Though it's well known that fewer CDOs have been pricing lately - linked to difficulty in placing mezzanine tranches - Laurie Goodman, head CDO researcher at UBS Warburg, goes on the record in her monthly research report stating that several mezzanine CDO tranches are clearing at spreads considerably wider than where initially priced.
Lately, only well established managers have been able to sell their deals at all, especially without a surety wrap, either in the primary or secondary market.
In the secondary market there has been considerable year-end selling. One trader has taken several calls from investors asking for secondary triple-A positions with a 100 basis points plus Libor spread, with the understanding that some pool deterioration is acceptable.
UBSW says the large volume of secondary activity continues to be centered on senior, fixed-rate, non-PIKable paper. This paper, with a triple-A-rating, when swapped out (fixed to floating), is selling at levels of +110-150 basis points plus Libor. Double-A paper is even cheaper.
Last week, IFR Asset-Backed Securities saw a triple-A abritrage cashflow high-yield CBO from 1999 offered at around 170-area basis points plus Libor (average life six-years). Granted, the deal is failing a couple O/C tests and is in early amortization, but it is also trapping nearly 3% in excess spread per annum.
European investors are said to be buying secondary emerging market CDO equity at a 35% total return with a zero default assumption (no calls).
Lastly, dealers are understood to have plenty of distressed mezzanine and equity CDO paper to move before year-end, but these trades are said to be infrequent.
