Given the building momentum behind the credit derivative counterparty and structured investment vehicle craze, one would think it were only a matter of time until the two structures merged, right? According to several sources close to the matter, at least five of the sector's participants are looking into creating companies, or branching out from current operations, to incorporate functions of both CDPCs and SIVs.
"You have the SIVs, which have been around since 1989, 1990, and now you have the new CDPCs, on the other extreme - but there is an area of overlap," one source familiar with the business plans said.
The move is seen as diversifying primary revenue sources from credit derivatives, in the case of CDPCs, or collateral investment, in terms of SIVs. Of course, for those planning the structures, the intent is not just to diversify revenue, but to increase it by investing in higher yielding collateral - most likely in the single-A arena.
"I think one of the things we always find in speaking with prospects and our client bases - there are a lot of converging techniques and technologies that are happening," Douglas Long, executive vice president of business strategy at Principia, said. "The lines are blurring. So you've got SIVs that are now going long and short credit. You've got CDOs using SIV techniques, and you've got CDPCs very much involved on the structured credit side."
The number of CDPCs queuing up for triple-A ratings at the rating agencies has grown along with the size and scope of the credit derivatives market. At last count, there were more than 20 CDPC proposals before Moody's Investors Service, according to its analysts.
The model behind most CDPCs is to earn a premium for writing protection on relatively risk-free collateral. Because the companies carry a triple-A rating, they generally do not need to post collateral. But in order for CDPCs to remain competitive, they need to balance their own capital requirements and operating costs with that premium - a fact leading many to presume the majority of CDPCs going forward will stem from sizable corporate parents.
Channel Capital Advisors, a London-based CDPC sponsored by a consortium of banks, is in the process of obtaining a rating, and Cournot Financial Products, a subsidiary of Morgan Stanley, obtained a triple-A rating from Fitch Ratings last week. CDPCs primarily act as highly rated counterparties in credit derivative trades. The rating process is rigorous, and, the set-up is expensive, leading many to be skeptical of exactly how many CDPCs will actually begin operating.
So far, all of the rated CDPCs in the market write protection almost entirely for senior corporate collateral, whether via single-name CDS, single-tranche CDOs or triple-A CDO tranches, although several have the intent of branching toward asset-backed securities. SIVs, which are likened to market value CDOs, generally buy cash securities and issue commercial paper, MTNs or subordinate capital notes.
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