Markets Edgy As Banks Calm CDO Fears

Source : The Business Times, Aug 08, 2007

Local banks tried once again yesterday to reassure investors that their exposure to collateralised debt obligations (CDOs) is small, but the stock market - which had battered their share prices on Monday - refused to respond. It ended the day in negative territory even though Wall Street had rebounded smartly just hours earlier.

It was a clear indication that caution still reigns over the state of the US credit market and the problems related to the sub-prime mortgage market.

After OCBC had tried to put fears about its CDO exposure to rest on Monday, DBS Bank followed suit yesterday. Meanwhile, United Overseas Bank (UOB) revealed that mark-to-market losses of $15 million were expected as at end-July and would be charged against the balance sheet. The bank has been scaling back its CDO exposure.


The market, however, remained wary. UOB hit $20.70 during the day but ended just 20 cents higher at $20 while DBS touched $21.60 but fell back to $20.70 for an eventual 20 cents loss.

DBS had tried to clear the air on its CDO exposure. It said its asset management unit has three retail funds with a tiny amount of exposure to CDOs while some affluent clients have bought CDOs directly though its Treasuries priority banking where the minimum investment is $25,000.

In a letter to DBS Asset Management (DBSAM) clients, it said the CDO exposure in three unit trusts was limited to between 1.02 and 5.33 per cent, amounting to a total of $17 million. The three funds are its highly popular Shenton Income Fund, DBS Enhanced Income Fund and Horizon S'pore Fixed Income Fund. DBSAM assured clients that the CDOs are strictly investment-grade with underlying securities credit rating of BBB- or higher by Moody's.

'The net asset values per unit of these portfolios have also been relatively stable during the last nine days even though world markets were fluctuating considerably due to the reassessment of credit risks,' DBS said. It added that the CDOs have no exposure to US sub-prime mortgages.

DBS Bank yesterday further disclosed that DBSAM manages two CDO portfolios worth US$1.03 billion. Neither CDO has underlying assets with exposure to US sub-prime mortgages.

The bank has also distributed a total US$1.7 billion of structured products including those from third parties involving CDOs backed by AA- to AAA-rated collateral to institutional, private banking and sophisticated retail investors. None of these have exposure to US sub-prime mortgages.

UOB disclosed that, over the years, provisions of $34 million have been made as at end-June 2007 for its CDO holdings. Currently, the bank has $392 million of CDOs, of which $91 million are in asset-backed securities and $301 million are in corporate CDOs. 'Further mark-to-market losses of $15 million are expected as at end-July and will be charged against the balance sheet,' said Terence Ong, senior executive vice-president.

He said, at the peak, UOB had US$580 million of CDOs. He was speaking at UOB's second-quarter results press briefing which was dominated by questions on the bank's CDO exposure.

UOB Asset Management (UOBAM) currently manages S$11.7 billion of CDOs, or 43 per cent of total assets under management (AUM) of $27 billion. These CDOs are distributed to institutional investors. Mr Ong said the CDOs are high-grade and there have been no downgrades.

UOBAM at its peak managed $21 billion worth of CDOs but it began selling them from 2004. It earned about $20 million fees per year for managing CDOs. 'Fees we earned (managing CDOs) make up less than 20 per cent of UOBAM's income and we see that figure going down,' said Mr Ong.

He said UOBAM decided to trim its CDOs because credit spreads had narrowed, the portfolio had become too big, we 'have to digest' and it was also a matter of taking profit.

Falls in the banks' share prices had led a 3.7 per cent plunge in the ST Index on Monday and it appeared briefly that the trend would be reversed yesterday.

The STI first jumped 58 points before eventually closing 6.98 points weaker at 3,302.01. Hong Kong's Hang Seng Index also surrendered a 240-point rise to end 28.74 down at 21,907.99. The same up-down trend manifested itself in most regional markets.

Since hitting an all-time high of 3,665 on July 24, the ST Index has now fallen 363 points or 10 per cent in 10 trading sessions.