Deals continued pouring out of the collateralized debt obligation pipeline last week, in line with the ABS surge of issuance that has rocked the market this month.
According to industry analysts, cash flow arbitrage CDO issuance levels could match or slightly exceed 1999 figures, despite the relative void of issuance seen at the beginning of the year. One of the reasons for the healthy issuance is the growing investor appetite for CDOs, which has tightened trading levels.
"What's going on is that there's a lot of new investors in the market for CDOs," said Glen McDermott, head of global structured bond research at Salomon Smith Barney. "One of the primary drivers of the new investor base are the repackaging vehicles, for example CDOs of CDOs. We think that that's one of the key drivers of demand right now."
Additionally, multi-seller conduits are becoming more apt to invest in CDOs. For example, last week Clipper Receivables Corp. a multi-seller asset-backed commercial paper program sponsored by State Street Bank & Trust Co. purchased $25 million in CDOs, according to a report from Moody's Investors Service.
Further, traditional investors are getting approval to buy further down the credit spectrum, McDermott said (see Erisa, page 1).
"So you have a kind of demand-driven phenomenon here, and even though losses in the high-yield market have been trending upward over the last eighteen months, spreads are coming in on CDOs," he explained.
Triple-A senior bonds will trade at about Libor plus-40, which is 10 basis points to 15 basis points inside of where they were trading at a year ago. Near term, McDermott anticipates some softening in CDO spreads, but sees additional tightening as the market heads into next year.
"I think we could see spreads in the triple-As come down into the mid-30s by the beginning part of next year," McDermott said.
Deals in the Market
The New York arm of Fuji Bank, acting through Mountain Capital Advisors, closed Mountain Capital CLO II last week, according to a source close to the transaction. Bear, Stearns & Co. was the lead. The deal is structured in six parts, not including the equity piece. Ratings range from triple-A to double-B-minus.
Deutsche Bank was said to have placed a deal called Nemean CLO, which has a triple-A senior tranche worth at least $610 million. ING Barings was said to be a co-manager on the deal.
Salomon Smith Barney was shopping Knight II Funding, a CBO backed by corporate bonds and junk bonds. The deal is structured in at least two parts, with a floating-rate triple-A class just over $400 million in size, and another triple-B class worth $26.5 billion, according to sources. Further details were unavailable.
Knight II appears to be a follow up to Knight CBO I, $500 million deal which priced in December 1999, also via Salomon Smith Barney.
First Union kept its pace, placing Tyron CDO, a $500 million deal managed by First Union Institutional Debt Management, FU's in-house asset management shop. The deal comes on the heels FUIDM's most recent Apex CDO I 2000-I, a $800 million deal said to have closed mid last week.
J.P. Morgan placed the Diamond Investment Grade CDO last week, which is being managed by American General Investment Management. The $512 million deal was structured in at least three parts: a $415 million floating-rate A-1 class rated Aaa by Moody's, a $29 million floating-rate B-1 class and a $36 million fixed-rate B-2 class, both rated A3 by Moody's, according to a statement from the agency.
Centre Pacific closed its $400 million Sierra CLO last week, which was managed by Banc of America Securities and CIBC World Markets (see profile, page 1).
Banc of America Securities was marketing a synthetic balance sheet CLO, with a reference portfolio of $10 billion. According to market sources, the deal could issue up to $750 million in bonds.
Structured Credit Partners was out with a $500 million repackaging, backed by real estate investment trust (REIT) debt and commercial mortgage-backed securities. There was talk of a deal from Coast Asset Management, a $400 million repackaging of ABS and CDOs.