Issuance of emerging markets CDOs remains steady even in the face of economic stress. Market analysts expect that the asset class will maintain its position, perhaps garnering more interest, as managers and investor's grow savvier on the CDO structure.
"These deals have been around for a long time, they are small but stable," said Henry Albulescu an analyst at Standard & Poor's. "It's hard to see who the investors are but more and more people are interested in the asset class."
Investors increased understanding of CDOs has helped the emerging market deals maintain appeal. As rating agencies work toward facilitating ratings criteria, investors that have in the past shunned emerging market debt may be more inclined to participate, especially as they look for new ways to diversifying portfolio holdings.
"It helps managers diversify risks and investors are attracted to avoiding short-term fluctuations of the markets," said Albulescu. "Even after the 1998 Russian crisis, 11 transaction came to market the following year."
According to Albulescu, the market has demonstrated a new tolerance for these deals evidenced by increased inquiries and proposals for new structures. S&P updated its own multijuridictional criteria that assess the correlation of risks in different regions of the world. The criteria was initially established to represent six regions, but the model now includes a more comprehensive view of correlating economies, covering 16 regions.
The model measures the concentration of collateral pools in any region. Once concentration increases beyond certain limits, ratings are adjusted to reflect the correlation among the credits. If credits in any one region exceed 15% of the pool, the notes are downgraded by one notch. For concentrations over 25%, the S&P model adjusts the rating by two notches and it's adjusted by three notches when concentrations exceed 30%.
On the European investor front, analysts say it's still a new asset class but, based of inquiries and the amount of deals in the pipeline, sources expect the ABS stage will host a number of transactions before year-end. "It's a new process and we are looking at a couple of CDOs to date," confirmed an analyst at S&P.