The CDO issuance lag earlier this year seems to have gone the way of winter, with a number of deals pricing last week and several more entering the pipeline - but it's still a market largely dominated by RMBS volumes. According to market figures, the near-term pipeline is at $25.8 billion equivalent.
Fuelled by falling default rates on both the speculative and investment-grade levels and a decrease in downgrade activity, corporate credit quality is beginning to show signs of stabilization - the impetus needed to fuel further growth in the CDO sector. CDO issuance is in fact on the rise, which could be a reflection of this renewed investor confidence.
According to figures released in April by Dresdner Kleinwort Wasserstein, CDOs reached a volume of $2.7 billion, qualifying it as the second-biggest asset class that month. The market has been dominated so far by highly structured synthetics, and the underlying assets are largely led by investment-grade credit default swaps as well as ABS and leveraged loans. These transactions are generally structured either as highly levered deals backed by a small number of triple-A tranches or as less levered transactions backed by a substantial amount of subordinated obligations.
New in the market was the first CDO of ABS managed by Dutch-based Faxtor Securities B.V. The $335 million equivalent CDO is backed by a portfolio of between 70 and 80 mezzanine tranches with no exposure to CDOs. The portfolio was made up primarily of ABS backed by consumer- and property-related assets. The deal was managed by Bear Stearns and marketed and sold throughout Europe to a diverse investor base.
RMBS issuance continues to maintain strong volume. The fourth Dutch RMBS transaction to reach the $1 billion (U.S. equivalent) mark heralded the beginning of May. The Arena 2003-1 transaction priced the triple-A rated class A1 and class A2 notes at 25 and 33 basis points over the three-month Libor, respectively. "Following some softening on the back of strong supply during the first quarter, triple-A RMBS spreads have heightened slightly over the past four weeks," reported Dresdner.
Market sources have indicated that at least four other big issues are expected in May alone, including the Granite structure, Mound, Bankiter and another TDA transaction. The Granite structure is offering sterling-denominated triple-A notes and Euro-denominated triple-B notes. The Mound transaction brings Royal Bank of Scotland back into the RMBS arena after a period of absence. The deal will issue notes in dollar, Euro and Sterling denominations.
On the CMBS side, the $374 million equivalent U.K. CMBS deal Hermoine ELOC 14 was expected to price last week. Price guidance on the double-A rated notes was revised to 65 basis points area over the three-month Libor early last week from earlier guidance of 70 basis points over. Price talk for the class A notes has been heard at 43 basis points over, 45 over for the Class B notes, 100 over for the
class D notes and 200 over for the class E notes.
Also expected to price last week was the $926 million equivalent U.K. CMBS Lombard Securities No.1 plc. Sources noted that CMBS deals are taking more and more time to market because of deal complexity and increased concentration issues coupled with negative news on the commercial property market.
Longer marketing times haven't been enough to deter new entrants, however. The first CMBS transaction backed entirely by Swiss commercial real estate began marketing last week. Eiger Trust, the $801 million equivalent transaction issued by Mable Commercial Funding, is expected to price by this Monday. The class A tranche carries a 4-year average life, and the remaining four tranches are marketed with a five-year average life. Guidance for the $292 million triple-A piece is at 35 to 38 basis points over the three-month Euribor. The double-A notes came in at 70 basis points, the single-A notes are at 105 basis points and the triple-B notes are at 200 basis points.
The notes are backed by rental and disposal proceeds from 112 commercial real estate units owned by Lehman Brothers Real Estate and SPS Property Management AG. State majority-owned telephone company Swisscom acquired the majority of the properties.