Just as the Euro market seemed ready for a slowdown, CDO flow is nearly matching London's heat wave, with temperatures in the city soaring above Barbados' high.
The majority of new CDOs are backed by ABS and leveraged loans, primarily driven by investor appetite for stable underlying assets to counterbalance new interest in the corporate unsecured markets, said analysts at Dresdner Kleinwort Wasserstein. Expect the steady flow of that collateral to continue through the second half of the year, the analysts said.
On the sell side, banks are taking advantage of favorable spreads for ABS. Tightening in cash ABS CDOs has allowed collateral spreads to remain firm. "Although most CDOs of ABS are now being structured synthetically, cashflow deals have achieved tighter pricing," reported Dresdner.
A number of deals priced in the first week of August, when market activity typically hits a lull. Alexandra Capital plc Series 2003-1, a 3 billion (US$3.4 billion) synthetic CDO of ABS, saw all tranches meet price guidance. The triple-A notes priced at 60 basis points over three-month Euribor, the class B piece priced at 90 basis points over three-month Euribor, and the class C notes priced at 150 basis points over three-month Euribor.
Galway Bay priced its 367 million (US$418 million) leveraged loan CLO last week. The transaction is the third to come from Allied Irish Bank Capital Markets (AIB). According to market sources, pricing on the floating-rate notes came in tighter than the GSC Partners leveraged loan deal that priced in July. The triple-A notes cleared at 58 basis points over three-month Euribor, the single-A, triple-B piece and double-B minus notes priced at 175 basis points, 300 basis points and 700 basis points over Euribor, respectively.
A new 165.3 million (US$188 million) deal from BNP Paribas, Leveraged Finance Europe Capital II, saw some tightening as well. All notes priced according to guidance, with its floating-rate, triple-A tranche finishing at 60 basis points over the six-month Euribor - five basis points under talk. BNP also began marketing 263.7 million (US$300 million) of notes from its Illiad Investments synthetic CDO of ABS that is being offered to investors over four series: 10, 11, 12, 14. According to market sources, the characteristics of the portfolio in series 10, 11, and 12 are much like the reference portfolios, except that the first loss threshold differs and the amount of substitution may vary over time. "This effectively allows investors with different risk appetites to be targeted with the same initial portfolio," one analyst said.
A new managed arbitrage CDO for the Bank of Ireland also began marketing last week. Partholon CDO will be managed by J.P. Morgan and offers investors six tranches backed by European senior and mezzanine loans. It will be the first CDO issued from the Bank of Ireland, which beefed up its acquisition finance arm in 1996 and has since gathered over 3 billion (US$3.4 billion) of mezzanine transactions. It maintains its focus primarily on Ireland, the U.K., France and Germany.