The dichotomy of tight bids on CDOs and a deteriorating high-yield bond market continued last week.
Despite anecdotes of high-yield deals with swelling triple-C buckets from the 1997-1999 vintage, Loomis Sayles Co.'s $285 million HY CBO appears poised to print in the area of 40 basis points over six-month Libor on the triple-As. Loomis has been seen marketing as tight as 38 basis points, with the tightest bids coming from the new conduits in Europe, sources speculated, though the orders were not enough for lead manager Salomon Smith Barney to complete the triple-A tranche at those levels. Bankers say CDOs haven't broken the 40 basis points over Libor floor since the Russia defaulted in 1998.
Meanwhile, one European portfolio manager told IFR Asset-Backed Securities it had sold off its entire $55 million area triple-A arbitrage, cashflow high-yield CBO portfolio at a profit. The sell-off was a credit decision, the manager said. One of the investor's CDO positions had its triple-A wings clipped a notch, and was still sold at 98.4 versus par.
"That triple-A CBO that fell to double-A could likely be worked-off at 94-95 cents on the dollar, while vulture CDO traders would be bidding the bonds at 91 cents," the portfolio manager said.
According to one prominent investment officer, upper management at several institutions have asked their portfolio managers to value the equity on their books. "If you're marking your book that the equity is worth 98 cents on the dollar, but your next bid is 90, you have a valuation problem," the source said. "The directive seems to be, If you cannot demonstrate what the stuff [equity position] is worth, get rid of it.'"
Seasoned HY CBOs appear to be where most of the focus remains. The second source of CDO equity in the secondary market is legacy CDO positions on underwriters' books that never made it out the door for one reason or another, sources said. CDO underwriters will sometimes take an equity position up to their management fees. Of dealers making a market for CDO equity, sources mentioned Deutsche Bank Alex. Brown, Credit Suisse First Boston, and Bear Stearns.
Along with Loomis, Deerfield Capital Management's Mid-Ocean II ABS CDO is in the market, talked at 50 basis points over three-month Libor. Despite coming out with market levels at 250-275 on the triple-B floater, Bear is now marketing this tranche at 275, sources said. Spreads on ABS CDO triple-B notes have been widening out over the past several weeks, likely due to credit concerns.
Deerfield plans to have $5 billion total under management by year-end.
Lastly, in the secondary market, about $13 million in 1997 and 1998 vintage emerging market CDO positions have been sold from a major U.S. dealer, which likely had the bonds in inventory, according to London CDO buyside sources.
One EM position had a class-B $4 million-area junior equity piece sold at a base case YTM North of 28% (discount of nearly 50%); maturity 3/2015, the investor said. At that offering level the position could withstand a 10% annual default rate and still break even, assuming a 50% recovery rate and no call. UOB Asset Management Ltd, of Singapore, is the collateral manager.
The investors said they are hearing the dealer has a few more EM CDO pieces in the 1999 and 2000 vintage still available.