Are EM Bonds Fit For CDOs?
With better than expected default rates and improving ratings, emerging market bonds - including those from Latin America - deserve a serious look from the collateralized debt obligation marketplace.
One of the fastest-growing segments in the fixed income market has been collateralized debt obligations (CDOs), the innovative $250 billion universe of repackaged instruments. The concept is simple: take a pool of debt with a blended credit rating and cut the pool into different asset classes with varying risk/return profiles based on seniority in the capital structure. CDOs grew out of the collateralized mortgage obligation (CMO) marketplace when it became clear that there might be a funding cost reduction when securities were pooled and resold in different tranches. CDOs now include high yield and investment-grade bonds, leveraged bank loans, emerging market bonds and asset-backed securities.
Under a typical CDO, bonds with a common maturity are placed in a trust and various capital tranches of the trust are rated. Such pools require significant diversity requirements in terms of industry and domicile, and have limits on issuer and issuer-type concentrations. The...
Already have an account?
Subscribe now for unlimited access to all current and archive news, data and market analysis.
Take a free two-week trial now for the latest news, data and market analysis.