While much of the structured finance market in Europe was badly affected by contagion from the subprime problem in the U.S. and the ensuing liquidity crunch, leveraged super senior (LSS) CDOs - a little-known facet of the European collateralized debt obligation marketplace - seem to have held their ground. And experts believe that this market can continue to hold its own because of the structure of LSS deals.
LSS transactions gained prominence in 2005 as a result of the downgrades of Ford Motor Co. and General Motors, when hedging in the super senior space became attractive to dealers. LSS deals, in essence, provide investors with leveraged exposure to the super senior portion of a CDO capital structure. Through leverage, super senior tranches achieve spreads that are typically five to 10 times higher than those of an unleveraged senior triple-A tranche. Indeed, when LSS CDOs were first printed in Europe, many investors benefited from spreads in excess of 100 basis points for triple-A risk, said David Littlewood, a principal at London-based structured finance and investment firm Cairn Capital.