While the wave of downgrades that toppled a number of CDOs in 2002 should ripple into 2003, appetite is strong, and investors are still willing to test the new renditions of synthetic structures.
According to market reports, synthetic deals dominated CDO issuance in Europe throughout 2002. "As a response to the fragility that earlier synthetic CDOs have shown in the face of investment grade deterioration, and in the face of waning investor demand, a new generation of structures is emerging with features designed to make them more robust in the current environment," reported Dresdner Kleinwort Wasserstein in its special report on the sector.
By last week, the New Year's first synthetic deal had already priced, dubbed Triplas Synthetic CDO. The $36.9 million resecuritization of 23 ABS obligations priced according to initial pricing spreads. The class A notes priced at 55 basis points over the three-month Euribor, and the class B notes priced at 110 basis points over. The single-A rated class C notes came in with a 6% fixed coupon. Credit Agricole Indosuez (CAI) acted as lead manager on the deal.
It's the first structure that included 100% European, triple-A rated paper; prior transactions executed last year included dollar-denominated paper in the pool as well as non-triple-A rated notes. Sources at the bank said that investor appetite was spread throughout continental Europe. "Investor reception was quite good," said one source at CAI. "We were able to grab the appetite of the traditional ABS investor because they were used to the collateral, but the structure also lured the traditional arbitrage investor willing to diversify with this new type of asset."
One difference, for example, is that the deal was structured to mitigate ramp-up risk and launched with a $565 million super senior credit default swap. "When you add up the small things, dealers end up looking better," said one market source. "Our understanding is that investors want to see deals that incorporate strict guidelines. Clearly for 2003, investors will have to understand that if you sacrifice quality, you'll have to accept volatility - there is no magic left."
CAI said that it is in the process of preparing a sequel transaction with similar features based on the positive reception it had received. Sources added that the structure would likely solicit investor requests and will include slight modifications to encourage more than the limited range of appetite generally available for this asset class.