Issuers

Will bespokes return? Yes, says Morgan Stanley

Tuesday, October 20, 2009

In a report entitled Will a bid for bespokes return? Morgan Stanley implies that CSOs could indeed make a come-back. The bank predicts that the first products that are likely to emerge will be funded credit-linked notes exposed to an unfunded basket of names. These will be attractive in an environment where corporate bonds are hard to source, say the researchers.

The report says that non-ratings-based users such as prop desks and hedge funds have never stopped trading synthetic tranches and that some of the foundations are in place for a return of rated CSOs.

It points out that future rated structures will respond to the methodology changes recently put in place by the rating agencies. Standard & Poor’s 2005 model tweak penalised weaker credits and therefore led to greater concentrations of investment grade, especially financial, risk. Similarly, S&P’s latest changes, such as its haircuts for systemic risk, will make it harder to structure CSOs as AAA and will lead to more A and AA rated tranches. Meanwehile, the new largest obligor test should lead to portfolios with larger numbers of credits.

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Comment by: Anonymous. Posted 4 months ago

Interesting to look back on this article and the comments from a year ago. The more relevant question now a year on is "Will Morgan Stanley return?" given their 5 year CDS in the 500bps to 600bps area and their equity price at less than 20% of its 2007 peak. Maybe report articles such as the above that seem, with the benefit of hindsight, to be way off the mark aren't helping?