Collateralised debt issuance jumps
ft.com
By Gillian Tett and Paul J Davies in London
Published: January 11 2007 22:14 | Last updated: January 11 2007 22:14
The issuance of securities linked to debt portfolio funds, known as collateralised debt obligations, swelled dramatically last year – a trend that could be helping to prolong the easy conditions in credit markets.
Some estimates of activity in this notoriously opaque sector suggest that more than $2,500bn of were issued last year. That was six times higher than in 2004, according to the Bank for International Settlements.
The data highlight how the structured credit and derivatives world is now expanding.
However, some analysts suspect this activity is, in itself, helping to prolong the easy conditions in credit markets. The explosion of CDO issuance is fuelling demand for debt products, helping keep the cost of borrowing in markets relatively low.
This is particularly marked in the leveraged loan market, where rapid growth in collateralised loan obligations is making it easier for low-rated companies to raise funds from the market. "CLO issuance is definitely affecting the cost of leveraged finance," says Stephen Dulake, European analyst at JPMorgan.
CDO structures typically pool bonds, loans or debt-linked derivatives, and use these assets to issue new securities, which are distributed to new investors.
A JPMorgan report this week suggested investors bought $503bn-worth of CDOs last year, 64 per cent higher than in 2005.
However, this excludes many private deals and portfolios of credit derivatives indices. If index portfolios are included, then last year's total CDO issuance could have been $2,800bn, extrapolating from recent estimates made by the BIS.
Further, data information group Dealogic has calculated that publicly announced CDO deals rose from $231bn in 2005 to $371bn in 2006.
Meanwhile, Moody's says it rated CDOs worth $304bn in the US and 124bn ($160bn) in Europe in 2006, more than double 2005's levels. Most bankers expect this pace of growth to continue in 2007. But the type of assets used in these structures is expected to change, with commercial real estate becoming a growing focus.
There is also expected to be high demand for leveraged loan CDOs, which could make it easier for companies with low credit ratings to raise funds. |
