Credit Based Asset Servicing and Securitization (C-BASS) will become one of the first home-equity/mortgage shops also to be a collateralized debt obligation (CDO) portfolio manager.

The $260 million deal, which is backed 65% by residential mortgage-backed securities and 35% by asset-backed securities, is being led by Credit Suisse First Boston. At press time, CSFB was pre-marketing the equity piece. The bonds backing the deal have an aggregate average rating below triple-B-minus, according to rating agency source.

"What's unique about this one is that there's going to be a lot of non-investment grade subordinate tranches in it," said an agency source. Most of the current asset-backed CDOs tend to hover around the triple-B quality range, the source added.

C-BASS has been a regular issuer of both asset and mortgage-backed securities.

The company brought five transactions for nearly $1 billion to the ABS market last year, according to Thomson Financial Securities Data. In addition to its servicing operations and home-equity term deals, C-BASS is also an investor of subordinate bonds. As one source put it, "They buy the tranches that have the most juice."

Because C-BASS tends to buy the riskiest bonds, they usually retain special servicing rights on the deals.

C-BASS has done re-securitizations in the past, through structures that are comparable to net-interest margin repackagings (NIMs), one source said.

However, CDOs of ABS were one of last year's blow-out trends, and, according to the rating agencies, it's not surprising that the market is seeing less traditional collateral manager types tapping the arbitrage vein.

Ironically or not, the rating agencies continue to release default studies demonstrating how well securitized products perform in the long term, when compared to corporate debt. A source noted the likelihood that the agencies are responding to this growing market of CDOs that repackage ABS, MBS and CMBS.

CDOs Circling

Also in the market last week, Netherlands' based M&G Investment Management Ltd (Prudential M&G) will manage a portfolio of various classes of fixed- and floating-rate notes in a European arbitrage CDO called Panther CDO I BV. The transaction comprises five tranches totaling GBP313 million in all. Morgan Stanley Dean Witter is underwriting the deal.

The proceeds will be invested in a GBP300 million portfolio of investment-grade and high-yield bonds, private placements, bank perpetuals, structured finance securities and senior secured loans, according to the presale report.

The issue will be carved into two senior tranches, a GBP240 million class I and a GBP32 million class II. The mezzanine class III will be GBP17.5 million in size and there will also be subordinated notes and combination notes for GBP23.5 million and GBP5 million respectively. All tranches mature in 2016

Also last week, Lehman Brothers priced the $300 million Saybrook Point CBO. Collateral manager on the deal is General Re/New England Asset Management. The deal was set to launch the week prior, but was pushed over the weekend.

Quietly some bankers were admitting that selling the equity in CDOs is not as easy as it could be with the string of bankruptcies the U.S. has seen in the recent weeks and more than a few CDO downgrades of late.

For example, CDO investors were in shock that within one month two triple-A rated CDO transactions had been downgraded for the first time. NorthStar 1997-2 was dinged by Standard & Poor's on Jan. 4 to AA from AAA and Fitch downgraded the deal to AA+ from AAA on Jan 5. Eisberg Finance Ltd. also known as BISTRO 97-1000 was downgraded to Aa1 on watch for downgrade from Aaa (also see California, page 2). - DG/MG

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