Role of Insurance Grows In Global Debt Offerings As Complexity Increases

Global Finance,  Jan 2005  by Platt, Gordon

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The growth in the issuance of collateralized debt obligations, or CDOs, and collateralized swap obligations, or CSOs, has been phenomenal over the past two years, says Robert McAdie, global head of credit strategy at Barclays Capital in London. There also has been a significant expansion of hedge funds and an expansion of credit proprietary trading desks and arbitrage funds, he says. "Low funding costs and low yield levels have propelled this industry," he notes.

The growth of the leveraged loan market has also been significant, especially in the US. Although not of the same magnitude, leveraged loan issuance in Europe also has taken off, McAdie says. "We do have concerns as to the performance of some of these deals, especially some of the German and Italian deals, where some of these low-margin companies will struggle in the low-growth, high-wage and high-material cost environment in 2005," he says.

Overall, the backdrop for credit in 2005 is solid, with low systemic risk, relatively low issuance and strong demand, McAdie says.

Clearly, the growth of hedge funds, funds-offunds, leveraged loans and CDOs is indicative of the amount of leverage that has been pumped into the system, McAdie says. This is a cause for concern, he explains, because the longer volatility stays low, the larger leverage will grow.

The greater the issuance, the greater the net impact will be on the market once there is any material volatility, he says.

-Gordon Platt

Copyright Global Finance Media Inc. Jan 2005
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