...Over the past twelve months, the ability of managers of investment grade corporate synthetic collateralised debt obligations (IG Corp synthetic CDOs) to trade has dramatically reduced as a result of structural constraints, a lack of market liquidity and unprecedented spread widening. These conditions have partly resulted from a reduction in the number of credit derivatives dealers and their capital allocation to correlation desks. In this context, corporate synthetic CDO managers have refrained from executing trades that would reduce the amount of available subordination for a given rating, or would result in a breach of one or more other portfolio parameters. This has lead to a number of IG Corp synthetic CDOs becoming largely static pools, leaving them exposed to potential credit events in the reference portfolio which might have been avoided had they operated under more flexible structures or more liquid credit derivatives markets. The following commentary is intended to highlight several...
