US credit default swaps and CLN markets recovering, says S&P

The US credit default swaps (CDS) and credit-linked notes (CLN) markets are recovering from a lull in activity, according to rating agency Standard & Poor’s (S&P).

“Activity began picking up at the end of the second quarter,” said Mary Ryan, a New York-based credit analyst in S&P’s structured finance ratings group. “Based on what we are hearing from the market, a number of transactions are expected through the end of 2003. By year-end, CLNs and CDSs should be a greater percentage of our business.”

S&P reviews credit derivatives either to assign a rating to a CLN or to review a CDS being purchased to be used in a collateralised debt obligation (CDO). The latter is termed assigning a ‘credit estimate’. S&P said that in the first half of 2003, the percentage of credit estimates it provided was 16% of total synthetic transactions. In the first half of 2002, credit estimates made up almost 55% of activity.

“Part of the decline could be attributed to the uncertainty that FIN 46 cast on the CDO market,” said S&P. The US Financial Accounting Standards Board (FASB) issued financial interpretation number 46 (FIN 46) in January. The ruling clarified earlier US accounting policy changes related to special-purpose entities (SPEs). Its objective is to improve financial reporting and disclosure by companies involved with variable rate entities, a broad term used by FASB to incorporate most SPEs.