Along with a continued push in the CLO sector, the CPDO contagion is likely to reach the Asian market this year, as an increasing number of arrangers in the region are inquiring about structuring the deals, according to Moody's Investors Service. Ex-Japan Asia is expected to be a boom market for CDOs, as money continues to chase emerging market credits in search of yield, and the region's banks look to lift risk from their balance sheets.
Arbitrage synthetic CDOs and synthetic balance-sheet CLOs are likely to remain key areas of interest in the region this year. Standard Chartered Bank issued two deals last year with portfolios heavily concentrated in Asian credits, and Calyon in Hong Kong issued the similarly weighted Daphne Finance 5 plc, said Myrna Fajardo, vice president and senior credit officer at Moody's. Earlier this month, private equity firm Clearwater Capital Partners launched the first publicly rated CLO backed by Asia ex-Japan distressed debt. The offering was small, at only $146 million, but it signifies the growth many say is overdue in the Asian credit markets outside of Japan.
While there is still a yield premium to such deals, they are becoming increasingly correlated to corporates both in Europe and the U.S., sources said, especially with ex-Japan Asia markets developing a higher level of sophistication. A number of CDO market participants cite the extension of CDO technology to the Asia-Pacific Rim as having a huge growth potential this year, with a significant amount of debt waiting to be securitized.
Several balance sheet cash CLOs were issued domestically in Malaysia last year and China saw its second domestic CLO, along with two non-performing loan securitizations, according to Moody's. The rating agency predicted more deals from Chinese banks this year, trying to achieve capital relief and gain technological expertise. Because several Chinese banks are looking to issue cash CLOs in local currency, cash deals overall should be up this year in the region, Moody's added. The securitization of SME loans is also gaining steam, a trend that could mean more activity from countries such as Korea, Malaysia and India.
Overall, privately placed and publicly rated single-tranche synthetic CDOs referencing U.S. and European corporates dominated the Asian market last year, as it did in 2005. Among the trends seen last year out of ex-Japan Asia - where most deals were tailor-made to meet specific investor requirements - was a growing interest in managed transactions over static deals. New deals were formed with managers, and older, static deals were restructured to add a portfolio manager, Fajardo said.
The interest in CPDOs, or constant portfolio debt obligations, is stemming from the welcome reception given to the structures by Asian investors last year. The structures, first introduced to the market by ABN Amro, are attractive to investors, in particular because they come to the market with a triple-A rating and yield as much as 200 basis points. But the deals have come under scrutiny from a number of market participants, who question the longevity of the triple-A rating they are awarded as well as the ultimate outcome of the investors who buy into them.
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