securitization volume by more than 20%. While firm numbers aren't expected until early January, sources at Moody's Investors Service stated CDO volume was indeed down for the year. At mid-December, it appears the number of Moody's-rated deals is down 10% to 15% from the 160 U.S. CDOs Moody's rated in 2002, and volume is down about 5% overall. In 2002, Moody's recorded $65.1 billion in dollar volume for the CDO market, a number expected to be far lower in 2003.

Synthetic issuance is expected to show the greatest level of decrease, and much like the case in 2002, 2003 saw almost no high yield bond CDOs. However, Moody's sources expect to find an increase in high yield CLOs and a large spike in structured-finance CDOs issuance this year compared to last year.

Early figures from Thomson Financial also shows a drop in volume, with 131 U.S. CDOs tracked as of mid-December compared to 171 U.S. CDOs for all of 2002.

As of Dec. 10, Thomson had recorded $49.68 billion in U.S. CDO volume compared with $56.33 billion posted for all of 2002. Structured-finance CDOs posted the largest market share, at 56.2%, and had pulled in $27.92 billion as of that date. Corporate loan-backed vehicles had dropped sharply, hitting just $8.06 billion as of Dec. 10 compared with $19.9 billion for all of 2002. Corporate bond- and note-backed entities also dropped sharply, recording $5.80 billion compared with $18.18 billion for all of 2002.

"The market is reacting... to moving through a particularly tough credit cycle," said one rating agency source. Predictions for 2004 mirror a cautiously optimistic approach.

Fitch Ratings just released its global outlook for 2004, and the good news for U.S. CDOs is most collateral classes are tagged as "stable" with the exceptions being the high yield bond arena in both the U.S. and Europe; both sectors were listed as "negative to stable" by Fitch.

"The general improvement of the U.S. investment-grade corporate credit environment [is attributed] to an increase in cash flows and strengthening of corporate balance sheets," the Fitch report notes.

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