NEW YORK - Packed with nearly 700 registrants the day before the presidential election, the process of politics was replicated at Standard & Poor's Annual Global CDO Conference held here last week. An audience participation panel provided an indication of what the CDO market could expect in 2005 and created a clearer picture of participants flocking to this growing market space.
When it came to expanding their market presence over the next 12 months, the majority of the audience said they plan to do so through exposure in mulit-sector CDOs, otherwise known as ABS CDOs. But synthetics provoked the most attention, with 38% of the audience responding they were present specifically to attend tracks related to the synthetic space; 30% of the audience was there to focus on the cash-flow CDO tracks.
Focusing on cash flow deals, the audience felt the most sensitive features of these deals were liability structure and waterfall mechanism over asset quality. Respondents said they would also like to see rating agency criteria expanded in the areas of ABS asset class treatment and hedge criteria.
As to why synthetic CDOs are attracting so much attention this year, the audience poll found they believed the beneficial areas of these CDOs are the ability to customize, as well as the yield pick up. The audience also found the long/short structure the most attractive recent innovation in the CDO market.
"Synthetic volume is going through the roof. Credit spread tightening has not stifled but spurred new structures," said Richard Gugliada, managing director at S&P. The entire market is having a strong year, he noted. But before investors go plowing all their money into synthetics, Gugliada noted "we are not seeing recoveries that we are seeing on the cash-flow side. This could be due to how synthetics are traded," he said.
Year-to-date S&P rated 290 U.S. CDO transactions compared to 181 for all of 2003. The same trend has occurred abroad. To date, S&P rated 418 European market CDOs, up from 225 for all of last year and has rated 67 CDOs in the Asian market, up from 43 for all of 2003. And according to S&P, about two-thirds of all institutional loan collateral is finding its way into CDO pools.
Corporates are still performing better than the structured finance arena. Structured finance CDOs are expected to see some stress in the CDO of ABS sector. Because of structural mitigants in structured finance, there is a lag time, said Gugliada, noting many of these deals are on credit watch negative.
In all, the conference produced a vision for 2005: investor appetite, liability spread tightening, an improved economy and improvement in credit aspects will drive the market next year.
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