CDOs/CLOs

Some CDO collateral managers have restructured their existing management fees to remove any performance-based compensation, so that they can avoid consolidation under Financial Interpretation No. 46-R.

Homestar Mortgage recently completed its first term securitization backed by $308 million of Alt-A mortgages and underwritten by Citigroup Global Markets, according to records filed with the Securities and Exchange Commission. This transaction is larger than the $200 million deal the company initially planned when it received regulatory approval last year (See ASR 8/11/03).

The U.S. ABS primary market had a respectable, if somewhat limited, week of new issue supply, pricing roughly $11 billion in primarily mortgage ABS. Aside from home equity, auto loan and student loan ABS were the only other options investors were given.

Downgrades in the term ABS market appear to be stabilizing, while upgrades have increased on a comparative basis, according to a new monthly ratings-action study published by Fitch Ratings. The inaugural edition of Fitch's Term ABS Credit Action Report incorporates commentary and analysis from Fitch's corporate and financial institutions group to keep investors informed of any recent rating actions that may impact their portfolios.

An Equity Default Swap (EDS) is a derivative contract between two parties - a protection buyer and a protection seller - whereby the former has the right, in exchange for the regular payment of a premium (fixed payment), to receive from the latter a protection amount (floating payment) in case of a "trigger" event.

CDO spreads are tight and a shortage of new issuance supply has helped drive investors into the secondary CDO market over the past year. But, according to market sources, a confluence of other events has helped spur that activity as well.

In what may be the next arena of expansion for the rating agencies, Moody's Investors Service has assigned its first servicer rating for a non-mortgage entity. As was the case when rival Standard & Poor's launched its non-mortgage servicer ratings last October (see ASR 10/6/03), Moody's views the credit card sector as where servicer ratings have value. Look for Moody's to move into other assets as well.

Merrill Lynch's Christopher Ricciardi, who heads the firm's global structured credit products group, had some choice words for dealers competing in the CDO market: put up or shut up.

A more mature market basking in the benefits of increased transparency. The birth of fluid, secondary trading. Fresh new asset types and improved structures. These were the mantras of IMN's annual New York-based CDO conference last week.

Investors in asset-backed securities have had a crash course in distressed scenarios over the past few years, beginning with, perhaps, the collapse of Heilig-Meyers in late 2000, the messy servicing transfer that followed and the ultimate disturbing recoveries to the once triple-A rated bonds.