Global issuance of the complex debt securities at the heart of the credit bubble has collapsed in the wake of thousands of ratings downgrades this year, cutting huge revenues from the biggest investment banks.
The volume of collateralised debt obligations, which pool together bonds, loans and other debt, sold in the first half of this year is equivalent to just 10 per cent of the volume in the first half of 2007, according to the latest data from Dealogic and Total Securitization.
The credit crisis that struck last summer has left banks nursing heavy losses on CDOs they either invested in or intended to sell but could not, while at the same time decimating what had been a hugely profitable business line.
Banks such as Merrill Lynch, Citigroup and JPMorgan have seen quarterly sales volumes of such products drop precipitously. Merrill sold $33bn worth of deals in the first half of last year and less than $1bn this year. “It’s the wind-down of leverage that has hit the market since early to the middle of last year,” says Eric Saari, managing director, structured research at TIAA-CREF, the US pension fund. “The losses by banks, brokerages, and other financial institutions has forced them to pull back.”
Investors have deserted all kinds of complex products since last summer, but CDOs have suffered disproportionately as waves of downgrades have hit these deals. Analysts at Morgan Stanley said on Thursday that more than 10,000 ratings downgrades had been handed out by the ratings agencies so far this year.
CDOs made up of slices of mortgage-backed bonds and CDOs have accounted for 86 per cent of those downgrades, with many of these being deals that were issued in 2006 and 2007 at the height of the market.
While CDO issuance in the US continued to fall versus both the previous quarter and year over year, Europe saw a rise in CDO volume in the second quarter from the first. Some 12 deals were done for $6.9bn versus 8 deals for $2bn in the first three months of the year.