CDOs/CLOs

KKR Financial, a San Francisco-based specialty finance real estate investment trust is launching an asset-backed commercial paper program to chase yield and continue to fund its mortgage loan business. The vehicle, called KKR Atlantic Funding, will issue up to $5 billion in secured liquidity notes.

Drawing on reserve funds has become more common among U.K. subprime RMBS transactions, with two deals siphoning cash just this month and others likely to follow.

The home equity loan sector back in the early part of the millennia - along with other segments of the capital markets - grew comfortable with a historically low interest rate environment, structuring their deals accordingly. Fast forward to the present, in the face of rising interest rates, some of those deals might face interest shortfalls that hit their available funds caps thus exposing them to greater basis risk, JPMorgan Securities analysts say.

The asset securitization market did not exactly come roaring back last week from its spring break. While market professionals hoped that the market would produce about $14 billion in new issuance by week's end, it actually came in at about $5.2 billion by press time.

While speculation continues to swirl about a pullback in the housing market, the homebuilder market is seeing slower top-line growth, ample unsecured credit agreement capacities and large cash balances. Combined, these factors have driven down debt issuance among home builders, and the trend is likely to continue, said Standard & Poor's.

More trust preferred securities-backed CDOs are expected to come to the market this year - with the number of rated deals topping $30 billion this month. Furthermore, these upcoming transactions are expected to contain a wider range of assets compared to older deals.

Last week Polaris Securities became the latest Taiwanese entity to complete a collateralized bond obligation. As with the previous issues, Polaris' NT$12.2 billion ($376.8 million) deal was an attempt to address the drop in value of structured bonds in Taiwan that has hit bond funds in the last 18 months (ASR, 10/31/05).

Bit by bit, more light is beginning to shine through what is arguably the most opaque corner of the CDO market - equity tranches. Helping matters are some initiatives from market players including Moody's Investors Service's recent announcement that it would begin tracking CDO equity return data. Furthermore, Wachovia Securities - whose analysts were concerned that Moody's data reflected bleaker-than-realistic returns - took that information a step further in order to ascertain more precise figures.

Commerzbank kicked off the season for small and medium enterprises (SMEs) loan CDOs with its CB Mezzcap deal, which priced at the beginning of April. It was closely followed a week later by a transaction from HSBC Trinkhaus & Burkhart. On the heels of these two transactions, market sources say there are several more CDOs of this type expected to come to market later this year.

Like many of his peers in the European leveraged loan market, Don Procter, chief investment officer of London-based investment management firm New Amsterdam Capital Management (NAC), believes that the unprecedented growth in the asset class should be viewed with some caution.