Do they have one? You may prefer to think not.
But Moody’s are determined to chew over exactly where and how the CDO world went awry - and where it did not. Overall US CDO issuance did tick down over 2007 - but the headline numbers masked the complete seizure of the market for structured finance CDOs in the fourth quarter. Those, on Moody’s definition, comprised about 40 per cent of deals and about 50 per cent of volume last year, with the rest divided between other variants such as market value CDOs, high yield CLOs, synthetic corporate, emerging market CDOs and Trups, the CDOs of which allowed smaller banks and insurance companies to raise money in a tax-advantageous way.
Issuance of all CDOs is expected to fall in 2008, with the sector in a sense poised to go back to basics, the cash flow CLOs and synthetic corporate CDOs which date back to about 1997.
The pain in 2007 was tightly concentrated, says Moody’s. The vast majority, about 95 per cent, of their record downgrades affected structured finance CDOs, notably the RMBS/HEL tranches.
Worth noting that the downgraded market value CDOs - while small in number - constituted a significant proportion of the overall segment, as these deals were forced to sell assets into a falling market to meet triggers on the market value of their collateral. The continued mystery surrounding asset pricing means that these may have little to offer in 2008.
But, the rating agency thinks, the banks’ current travails may prompt them to look again at the original CDO structures, built to raise money against assets off balance-sheet rather than motivate by the opportunity for arbitrage by packaging debt into tranches.
Whether they will continue to be known as CDOs, or whether that badge will emerge irredeemably tainted is yet to be seen. Rebranding suggestions on a postcard.
