Structured credit is becoming a syndicated market. At the forefront of this development is JPMorgan, which in April structured and launched the first syndicated single-tranche collateralized swap obligation, a CDO whose underlying reference portfolio consists of credit derivative swaps. Aria CDO 1 is an active deal managed by AXA Investment Managers. JPMorgan recruited a five-strong group of selling banks to distribute the deal just as it would involve co-lead arrangers to sell a corporate bond.
?Aria is changing the way structured credit is distributed,? says Ian Slatter, managing director, European credit sales, at JPMorgan. ?The days of having to place the full capital structure are over.? Of the investors who bought Aria, 18 were participating in their first structured credit deal.
Aria didn’t keep its market-leading status for long. At the start of August Goldman Sachs and Calyon launched Ocelot, a e5 billion synthetic CDO programme managed by Prudential M&G on which the banks are joint arrangers.
?We’ve set this up as if it were a flexible MTN shelf that we can tap over time,? says Vishal Gupta, head of credit and equity exotics at Goldman Sachs. In the past, meeting investor demand for e200 million or e300 million trades hasn’t been feasible because of fixed costs, such as getting a rating.
Competitors collaborate
On Ocelot, two correlation dealers have created the tranches that are sold. Any bank that has a secondary trading book for CDOs can then trade them. ?Two competing correlation dealers have joined forces,? says Loic Fery, global head of structured credit, derivatives and CDO structuring at Calyon. ?Two dealers means two valuations and two quotes.? At the beginning of September, Goldman Sachs and Calyon were due to start providing on-screen secondary market prices to investors.
As manager, Prudential M&G will select and manage a global portfolio of 125 corporate credits, over 90% of which are investment grade. At the time of writing, the first tap was well on the way to filling its e750 million allocation.
Many see these deals as just the beginning. ?We believe that the global syndicated deals will become a more regular feature of the market,? says Brian Zalaznick, head of alternative fixed-income strategy at Barclays Global Investors. ?There’ll be more lead managers, they’ll be in multiple currencies and a liquid secondary market will develop.?
It’s a part of the market Zalaznick wants to move BGI into. ?We want to become a third-party credit manager, running CDOs for other investors,? he says. ?For investors there’s a trade-off between the liquidity from buying tranches on the CDX index and doing customized and bespoke deals. Investors can create their own 100-name portfolio but there can be massive liquidity problems, and the bid-ask spread can be enormous. Those who don’t want to deal with that want liquidity and minimized defaults, and a manager who knows the complexities of the structure. And that’s where we’re building our capabilities.?
