Collateralized debt sales in Taiwan may increase by 50 percent this year to at least US$1.5 billion, leading a boost in the market across Asia, Fitch Ratings said.
Hong Kong-based banks have dominated the firms selling the securities to investors in Taiwan so far this year, Fitch said in a report dated last Thursday, basing its research on those securities it has been asked to rate. Insurance companies and banks are among the biggest buyers, the report said.
Collateralized debt obligations (CDO) use income from portfolios of bonds and loans to pay investors. The securities are part of the US$12.4 trillion global market for credit derivatives, financial obligations whose value is based on debt prices.
"The growth of the CDO market is driven by investor demand and increasing awareness and understanding of the CDO product," Rachel Hardee, Fitch's Hong Kong-based head of structured credit for Asia Pacific, said in an interview. "Growth is expected from a number of Asian countries, with South Korea and Taiwan likely to remain strong."
Sales of collateralized debt in South Korea reached about US$3 billion last year, Charles Chang, a Hong Kong-based analyst at Fitch, said in an interview last Tuesday. Most of the securities aren't rated by Fitch, Hardee said.
Collateralized debt obligations are divided into portions, or tranches, of varying risk and payments. The lower-rated pieces, which pay the highest yields, are the first to absorb losses in the underlying portfolio and act as a cushion protecting the higher-rated portions.
Banks in Asia often create collateralized debt obligations for specific clients, rather than to sell to a wider group of investors, Hardee said.
"What you get a lot in Asia, that is different from Europe and the US, is that a large amount of CDOs are structured for one investor," Hardee said. "To date, most of the demand for CDOs in Asia has come from commercial banks and insurance companies, as part of their portfolio management strategy."
China's market for collateralized debt, which had its first deal last year, will take six years to develop as regulators ease restrictions and investors become familiar with the contracts, Fitch said in a report last Tuesday.
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