CDO Sales Reach Record $251 Billion in First Quarter, BIS Says

CDO Sales Reach Record $251 Billion in First Quarter, BIS Says

http://www.bloomberg.com/apps/news?pid=20601085&sid=abolDfXdeP64&refer=europe

By Hamish Risk

June 11 (Bloomberg) -- Sales of collateralized debt obligations reached a record $251 billion worldwide in the first quarter, led by bonds backed by credit derivatives, the Bank for International Settlements said.

Banks and asset managers create CDOs by packaging bonds, loans or derivatives into new securities. Sales of CDOs that pool credit-default swaps, contracts used to bet on corporate creditworthiness, rose 32 percent to $121 billion from the previous quarter, the Basel, Switzerland-based bank said in its quarterly review published on its Web site.

Sales of the securities helped push bond yields lower, the BIS said. CDOs create investor demand for underlying debt that is used in the securities.

CDOs are divided into portions of varying risk, which can offer higher returns than the debt they are based on or equivalently rated bonds. Cash CDOs package assets such as bonds or loans, while synthetic CDOs parcel credit-default swaps.

Credit-default swaps are financial instruments based on bonds or loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders against default. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to keep to its debt agreements.

While sales of synthetic CDOs reached a record, total issuance of dollar-denominated cash CDOs slowed in the quarter, according to the BIS.

Sales of CDOs pooling asset-backed securities increased 21 percent from the previous quarter. The derivatives are typically backed mainly by subprime mortgage bonds, or securities created from loans to homeowners with poor or limited credit histories.

The BIS, formed in 1930, monitors financial markets and regulates banks.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.