Similar transactions are expected as other banks such as UFJ Bank and Sumitomo Mitsui Banking Corporation look at the possibility of issuing their own synthetic CLOs.
But report author and Moody’s senior analyst, Yusuke Seki, warned that investors may not be paid enough for the risks they are taking with regard to arbitrage synthetic CDOs. “Moody’s is strongly concerned that CDO investors to such transactions in Japan are not enjoying enough credit spread commensurate with credit risks,” Seki stated in the report.
“The lack of adequate spreads results from the fact that most of synthetic CDOs and first-to-default transactions in Japan are private transactions with a limited number of investors, and the information on such transactions is rarely disclosed,” she added.
The agency noted that, of the 21 CDOs worth ¥2.4 trillion issued so far this year, more than 80% were of a synthetic nature.