While investors complain about depreciating CDO market value, others, with robust credit skills welcome the bargain hunting opportunities in the secondary market. Nothing pleases the vultures more than an ABCP conduit with wounded CDOs. "CDO secondary spreads have only one direction to move, and that's wider," said one industry insider.

The theory is that if the CDO ratings downgrade momentum continues, as it likely will, several ABCP vehicles could be forced to liquidate their first priority, triple-A positions. That would cause senior CDO spreads to widen and subsequently make the less attractive mezzanine bonds cheaper. The rating agencies do not allow CP conduits to hold sub double-A securities. And it is not uncommon for senior paper of arbitrage cashflow CDOs, slightly breaching ratings test, to see bids below 93.00.

It should be noted that a growing proportion of CP vehicle's CDO holdings are wrapped, either before or after a transaction closes - a booming business for the monolines.

For the conduits, CDOs are still the cheapest, easily accessible triple-A rated security around. Compared to seven-year average life, triple-A credit card ABS at 20 basis points over one-month Libor, a wrapped CDO offers a 20 to 24 basis point pickup.

According to JPMorgan Securities, ABCP conduits hold between $50 billion and $60 billion of all senior outstanding CDO paper. The firm derives its estimate from a review of the holdings of the top multi-seller conduits, securities arbitrage conduits, and structured investment vehicles (SIVs). According to Moody's Investors Service, the top 50 multi-seller conduits, accounting for $320 billion in ABCP daily outstandings, hold 5% of their assets in CDOs. While SIVs hold on average 5% to 6% of their assets in CDOs, securities arbitrage vehicles hold the most in CDOs - on average 30% to 35% of their assets.

An example of the direction spreads are heading is a triple-B rated C-class of a distressed arbitrage CLO from the 1999 vintage offered in the secondary market at 500 basis points over three-month Libor in July. The same issue's C-class, following the most recent dealer-mark, is 1000 basis points over Libor. Buyer beware.

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