Several factors have led to the significant increase in CDO issuance, including the relatively strong corporate performance and a large supply of loans, along with the increasing size of the investor base and the flexibility provided by synthetic structures, according to the Bond Market Association. The BMA made this statement last week in conjunction with the release of its quarterly global CDO issuance data.
Global CDO issuance through 3Q06, at $322 billion, has exceeded full year 2005 issuance by 20%. Issuance in 3Q06, at $117.8 billion, has also exceeded issuance in the third quarter of 2006 by 30%, the BMA reported.
"Clearly the CDO market is growing significantly, a tribute to the increased liquidity in the market and innovative structures" said Robbin Conner, vice president and assistant general counsel at the BMA, in an association release. Synthetic structures have allowed CDO arrangers to ramp up deals much faster, and with a wider and much more readily available array of collateral choices. In fact, CDO issuance has outpaced the rate at which some of the deal type's most popular underlying bonds - such as home equity loans - have come to market.
Cash flow and hybrid CDOs, with issuance of $90.1 billion, made up over 75% of issuance in the third quarter, which is the largest sector in terms of structure. Arbitrage CDOs, at $106.9 billion, were the largest deal type in terms of the motivation for the deal. The BMA's issuance data, which is broken down by both deal type and underlying collateral, is available on its Web site.
CLO issuance, in particular, remains unshaken. In fact, market experts say that after the anxiety over a market slowdown last spring that turned out to be merely a lull in the deal pipeline, issuance has now pushed ahead with a vengeance. At the end of the third quarter 2006, data provider Dealogic reported 131 U.S. issuances totaling $63.2 billion and almost doubling the 69 issuances for the first three quarters in 2005, a total of $37.1 billion.
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