Creditex sees limited structured products growth

Creditex, the online credit derivatives broker that launched in March 2000, has been growing its business in structured credit transactions, according to company executives. Officials said the privately owned firm’s revenue has increased six-fold since August 2001 on the basis of only a three-fold rise in total notional transactions. The difference, they claimed, is due mostly to the higher margins earned from intermediating structured transactions as compared with low-margin plain-vanilla credit default swaps.

While Creditex was set up primarily to broker credit default swaps, they are now viewed only as a 'break-even' business necessary to support the firm’s developing businesses selling credit risk price information and intermediating structured transactions, said Sunil Hirani, company co-founder.

Creditex facilitated its first structured transaction in September 2000, when French bank Société Générale sold $283 million in credit risk in a portfolio transaction. There were few further structured transactions until September this year, when, Hirani said, higher volatilities and months of effort cultivating interest in structured transactions through the company began to pay off. Transaction sizes have since been as high as $800 million, and have involved as many as 40 names, according to John McEvoy, another Creditex co-founder.

McEvoy said the company now receives 10 to 15 inquiries a month from parties interested in selling off credit baskets and portfolios. Creditex offers banks looking to offload structured credit risk more potential counterparties and, so far, greater assurance of bid-offer matches. “Basically customers are telling us we’re able to get better distribution and price execution,” claimed Hirani.

Before offering a structured position for sale online with Creditex, offering banks approach Creditex marketers, who determine likely market interest among the broker’s 100 subscribers. Creditex will next recommend for or against the transaction going forward. The process is intensive because credit derivatives traders do not have the patience to offer deals when there is too often insufficient bid interest in return, said Hirani.

The potential downside to the structured transaction market for Creditex is the cost of effort necessary to pre-market any potential offered transactions to ensure that they find successful bids before posted online with Creditex, he added.

Looking forward, company executives expect continued growth along with the credit derivatives market, which they say was given a big confidence boost by the successful credit transfers in the wake of the collapse of Enron.

Creditex receives about 4,000 postings for credit swaps per month, which helps credit derivative price discovery, but a spokesperson refused to reveal actual trading volumes.