World CDO credit crisis: Philippines secure…

August 10, 2007 at 3:30 pm Leave a comment

Sometimes lessons can be learned by the rest of world from the Philippine banking system and its slow conservative approach to stock investments while may slow the pace of growth have left it somewhat insulated from the ongoing credit crisis over investment securities overseas – in particular on subprime mortgages.


A credit crisis is sweeping the global financial markets although its impact will be felt perhaps in currency fluctuations and investment retirement funds – the western credit financed with stock and insurance and assurance markets tied into financial investment credits is somewhat in disarray.


At the center of the crisis are CDO’s meaning – Collateralized debt obligations (CDOs) are a type of asset-backed security and structured credit product. CDOs gain exposure to the credit of a portfolio of fixed income assets and divide the credit risk among different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are applied in reverse order of seniority and so junior tranches offer higher coupons to compensate for the added risk. CDOs serve as an important funding vehicle for portfolio investments in credit-risky fixed income assets.


Philippine central bank Governor Amando Tetangco says domestic liquidity is sufficient and that local banks have no significant exposure to the market for collateralized debt obligations (CDOs). Tetangco believes that any impact of the crisis on the domestic economy ‘will be largely indirect, mainly in the form of risk aversion. ”It is expected to be limited. Philippine banks are not exposed in any significant way to CDOs.

‘There is sufficient liquidity. More fundamentally, the increased availability of longer-term funding in pesos has also reduced the country’s vulnerability to adverse external market developments,’ he said.


Europe slammed by US credit crisis
International Herald Tribune, France – FRANKFURT: Fears of a credit crisis in Europe deepened Thursday, as a big French bank announced it would close three investment funds,
Credit crisis puts global finance to test International Herald Tribune
Subprime crisis hits BNP, sends markets reeling Indian Express
Markets fear crisis in capital Salt Lake Tribune


The Bank of Japan pumped one trillion yen into the local money markets Friday as overnight rates shot up amid fears of shrinking liquidity.


In Australia, the Reserve Bank injected more than twice the average daily amount of funds into the banking system. The central bank’s market data showed it injected 4.95 billion Australian dollars into the system Friday, well above the daily average for the year-to-date of around 1.86 billion dollars.


All of this – follow the European Central Bank’s move Thursday to pump an unprecedented 94.84 billion euros into the euro area money markets to meet a liquidity shortage after France’s biggest bank BNP Paribas froze three of its funds with exposure to the US subprime market as it could not accurately determine their value.




Investors can assess the various tranches of the CDO with full knowledge of what the collateral will be. The primary risk they face is credit risk. Which is currently what is being attempted to be addressed with the current cash in-flows into the banking and subprime sectors of the US credit system.


Under extreme pressures now are portfolio managers who are appointed to actively manage the collateral of the CDO. But in many cases the CDO’s much like 80’s venture capital has yet to see maturity and if credit is dried up in the meantime the deals and goals and financial situation could see movement and aversion from investors to take risks for something not yet ready. Think of it as investing in a dream or idea or program or platform – yet – while it will be worth something someday- currently -0 it is project under development. Often secured by collateral – but at the same time still being developed. Investors know if and when the projects come to full development the projects they have will see a high rate of return.


However – risks are there a managed deal often has three phases:


Ramp-up lasts about a year, during which the portfolio manager initially invests the proceeds from sales of the CDO’s securities.


The reinvestment or revolver period lasts five or more years. The manager actively manages the CDO’s collateral, reinvesting cash flows as well as buying and selling assets.


In the final period, collateral matures or is sold. Investors are paid off.


“At the time they purchase the CDO’s securities, investors in a managed deal do not know what specific assets the CDO will invest in, and those assets will change over time.” The defines it further by pointing out. “ All investors know is the identity of the portfolio manger and the investment guidelines that he will work under. Accordingly, investors in managed CDOs face both credit risk as well as the risk of poor management or credit crisis. ‘


It is in some cases CDO’s being at times proprietary in concept do not reveal goals plans or investment potential to those seeking investments – in simple terms – its higher risk for those with unknown or untried fund managers but is often clearly protected when fund mangers are large investment house or in some cases banks or financial institutions.



Entry filed under: CDO, Collateralized debt obligation, philippines.

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