The CDO pipeline is expected to straddle into the first quarter of 2001, bankers say, as well over 55 transactions continue marketing either debt or equity - providing promise for a busy spring. There are 14 visible deals marketing debt tranches, many of which hope to price before month-end, according to IFR Asset-Backed Securities.
If Moody's Investors Service's prediction of 51 CDOs closing before 2001 comes to fruition, spreads on mezzanine tranches are expected to widen significantly. Meanwhile, the flood of deals racing to the year-end finish line may force a seasonal widening to the 50-basis-point area on triple-As, which was seen in December of last year.
For example, Prudential Investment priced Dryden, a $400 million area arbitrage, cashflow high-yield CBO at +47 basis points over the six-month Libor on the triple-A notes (A/L 9y) via Merrill Lynch last week. Further, as of press time, Lehman Brothers launched a $300 million structured finance CDO from highly regarded Met Life at +53 basis points over threemonth month Libor (A/L 8y). Prudential Investment is considered a highly capable manager and the +47 level surprised some bankers. Dryden's triple-B and double-B notes widened from initial talk as expected. The triple-B tranche finished at +260 basis points plus six-month Libor, from talk of +230-240 (A/L 11y). The double-B tranche jumped to +725 basis points plus six-month Libor, from +675 talk. The trade is backed by a portfolio of 80% HY bonds and 20% loans.
More trends seen
A second static-pool structured finance/multi-sector CDO entered the market, Helios 2001-1, from Hyperion Capital. The deal is the second static-pool structured finance CDO introduced to the market following Wachovia's LYNX CDO, which is still marketing. Hyperion's $443 million triple-A is talked at the +50 basis points area plus Libor.
The Helios trade is unique in that it is structured as a static-pool transaction, where the manager has no reinvestment period and basically can only sell problem credits. Sources said the deal is structured with a 10-year non-call period. Assets backing the trade are CMBS, corporate bonds, ABS and CDOs.
Currently there are at least two visible hedge fund-of-hedge-funds market-value CDOs in the market. Credit Suisse First Boston held a preliminary roadshow of a $500 million fund-of-funds/MV from Bahrain-based Invest Corp. that surprised some skeptical SIV investors who acknowledged that the structure seems logical and relatively attractive. Invest Corp. has offices in London and New York with several billion dollars under management. The trade is said to have four tranches, all of which are structured with a five-year bullet.
Another similar deal in the market is Ivy Alternative Investments CDO I from JPMorgan. In the Ivy deal, which is likely similar to Invest Corp., investors are essentially taking a bet on the returns of a group of twenty to thirty different hedge funds, where Ivy Asset Management acts as the fund-of-funds manager or advisor. Exposure to each hedge fund is limited to around 5% and there is expected to be a 10%-20% cap on exposure to each fund strategy; e.g. long/short equity, relative value, or convertible arbitrage. The SPV acts as limited partner investor in each fund while Ivy Asset Management is the general partner, sources said.
Equity investors are seeing extreme discounts from CDO underwriters looking to clear equity off their books by year-end. Some CDO equity investors have almost stopped buying in the primary market.
