Innovative CDOs set to lead the way in 2002

Innovatively structured collateralised debt obligations (CDOs) will spur the growth of structured finance products in 2002, according to a report by rating agency Standard & Poor’s (S&P).

Soody Nelson, managing director of S&P’s structured finance market value group and author of the report, said issuance of 'alternative investments' - a term Nelson uses to encompass securitisations of private equity fund of funds and hedge fund of funds - are set to grow rapidly in 2002. The rating agency estimates the market to be worth more than $500 billion this year.

S&P has reacted to the expected growth of such alternative investments by developing criteria for rating debt secured by the market value of hedge funds. The US agency expects that rating these CDOs will encourage a wider investor base for the deals which, to date, have been dominated by niche investors.

“For the first time, typical bondholders can participate in private equity funds and hedge funds by investing in these rated leveraged structures,” said Nelson.

Standard & Poor’s is presently reviewing five transactions securitising investments in hedge funds.