CDOs/CLOs

Personal income growth is expected, by and large, to exceed upward movement in both the per-capita cost of energy and adjustable-rate mortgage payments upon rate reset among non-agency borrowers, according to a recent report by Friedman Billings Ramsey. And, while consumers may be spending less in general expenditures when their mortgage rates do reset - causing a dampening in economic activity - the behavior "should support timely mortgage payments," FBR's Michael Youngblood wrote in a report released last week.

While roughly one-third of outstanding subprime mortgage loans are scheduled to reset into higher interest rates, mortgage issuers are expected to be waiting in the wings with a new suite of affordability products to help keep mortgage payments manageable, according to Fitch Ratings. And while prime and alt-A borrowers are anticipated to favor fixed-rate products, subprime borrowers are likely to remain in the adjustable-rate sector.

Fortis Bank recently completed one of the first synthetic CDOs incorporating credit default swaps with varying maturity dates. The Regatta CDO, issued by Solent Capital, includes both five-year and eight-year maturing credit default swaps. The structure is expected to become more popular as innovation within the managed synthetic CDO market continues developing.

LAGUNA NIGUEL, CALIF. - Credit opportunity funds - defined as a fund that allows the manager to rejigger his or her asset mix - are employing that flexibility to swoop in and purchase discarded CDO bonds, said Dale Leshaw, head of credit at Alcentra, during a panel discussion at Opal Financial Group's CDO Summit held here last week.

The U.S. ABS primary market posted another extraordinary week, generating $23 billion in issuance and continuing the predicted flood of paper as issuers rushed to get deals finished before the Jan. 1 implementation date of the Securities and Exchange Commission's Regulation AB.

After nearly two years of leaping regulatory hurdles, Houston-based CenterPoint Energy priced a $1.25 billion rate reduction bond offering last week. The deal is to be the first chunk off a $1.85 billion RRB program approved this spring, with the next $600 million offering slated to hit the market sometime in 1Q05. Credit Suisse First Boston, Lehman Brothers and RBS Greenwich Capital led the current deal, which priced Friday morning, after ASR went to press.

Much attention lately has been paid to the prospective performance of subprime mortgages originated to borrowers this year. The 2005 vintage, some say, consists of borrowers that either needed to refinance to avoid payment shock from earlier originated mortgages, or, borrowers that couldn't get a loan until lending standards reached down far enough to scrape them off the credit barrel's bottom.

Managing a loan or bond portfolio is a far cry from what it used to be, thanks to recent market developments such as the rapid growth of credit derivatives.

The credit derivatives market has grown so exponentially (by 86% in 2005 alone) that its notional value of $5.3 trillion now tops the $5.0 trillion of the entire US corporate bond market, according to a Fitch Ratings survey released recently. In the process, it has thrown an occasional scare into the capital markets and raised more than a few eyebrows, especially among regulators. That situation will likely intensify in 2006, as credit derivatives look to get even riskier, and have an even larger and potentially more volatile impact on the high yield bond market.

Year to date as of 12/09 Term (days) 12/05 12/06 12/07 12/08 12/09 1-week