The European market has enjoyed a rather robust year of CDOs thus far, and can expect a similar amount of issuance through the rest of the year, a report issued by Moody's Investors Service said.
High-yield CDOs have not been a great part of the market as synthetics, particularly balance sheet CDOs, have made up nearly 92% of the issuance in the first half of the year. "Synthetics have exhibited such strength during the first half of the year that it is difficult to imagine that their dominance will not continue into the rest of the year," the report said. "Indeed, the existing pipeline is full of synthetic CDOs, thus strengthening these expectations."
While resecuritizations have been and will continue to be the strongest CDO-type in the region, Moody's said that more exotic deals have begun to add flavor to the market this year, although the numbers and volumes of these intriguing deals are relatively small. Diversified Strategies CFO, which was unique in that it contained a portfolio of hedge funds. Additionally, Dresdner Kleinwort Wasserstein is buying protection through a credit default swap on a portfolio of $2.1 billion in the Petra Capital Limited deal - an extremely diverse transaction as a result of the 420 investment grade companies in its portfolio.
The newfound attention investors have been giving to high-yield-backed CDOs is something rather surprising to the European CDO market, although market sources have noted that it may suggest that the capital markets are stabilizing (see ASR 5/6/02 p.17). "The continued appearance of new high-yield transactions in the first half of 2002 has been surprising to some," the report said. "The question is whether there is a sufficiently strong investor appetite for more such deals. At this stage, this is difficult to gauge, although it would not be unreasonable to assume a decline in new high-yield transactions for the second half of the year."