A handful of deals backed by mezzanine CDO tranches are currently in the market, two of which structured with no triple-B or double-B debt classes, typically the most difficult to sell in an a CDO-of-CDO - especially of late, as there seems no end to the downgrades associated with the lower rated tranches and subsequently widening funding costs.
Zais Group's ZING transaction is a whopping $600 million deal via Deutsche Banc. Sources said the trade has a higher quality pool than past CDO-of-CDOs, allowing DB to structure the deal with no debt classes rated below than single-A.
"The cost of funding for junior mezzanine debt in CDOs has jumped up in 2002, so eliminating the lower rated classes can lower the overall funding costs in a CDO," commented one Street analyst.
ZING's $437 million, triple-A rated A1-class is heard at Libor plus 50 basis points area, while the $38 million, Aa3-rated A2-class is heard at Libor plus 80 area. The $59 million, A3-rated B-class is expected at Libor plus 150 basis points. The equity slice will be $60 million ($10 million of par).
Lehman Brothers is lining up Coast III, a $300 million CDO-of-CDOs, for Coast Asset Management. Financial Security Assurance (FSA) is wrapping the deal, which is also absent triple-B or double-B tranches. Investors report the weighted average rating is targeted at 640, which is below investment grade. Coast is structured as 72.5% triple-A (A/L 10-year), 7.0% double-A rated B-class (A/L 11.5-year), 9.0% single-A rated C1-class (A/L 11.5-year), 2.0% single-A rated C2-class (A/L 11.5-year), and equity 9.5%. Moody's Investors Service is the only agency rating the sub classes.
Lastly, Bear Stearns has a $117 million CDO-of-CDOs deal offering only the double-A notes. The six-year average life deal is rated by all three rating agencies. Since the offering is a static pool, no active management is required and no manager is mentioned in preliminary marketing materials. Investors suspect Bear is managing the deal off its own book, sourcing balance-sheet inventory and a major client's holdings.
Most of the pool is triple-B CDO positions. A coupon of 100 basis points over three-month Libor was listed in the documents, which is likely a modeling level, investors report.