New names continued to enter the CDO market last week. While Morgan Stanley is edging in on the launch of EPOCH II, a synthetic CDO, via an FSA wrap, and UBS Warburg is in the market with three mandates totaling approximately $1.2 billion, Aladdin Capital, a newcomer, was in the pipeline with a leveraged loan-backed CDO via Bank of America.
And there's more: Cashel Rock is on the table for UBS Warburg; the $300 million high-yield CBO will be managed by Allied Irish's New York-based U.S. high-yield group. UBSW, along with joint lead Soc Gen, is also working on Diversified Global Securities, a $300 million fully funded cashflow CDO for UBSW Principal Finance.
Diversified Global is a static pool of mezzanine CDO investments with an average rating of double-B. One buysider said that double-B CDO tranches are less common, which begs the question of whether there are distressed CDO securities in the pool. UBSW Principal Finance previously closed North Street CDO III in late April, a $2 billion synthetic CDO backed by debt purchased by the firm.
CDO pricings continued to tighten last week, sources said. CIBC priced Nova, a high-yield (2/3 bonds / 1/3 loans) CDO for Phoenix Investment Partners, at Libor plus 44 with an FSA wrap. Antares Asset Management, a subsidiary of Mass Mutual, is the subadvisor on the senior secured leveraged loan pool. The manager is a subsidiary of Phoenix Home Life Insurance and has several outstanding CDOs.
Mitchell Funding, the $250 million market value CDO deal for White Ridge Investment Advisors, has also priced. The double-A rated deal from all three agencies priced at Libor plus 100 basis points via Bank of America. The underlying assets were high-yield bonds. Additionally Goldman Sachs priced Capital Guardian HY CBO I, a $316 million high-yield CBO, at Libor plus 45 on the triple-A's.
Eastman Hill Funding I, a true multi-sector CDO for Trust Company of the West, has reportedly placed the majority of its preferred shares. It is structured to maximize TCW's Los Angeles fixed-income group's expertise by utilizing models, research and staff. The deal, for between $600 million and $730 million, has three tranches with 87% triple-A bonds talked at Libor plus low 50's (average life of eight years, final maturity in 2031). Ten percent of the deal is single-A minus, talked at Libor plus 150-160 basis points, and about 3% of the pool is preferred shares.
Of note, TCW printed the first GEM Leverage Investment (LIGOS) I at Libor plus 46 basis points with an MBIA wrap, via Morgan Stanley. The company also priced the first visible investment grade average arbitrage CDO backed by emerging market debt late last week, also with Morgan. The innovative CDO is expected to be the first of a series of Leveraged Investment Grade Opportunities (LIGOS) transactions from TCW, sources close to the deal said. The $300 million deal has an MBIA wrap on the senior class. GEM Ligos is the tightest print of the year for an emerging market CDO, coming +9/Libor tighter than the last EM CDO, Atlas CDO Ltd, from U.K.-based Ashmore Asset Management. Ashmore's EM CDO printed at +55/Libor on a seven-year WAL with an FSA wrap.
According to market participants, one of the biggest challenges in getting the LIGOS deal off the ground was getting the rating agencies comfortable with the first IG average collateral, sources said. For example, the recovery rate assumption on the assets is 25 cents on the dollar, even if the credit is investment-grade, but the issuer is domiciled in a below-investment-grade country. Also, limiting the size of a GEM LIGOS bet on one particular country was a concern for the rating agencies.
On the bottom classes, only the class IIA "Aa1" tranche was a floater, pricing at +100/6-month Libor.
Meanwhile, Asia is continuing to play a larger role in buying CDO equity as was seen in the recent high-yield CBO, Liberty II, for Wellington Management.
Overseas Chinese Banking Corp. is listed as the Asset Manager on the blacks for Liberty II, Wellington Management's latest high-yield CBO via Lehman Brothers, while Wellington is listed as the investment advisor. Sources away from the deal see this set-up as Wellington managing the day-to-day operations of the high-yield portfolio and OCBC as managing the equity.
Liberty II is the third CDO that Lehman has done in 2001 involving Asian entities. Furthermore, Sumitomo Life Insurance has a 25% ownership stake in Deerfield Capital which is known as a CDO factory and frequently takes at least 40% of the equity in its deals for itself or affiliates.
"Asian banks and investment shops have a keen interest in getting involved with US and European asset managers and CDOs are a mechanism to forge those relationships," commented one CDO banker.
