Merrill Lynch & Co. is expected to close this week the ninth cash CDO managed by Mclean, Va.-based Declaration Management and Research LLC.
The $502.9 million deal, Independence VII CDO, will be backed by a portfolio of residential mortgage-backed securities, CDOs and commercial mortgage-backed securities.
The deal, which matures in 2045, will be 70% ramped at closing with an additional 120-day ramp-up period and a three-year revolving period. Most of the CDO's collateral, 89%, will consist of subordinated RMBS. Fifty percent of that allocation will be subprime mortgages.
A little under half of the CDO's assets could consist of synthetic securities, which are allocated as much as a 40% bucket. Growing liquidity within the synthetic ABS market has allowed deals such as this to come to the market in a shorter amount of time than an entirely cash deal. Managers have more flexibility to choose assets to reference instead of scooping up only those cash securities that are available. The last CDO issued by Declaration - the Independence VI CDO - had a 25% bucket for synthetics and was significantly larger, at $956 million. The deal closed on June 30.
When the CDO is fully ramped, uninvested proceeds of this deal will be used as either interest or principal proceeds and distributed according to priority of payments, as opposed to many CDO transactions that cap the portion of uninvested proceeds that can be distributed as interest, according to Fitch Ratings.
JPMorgan Chase Bank will act as trustee on the Independence deal. As of the end of last year, Declaration had completed $6.9 billion in actively managed structured finance deals and had about $13.5 billion in assets under management.
Two Declaration-managed deals - Independence I CDO and Independence II CDO, which were closed in December 2000 and July 2001 - simultaneously received downgrades from Fitch last week. Independence I's class A notes were downgraded to A' from AA'; its class B notes were downgraded to B' from BB'; and the class C notes were bumped to C' from CC'. Like many CDOs of that vintage, that deal consisted of 44% ABS and only 16.1% RMBS. The Independence II deal's class A' notes were downgraded to A-' from AA'; the class B notes were downgraded to CCC' from BB-'; and the class C notes were downgraded to C' from CCC'. That deal had only a 16.2% concentration of ABS, a 42.3% exposure to CMBS and 34.5% to RMBS.
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