Following on the heels of the booming synthetic subprime mortgage market, CMBS are picking up steam within the synthetic sector. The collateral type is no longer just an afterthought in synthetic CDOs of asset-backed securities, as CMBS now constitutes larger portions, and at times the entirety, of synthetic CDO collateral in some deals, according to Richard Hrvatin, a senior analyst at Fitch Ratings.
"I think a lot of it has to do more with just a general acceptance of the synthetic technology," Hrvatin said. In other words, CMBS issuers are catching up to ABS issuers as previous barriers to liquidity in the synthetic marketplace for these securities are coming down. For example, the International Swaps and Derivatives Association's release of standardized synthetic ABS trading forms in June. The pay-as-you-go format was designed in particular for RMBS and CMBS trades.
Adding further liquidity, the synthetic subprime RMBS trading index - the ABSX - is expected this quarter, closely followed by a CMBS counterpart. The CMBS index is likely to include a single triple-A tranche, according to Hrvatin, contrasting from the five sub-index offerings in the ABSX. Similarly, the overall funded amount of synthetic CMBS CDOs has been small relative to the cash CMBS market, in large part because synthetics are typically referencing only the highest-rated tranches of the structure, according to Fitch, and protection buyers have chosen to transfer only a small amount of credit risk of the entire reference portfolio through a funded credit default swap. The rating agency released a report last week outlining the characteristics of synthetic CDOs compared to their cash counterparts to CMBS originators.
More investors are looking to CMBS as an RMBS alternative, as fears of an overblown housing sector and loose underwriting abound.
"If someone has a triple-A CMBS deal, it is very easy to know what you're getting into. That is why it works well with high-grade CMBS. It is some of the best liquidity in the asset-backed sector," Hrvatin added.
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