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of securitised products
The use of the CDO/ CBO device has been increasing tremendously, and in the process, there is a distinct new asset class in securitisation emerging: re-packaging of securitised products.
Re-packaging refers to securitisation of bonds or debt instruments bought from the market and securitised using the CDO device. The motivation, obviously, is arbitraging. Arbitrage opportunities arise in the market due to high premiums offered for liquidity (banks or investors wanting to liquidate their portfolios) or risk-return asymmetries.
Of late, there is a distinct opportunity in re-packaging of structured products. This process could also be called re-securitization, or repackaging of securised products.
According to a Deutsche Bank publication titled Structured Product CDOs, March 20, 2001, the first application of structured product CDO was seen in year 2000-1. This report says that in year 2000, CDOs of ABS/MBS have grown from virtually zero in 1998 to over $10 billion in 2000órepresenting nearly 10% of all CDO issuance. The report says: "The year 2001 is expected to again be a record year as indicated by the current pace of new issues and pipeline of deals reported to be in the works. In addition to the $10 billion of subordinate structured product collateral expected to be issued in 2001, there are about $30 to $50 billion of previously issued subordinated structured product securities also eligible for CDOs.".
Recently, rating agencies (both Moody's and Standard and Poor's) issued rating transition matrices for securitised products. [See reports on our site here ]These rating transition studies showed that asset-backed securities are far safer than corporate debt, particularly the subordinae tranches. This has stirred interest in investing in subordinate tranches, throwing up opportunities for CDOs of subordinate tranches. Investors have preferred CDOs based on subordinated ABS tranches to traditional high yield debt, where defaults are far more common. Deutsche Bank publication puts it as follows: "By pooling mezzanine and subordinate structured product tranches in a CDO, the collateral manager can create higher-rated, more liquid securities for senior investors and leverage market inefficiency to generate returns for equity holders."
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