Goldman pushes into burgeoning CDO securities lending market

Goldman Sachs has entered securities lending trades with a handful of collateralised debt obligations (CDOs) in the past few months, says Alex Reyfman, New York-based credit portfolio quantitative strategist at Goldman Sachs.

The US house is pitching the idea of securities lending as a way for cash CDO managers to garner additional returns and more effectively manage risk. Most of Goldman’s transactions have been loan-backed and typically involved notionals of less than $400 million. CDO managers could pocket a fee of up to 35 basis points per annum through securities lending.

Clauses allowing managers to lend their portfolio’s assets have laid dormant in the indentures of CDOs for years. Activity is finally picking up because even relatively well-performing assets such as leveraged loans, for example, are not yielding as much as managers had hoped.

According to a structured credit strategist at another US dealer, who asked to remain anonymous, several CDO managers have started lending out securities from their portfolios this year to dealers other than Goldman.

Aside from risk management of existing loan portfolios by banks, borrowing the loans could give credit derivatives dealers a valuable extra source of liquidity for shorting credits to hedge their default protection selling.