The sales of synthetic Collateralized Debt Obligations (CDO) have skyrocketed in 2022. This is a dramatic and fortunate turnaround for this complex corner of the credit market. Covid-19 has caused issuance to a standstill. Based on the analytics from Quantifi, CDO will quadruple this year reaching $40bn. A type of synthetic CDO curving up pools of credit default swaps linked to corporate debt is the volume of bespoke CDO, said IFR Asia.
Although there has been market volatility in the past two years, the rebound finds that the appetite of the investors remains. This is because volatility would impact more on the engineered and leveraged products, leaving a bad sign for high-profile investors in the sectors. When activities are also quite terrible following Russia’s invasion, bankers say that they still find hopes in inventors.
According to the bankers, investors continue to seek advantage in credit spreads widening to their distressed level. It has happened since 2020. A senior structured credit trader, Sukho Lee from Nomura is confident by saying that CSOs have returned. Previously, he pointed to a decent pipeline of deals in January and February. He argued that now credit spreads are bigger and credit curves are flatter. Thus, it is a proper time for credit pickers to go long and get full control over credit selection.
The synthetic CDO machine once led to the great crisis of 2008. It fueled big growth in credit derivatives. These products are for a vehicle to spread and amplify losses in subprime mortgages worldwide. Banks like BNP Paribas, Citigroup, JP Morgan, and Nomura have succeeded in rehabilitating the corporate CDS-linked part over CDO Market. The ranks also increased following Goldman Sachs involvement in the bespoke CSO market this year with many deals.
