Last week, Deerfield Capital priced an investment-grade average CDO, with the triple-As and double-As coming in at the tightest levels seen this year for that type of deal.
The transaction, called Valeo II, was brought to market by Credit Suisse First Boston. The triple-A wrapped seniors printed at +43 over the six-month Libor, while the double-As came in at 70 over the same benchmark.
"Having IG collateral from an experienced manager with several well performing CDOs was what pushed spreads in," a source close to the deal said.
The triple-Bs, however, were a tougher sell, printing at +260 over the six-month Libor, 30 basis points wider than the tight end of talk.
The triple-B tranches of IG CDOs often widen out, as investors feel squeezed between the seniors at the top of the waterfall, and the well compensated equity note holders.
Valeo II has a 10% bucket for synthetics, which the manager will likely make use of to capture spread, or "juice," as buysiders say.
One of the benefits of doing an investment grade CDO for the manager is the efficient ramp-up period. Deerfield reportedly was about 60% ramped-up by early March, just weeks after placing all of the equity. If the ramp-up wasn't well underway early in the year, Deerfield would have missed the arbitrage, due to a sustained rally in corporate spreads, sources familiar with the situation said.
Although the average rating on Valeo II is Baa2/Baa3 (rating factor 560), the deal can include up to 10% securities rated below Baa3, with the lowest allowed credit being Ba3. The average dollar price of the portfolio is 97 cents. Currently, the deal is 85%-90% ramped-up. The portfolio is made up of non-callable bonds, and the deal has a four-year non-call period.
Deerfield is taking 40% of the equity in-house or through its affiliates. The company is 25% owned by Sumitomo Life Insurance.