There are near term opportunities for high-equity deposit managed CDOs and static pool synthetic CDOs, in light of potential dislocation stemming from current accounting issue uncertainty, according to Banc of America CDO research director Lang Gibson.
For example, if the Financial Accounting Standards Board is proposing that non-QSPEs have a minimum of 10% outside equity, a handful of instruments will likely see short term benefits.
Default swap based static synthetic deals will not be impacted by the proposed changes as the language currently stands, as long as 10% of the deal's notional amount is sold to third-party investors as notes and equity, in compliance with pre-existing accounting rules.
Also, static pools and deals structured with automatic trading triggers can qualify as QSPEs. Further, CDO managers outside of the U.S. GAAP umbrella would certainly see an uptick in selected business, and primary issuance flows before any FASB clarification will certainly come from such collateral managers. One thing is certain, however. If issuance does in fact dry up for certain CDO classes, secondary levels will richen up dramatically given the scarcity premium attributed to such deals.
Finally, Gibson observes, if the current proposal emerges in its present form, some CDO managers may be forced to liquidate a portion of the equity currently on their books. Bargain hunters in the secondary would certainly benefit from such a sell off.