As the mid-year point rapidly approaches, CDO professionals are not looking forward to the relaxed pace of a summertime market. After all, new issuance slowed early on this year. Market mavens are doing all they can to keep investors from singing the summertime blues and from sliding too deeply into secondary market activity.
Taking into account the current pipeline and recent new issues, it is clear firms are focused on selling structured product CDOs. The last three most recent U.S. market pricings were CDOs comprised mainly of asset-backed securities. Lubeck CDO Ltd., Callidus Debt Partners and Trapeza CDO LLC all issued ABS CDOs in June. Reportedly, CDO Repackaging Trust also issued an ABS CDO last week.
According to Deutsche Bank, of the $8 billion to $9 billion in the firm's current U.S. CDO pipeline, roughly $5 billion is comprised of structured product CDOs.
Of the approximately $20 billion in year-to-date global volume, half has come from the structured product sector: CDOs backed by ABS, RMBS and CMBS. So while high yield loans have garnered the most attention this year, according to Deutsche Bank, U.S. market issuance for CDOs backed by high yield loans is $3.1 billion compared to $8.9 billion for CDOs backed by ABS, CMBS and MBS.
Ratings actions this year have shined a positive light on asset-backed CDOs. While total downgrades is approximately $33 billion, ABS CDOs account for just
5% of that figure.
According to sources, two of the newest additions to the U.S. CDO pipeline are deals stemming from structured products,Independence IV CDO Ltd. and Lennar CDO 2003-1.
Lennar Partners' Lennar CDO 2003-1 is a $763 million structured finance vehicle containing real estate collateral with a weighted average life of 10.22 years. The arbitrage cash flow deal is agented by three firms - Deutsche Bank, Merrill Lynch and Morgan Stanley - an unusual sight on the CDO front. The Lennar CDO features a plethora of tranches - A through F - and the lowest tranche comprises the majority of the deal, 45%, or $343.2 million. The CMBS collateral pool breaks down as: retail, 34.5%; office, 26.8%; and multifamily properties, 22.8%.
Independence IV is a $400 million cash flow CDO backed by ABS and MBS collateral with a weighted average life of 7.5 years. The deal is managed by Declaration Management & Research LLC, which was previously known as Independence Fixed Income LLC. Declaration's parent company is John Hancock Life Insurance Co, a double-A rated credit by Fitch Ratings. Credit Suisse First Boston is the deal's agent. One noteworthy item of the deal is that excess spread exceeding a 10% equity cap will be used to pay down subordinate notes.
At press time spreads on Duke Funding Ltd. tightened from last month; the deal's I-B $12 million tranche reportedly saw spread talk go from 125 basis points over the three-month Libor to current talk of 100 basis points over the same benchmark. Duke Funding's top tranche, I-A, worth $300 million, is heard to be at 65 basis points over the three-month Libor, or at 55 basis points with a wrap. The CDO's manager is Ellington Capital Management and the deal is comprised of diversified structured finance collateral.
Finally, with so much focus on the high yield loan market, recent pipeline entrant NYLIM Flatiron CLO 2003-1 already has price talk. Sources report the $350 million leveraged loan-backed CDO has top tranche talk at 54 basis points over the three-month Libor and B tranche talk at 90 basis points over the same benchmark.