S&P: CLOs will lead European CDO growth in 2007

The European surge in cashflow collateralised loan obligations (CLO) will continue into 2007, according to a report by Standard and Poor’s (S&P).

As well as confirming the robustness of CLO growth in the region, which has also been reported by other ratings agencies, S&P said collateralised debt as a whole would remain buoyant in 2007. The agency also predicts growth in collateralised debt obligations (CDO) composed of asset-backed securities (ABS), although they will continue to play a minor role in the wider market. Within CDOs of ABSs, S&P predicted a move towards more synthetic deals and high-grade assets. Many special investment vehicles for CDOs that have been worked on in the past year will also launch, according to the agency.

In synthetics, S&P said CLOs of leveraged loans would emerge during 2007, as leveraged loan credit default swaps and indexes gained liquidity, backed by growth in the cash market. It expects a small rise in niche sectors such as project finance CLOs, emerging market, and mono-sector CDOs, such as German re-insurer Hannover Re’s recent deal (See: Hannover Re launches insurance CDO).

S&P also believes there will be growth in hybrid CDOs, including constant proportion portfolio insurance and constant proportion debt obligation transactions, which will increasingly be managed.

S&P said that synthetic CDOs of ABSs could become more popular, but outstanding problems, such as liquidity and homogeneity, would need to be cleared up. Synthetic CDOs based on commercial real estate would also prove to be popular, the agency said.