But all risks for such investments would be borne by the clients
SINGAPORE banks are making new bets in collateralised debt obligations (CDOs) as they sense opportunities in a market that has fallen out of grace.
DBS Group Holdings is selling new CDOs to buyers hungry for risk and Oversea-Chinese Banking Corp said its insurance unit launched a fund investing in CDOs.
CDOs are pools of debt instruments, such as bonds or loans, that are repackaged into different slices carrying various levels of risk. These slices, or tranches, are then sold to investors.
The CDOs have been hard-hit by the United States sub-prime mortgage crisis, as some are mortgagebacked, underpinned by sub-prime loans. With few willing to buy CDOs, the market for those instruments has virtually come to a standstill.
But most of Singapore’s well capitalised banks — considered Asia’s, excluding Japan, specialists in CDOs — seem to think that now is the time to return to the market as issuers.
“(We are) conscious of the current uncertainties surrounding the CDO and sub-prime mortgage securities markets, but (believe) that, fundamentally, CDO remains a sound investment instrument if it is properly structured to achieve the desired returns and risk profile,” said OCBC’s insurance unit, Great Eastern Holdings.
The fund won’t have any direct exposure to sub-prime mortgage securities and “aims to take advantage of current market conditions to offer high credit ratings, reasonably attractive returns and good insurance cover to policyholders,” Great Eastern said.
The target fund size is about $100 million.
OCBC shares have fallen more than 6 per cent since mid-July, when the credit markets were rattled from the sub-prime woes.
The bank has said it holds US$430 million ($646 million) worth of CDOs, including US$181 million in asset-backed securities with various degrees of sub-prime exposure. Its majority-owned Lion Capital Management holds about $5.7 billion in CDOs, including $1.5 billion in assets linked to US sub-prime mortgages in its customer accounts.
OCBC said all risks are borne by the clients.
“To be honest, I was surprised that Great Eastern was pursuing this fund” given the current market conditions, a Wall Street investment bank analyst said. “But this shows the company thinks there is a market out there. Potentially, this is a good move, depending on the nature and quality of the CDOs.”
DBS recently sold two synthetic CDOs with principal values of US$17.19 million and US$13.64 million through a special purpose vehicle.
In each transaction, it packaged insurance on corporate debt into the securitised instruments and passed the default risk on to investors. The bank makes money by receiving a premium for the insurance policies and passing the risk on to investors, who receive a lower premium.
Rating agency Fitch has assigned a triple A rating to both CDOs. Last year, Singaporebased CDO asset managers launched $6.7 billion in CDOs.— DOW JONES
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