Hong Kong’s PCI sees opportunities in US, Europe synthetic CDOs

“We’re not in a hurry to be involved in a lot of CDO deals, but if an opportunity comes up, we would like to invest in it again,” Fung told RiskNews. “This time we did one with more emphasis in Asia, but in the future, I think that if there are good opportunities, we may consider maybe having a higher proportion in the US and Europe. But we have to be more comfortable with the economy in these two areas,” Fung added.

PCI and lead manager Lehman Brothers closed a $500 million synthetic CDO, called Asia IG CDO, at the end of November. The transaction was referenced on a portfolio of credits which were 63% Asian. PCI chose to include a majority of Asian credit in its first synthetic CDO because the region has been relatively more stable than the rest of the world since the Asian crisis of 1997, Fung said. Asian credits have been indeed more resilient in the face of Latin American crises, record-high bankruptcy rates in the US and series of downgrades in Europe.

But going forward, PCI could consider being involved in a synthetic CDO that would include more US and European names. “Right now, in terms of credit spreads, [Asian credits] are more stable than in the US or Europe. But on the other hand, corporate bond spreads in the US and Europe have widened significantly and there are a lot of opportunities there,” Fung noted. He warned, however, that “one has to be very selective in picking the corporates.”

Fung explained that “going forward, I think if the US economy continues to improve, I think that the chances for credit spreads to come down is substantial.” As a result, buying some of the credits that have widened could yield significant gains as the credits improve and the spreads tighten.

He added that “people are less risk averse. The economy is growing, although still at a very low pace, but as chances of a double dip are lessening, people will feel more comfortable in taking more risk and move down the credit curve.” As rates are expected to remain at current low levels for the next six months, investors could continue to look for alternative investments such as synthetic CDOs and even potentially the equity, or first loss, portion of the CDO.

PCI Investment Management, a unit of Hong Kong’s Pacific Century Insurance Holdings, was set up in 2000 and currently has over $1 billion of assets under management.