CSO issuance was low before the coronavirus-led March sell-off, given ultra-tight spreads. Thereafter it fell close to zero as volatility rocked the market, curves inverted and investors faced margin calls. But sources say the third quarter has rekindled demand for structured products, with money available and ready to be put to work.

“After large amounts of CSO risk rolled off in June, we saw renewed investor interest for new business and were able to print some of our pipeline with a mix of old and new investors,” says Guillaume Mear, head of structured credit trading at BNP Paribas.

Falling volatility since April has allowed more realistic mark-to-market pricing, but left big pockets of value in credit versus other assets, such as equities and rates, says another senior structured credit source at a bank in New York. The continuing flatness of curves offers an additional incentive for trades at this entry point, given the typically sharp roll-down of CDS spreads over the first year or two.

“If the curve steepens you’ll have a big gain in your position,” says the senior structured credit official. “You’ll make money faster because it rolls down faster.”

New CSOs have mainly been two and three-year tenor, say sources, although it is thought one smaller five-year deal has printed. Equity is the stickiest piece to shift, and appetite is geared towards portfolios of investment grade and crossover credits, as these offer decent returns with a low default profile. On a three-year 200 basis point average spread portfolio, a 0-5% or 0-7% equity tranche investor might receive as much as 20%, while a 15-100% senior tranche could pay 70bp to 80bp, say sources.

One positive is that most established CSO investors managed to ride out the coronavirus downturn. Another is the evidence of funds entering the market. As reported by last month, former JP Morgan credit correlation trading head Fajr Bouguettaya has launched his BirchLane global credit fund management business with $200 million of assets and a mandate that includes CSOs and index tranches. Another new firm, Palm Lane Partners, has a similar mandate.