Deutsche Bank has successfully sold a new synthetic collateralised debt obligation referencing the credit derivatives traded on Russian companies, proving investors still have appetite for such risky complex debt instruments despite the turmoil in the credit markets.
The 8.95bn ruble (€257m) CDO, dubbed Vityaz CDO I, closed yesterday some three months after volatility born from the sub-prime mortgage crisis in the US emerged, hitting CDO sales and almost bringing the entire market for the instruments to a standstill.
As delinquencies in US sub-prime mortgages originated last year and this year have risen, so too have concerns surrounding the stability of cash and synthetic CDOs that have used the securities within their collateral pools.
Investors fear that any further deterioration in the sub-prime market could lead to widespread ratings downgrades of CDOs, potentially triggering an unraveling within certain structures, which would in turn lead to heavy losses.
CDOs bring together bonds, loans or other kinds of debt instruments and sell notes that represent different levels of risk in the pool. These run from large triple A-rated tranches, which pay modest returns, to small unrated equity tranches, which bear the risk of the first defaults.
Whereas cash-flow CDOs repackage actual bond and loans, synthetic structures bundle credit derivatives, offering investors a sophisticated way to hedge risk while allowing exposure to credit without buying the underlying asset.
In the Vityaz structure, credit default swaps are pooled on the local currency bonds of a diversified portfolio of Russian companies and financial institutions. The portfolio is managed by Troika Dialog, one of Russia’s leading investment banks.
Yuri Soloviev, first deputy chairman of the board Deutsche Bank in Russia, said: “Vityaz CDO I is a testament to both the growth in non-governmental domestic debt issuance in Russia, and the increased investor appetite for such structured risk.”
Last year saw record global issuance of cash CDOs, at $470bn (€349bn), but there was another $524bn issued in synthetic CDOs, according to the Bank for International Settlements.
Analysts estimate that sales of synthetics in the first quarter were $121bn compared with $92bn the same period a year earlier, according to the BIS.
The Vityaz sale comes a month after Brushfield Capital, the platform created by ABN Amro to sell and manage CDOs, closed a $1.25bn (€900m) CDO backed by asset-backed securities.
Source: efinancialnews.com
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Interesting post about sale.
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