The April showers raining down last month produced increased CDO volume. However, while issuance was strong, market research shows it was just a few key storms that filled the CDO pool, which totaled $13.2 billion year-to-date by at least one account.
According to sources, the easing of tensions in Iraq helped boost market sentiment. A flight to quality has also benefited the market. Such highlights helped to pry open investors' bank accounts, improving volume last month and subsequently benefiting the pricing of one of the year's most talked-about new issues.
William Street Funding Corp., an issuance vehicle for Goldman Sachs, issued two liquidity funding note series so large they comprised $3 billion of the $6 billion in April CDO issuance, as calculated by Deutsche Bank research.
The size of the issuance certainly turned heads, as it catapulted Goldman Sachs to the top slot of Thomson Financial's year-to-date league tables, which ranks managers by proceeds. Goldman snagged the top slot with the William Street issuance alone. By comparison, second ranked player Deutsche Bank AG had three new issues totaling $1.46 billion year-to-date, and Credit Suisse First Boston ranked third with three issues totaling $1.40 billion in proceeds.
Sources report certain market participants are grumbling over the leap William Street Funding gave Goldman, charging that balance-sheet transactions should be excluded from the CDO league table, or that these deals should fall into a category all their own. Others countered to let sleeping dogs lay, taking the view that if Goldman sold the bonds it should receive the credit. For CDOs, should the means of collateral sourcing be a factor in what is or isn't league table worthy? That said, is marketing the merits of a third party collateral manager a business separate from selling bonds backed by a bank's balance sheet? The William Street issuance did not include any subordinated tranches.
Overall, April's figures more than doubled the volume done in the first three months of 2003. Breaking down that $6 billion figure further, high-yield CLOs made a strong showing with a $408 million issuance from Ares Management and a $331 million issuance from Deerfield Capital Management.
"Some of the newer high yield loan deals also feature more conservative structures than the first generation of deals," noted Deutsche Bank's Anthony Thomson, in a recent research note. This, in addition to issuance stemming primarily from experienced managers, has helped to shape a high yield marketplace currently favoring loan collateral as opposed to bond collateral. Researchers note an additional coverage test, applied in the reinvestment period, has become a structural protection feature in more CLOs thus far, as has haircuts to market price for assets purchased below some threshold levels. And CLO vigor continued up through early May as Katonah Capital Management priced a $250 million CLO, the fifth in the Katonah series. Triple-A notes went for 57 basis points over LIBOR according to sources, slightly wider than that of Deerfield's Forest Creek 2003-1, where triple-As priced at 55 basis points over LIBOR.
According to Banc One Capital Market's Rusty Hurst, triple-A spreads for high yield CLOs have widened 10 basis points year-to-date, but triple-A spreads for high yield CBO and IG European CLOs have not. Factors attributable to spread tightening include a flight quality. This compares to year-to-date spreads for mezzanine and subordinated CDO tranches across all collateral classes, which have witnessed "significant" spread widening, as year-to-date spreads have moved from 10 basis points to 100 basis points, Hurst reports.
