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Resurgent CSO market bets on ESG and new equity
March 2021 | Issue 232
Dan Alderson
Deputy Editor
After a challenging 2020 the synthetic bespoke market has begun this year in style, with a pipeline of deals, talk of new investors and hopes that ESG could play a key role in driving deal volumes.
“We resumed our primary activity in January, with a convergence around the three-year point of the curve,” says Guillaume Mear, head of structured credit trading at BNP Paribas. “This tenor balances the liquidity of the long end of the curve with the visibility of the front end, crucial for credit pickers.”
Collateralised synthetic obligation (CSO) primary business dropped off precipitously following the March/April CDS spread blow-out last year. Partly this was due to coronavirus volatility and mark-to-market problems, but investors also found lucrative opportunities to source secondary paper as selling picked up.
“ESG comes in many flavours and bespoke CSOs may be suited to achieve specific objectives”
Guillaume Mear, Head of structured credit trading | BNP Paribas
“The CSO market weathered the storm better than might be perceived,” says one investor.
“Most participants haven’t gone away. But for a while their focus was on secondary markets as they offered a premium. Trades generally had a one- to one-and-a-half-year weighted average life, so investors will look to recycle that money as contracts expire. December was one key date and June will be an even bigger one.”
A handful of new CSOs have printed in 2021, with BNP Paribas and Citi leading the charge, according to buy-side sources. A large amount of cash is understood to be waiting on the sidelines to be put to work in CSOs if spreads widening avails a better entry point for deals.
Market participants say ESG factors could prove key to a resurgent CSO business this year. In 2020 the topic went from barely registering to become a key focus for structured credit investors. Securitised products have trailed demand largely due to lack of agreement on standards, but managed bespokes by their nature have an opportunity to take the lead.
The ESG angle is an exciting development in bespoke CSOs, says Mear. “While there have been efforts to develop benchmarks in the ESG space, such as the iTraxx Europe ESG index, ESG actually comes in many different flavours and bespoke CSOs may be better suited to achieve specific regional or thematic objectives.”
The inclusion of credits from covid-affected industries could also help shorter tenored CSOs beat benchmarks as economies reopen. But attention is once again turning to longer-dated managed portfolios, where equity investors with substitution rights (akin to CLO managers) could help outperform beta.
“We are also seeing a diversification of the equity investor base and issuance formats, and hope to resume discussions around managed CSOs with asset managers soon,” says Mear.
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Global credit funds & CLO's
March 2021
| Issue 232
Published in London & New York.
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