Despite intense hurdles for second-tier collateral managers new CDO transactions continue to come to market. According to IFR Asset-Backed Securities database there are currently 11 visible U.S.-dollar CDOs marketing debt tranches, and 15 deals still marketing equity, at this point. Saying equity is hard to sell has become as obvious a statement as saying the sky is blue.
"Many of my counterparts are waiting on the sidelines to see where the bottom of the financial markets is and what will be the reaction to further U.S. attacks," said a CDO equity investor. "Although equity investors are largely sidelined, the returns are great." Write downs of CDO losses such as American International Group's recent $125 million hit has taken-out several participants that bought at the bottom of the capital structure. Further, one of Europe's largest CDO investors, with over $600 million in CDO equity exposure, has put a freeze on buying high-yield equity largely because the firm doesn't see a realistic premium in high-yield bonds currently being purchased by collateral managers. However the firm is still buying ABS and bank-loan CDO equity.
As of press time, four arbitrage cashflow deals from top tier managers were near pricing $1.4 billion in paper in the +42-45 basis points over Libor range on the triple-A notes. The two most advanced deals, which were aiming to price on Friday, were the $272 million Seneca high-yield CBO IV Ltd (via Salomon Smith Barney) that reportedly had its triple-As soft-circled at +42, and the $300 million TIAA High-Yield CDO I, Ltd. (via Lehman Brothers) talking its triple-As at +43-45. On the CLO front, Goldman Sachs had the $400 million Ares V CLO talked at +43-44 and JPMorgan was working on the Denali, FSA-wrapped, CLO talked at +43, investors said.
On the synthetic CDO front, Bear Stearns continues to capitalize on the managed investment grade CDO product with billion dollar deals for Global Investment Advisors and Wells Fargo. Both deals will have super senior credit default swaps making up about 90% of the capital structure and 10% funded notes with 2% equity support.
One challenge in marketing synthetic investment grade CDOs is that the investors are not impressed by the rating migration statistics for triple-B bonds. "All it takes is two triple-Bs to drop into default and you're in big trouble," said one banker, who added that, "The more diverse the pool is, the greater the chance that there will be a couple of fallen angels in the muck."
