Synthetics likely to dominate CDO issuance in 2003

Despite growing senior funding costs, the relative cheapness of super-senior swap funding should ensure that synthetic investment-grade issuance continues to outpace cash deals in 2003, according to Bank of America.

Research by the US bank's structured credit products team showed that $209 billion of synthetic collateralised debt obligations (CDOs) were issued globally last year - a 74% increase on the total for 2001.

Among synthetic deals, the static arbitrage CDO sector grew fastest, with around two thirds of the $105.7 billion of visible issuance accounted for by investment-grade collateral deals. The independently managed CDO sector was also dominated by investment-grade collateral deals, which accounted for 92% of issuance in 2002.

Beyond synthetic deals’ superior economics compared with cash CDOs, scarcity of collateral may accentuate the move towards synthetic issuance in 2003. US investment-grade corporate bond issuance decreased by 12% last year. Bank of America estimated that investment-grade credit default swap volumes grew by up to 50% during the same period.