Collateralized debt obligations (CDOs) are being created at a record pace – with more than 270 CDO transactions established in the Cayman Islands in 2005, representing approximately $125 billion in assets, according to Walkers, an offshore law firm that advises investment banks, international law firms, collateral managers, and other financial institutions.
“The first Cayman CDO was issued in 1994, however current stability in the corporate marketplace combined with the lacklustre performance of debt and equity markets worldwide is translating into a surge in demand for CDOs of all types,” Ian Ashman, a partner in Walkers’ structured finance group, said. “This type of vehicle is being used in a wider range of transactions including high volume commercial real estate deals and middle market loans.”
A recent report by Moody’s Investors Services predicts that the record- breaking 73% increase seen in CDO issuance worldwide in 2005 should translate into a strong first quarter in 2006. Walkers has seen increased activity in their CDO work to support this analysis.
One of the drivers for this growth is that CDOs are being used in more ways than ever before: as asset-backed securities, commercial- and residential-backed securities, balance sheet CDOs backed by pools of commercial loans, high-yield bonds, leveraged loans, and repackaged CDOs, the Cayman-based group contends.
“There weren’t a lot of corporate credit roller coasters in 2005, so CDOs performed well, diversified, and became increasingly attractive to investors and bankers,” David Egglishaw, managing director of Walkers SPV, a trust company owned by Walkers, said. “And this seems to be just the tip of the iceberg. The markets are much more transparent and liquid and we expect to see CDOs applied in increasingly innovative ways in 2006.”