A slew of multisector CDO repacks has hit the new issue market over the last two weeks. A closer look reveals the collateral has overwhelmingly been real estate-related, no surprise given the pace at which the home equity market has been churning.
Traditionally, multisector vehicles have a more diverse mix of real estate assets, including REIT and CMBS exposure, though the current pipeline is showing a heavy lean toward HEL, a source noted.
"[Collateral for] multi-sector repacks is getting harder to find," said one source who plays primarily in ABS CDOs. Preferring to purchase subordinate tranches, the source reported difficulty finding any paper of value recently. "There's a huge supply of home equity paper, and that's finding its way into repack deals. I'm steering clear of most of it however. The triple-Bs have decent cash flow but if rates go up, which they will...defaults will go through the roof."
According to Banc One Capital Market's CDO researcher Rusty Hurst, triple-B HEL issuance has grown by 92% year-over-year. Spreads on triple-B HELs are at their widest in recent memory, at 325 basis points for fixed rate and 375 basis points for floating rate, Hurst reported.
Researchers at Citigroup report CDO managers have definitely shifted their focus to subordinate CMBS positions, noting CMBS has attained status as a stable asset class and limited default experience. Citigroup estimates the CDO pipeline holds $1.2 billion to $1.5 billion in real estate-related vehicles. Spreads for triple-B CMBS have tightened 40 basis points since the spring, now at 135 basis points over Treasurys, Citigroup said.
Analysts speculate that the lines between traditionally seen multisector repack and CMBS CDOs blurring. "The line between these two types of deals is getting harder to find," said Hurst. Asset-backed CDOs are now tapping commercial real estate collateral, meaning little to no consumer ABS exposure. "This shows that the market always finds a way," said Hurst, noting in his most recent research piece that repacks stand to gain increased acceptance by steering clear of subordinate classes of esoteric assets.