Leading equity derivatives players are pitching higher yields and name diversification to CDO investors. But deals need to be conservatively modelled and attractively priced.
Deal: Goya managed CDO of CDS and EDS
Structurer: SG Corporate & Investment Banking
Manager: Fortis Investments
Date announced: November 5 2004 SG CIB and Fortis Investments are developing new collateralized debt obligation technology through Goya, a CDO that references both credit and equity derivative swaps.
Banks have put EDS in structured credit deals before. In October, Standard & Poor's rated Chrome, a €62.5 million deal arranged by CDC IXIS Capital Markets. Chrome references 30 second-to-default baskets, each containing three CDS and one EDS. But in Chrome, there were restrictions on how the EDS could be managed in and out of the reference portfolio. Goya is the first CDO where the EDS will be fully actively managed over the life of the deal.
As a less liquid product, EDS should provide a spread pick-up for CDO investors, as well as some name diversification. But as Euromoney reported in September this year, some investors see EDS as badly priced and unsuitable for CDOs.
On November 17, Fitch predicted more issuance of CDOs backed by EDS.