JPMorgan is closing $8.3 billion notional worth of synthetic investment-grade CBOs via two deals in April, according to European investors: the AMBER $1 billion notional arbitrage static pool synthetic investment grade CBO and the Horizon $7.3 billion CBO linked to a Moody's IG of 2088 corporate credits rated Baa3 to A1.
Horizon, the largest visible USD IG CBO to date, is believed to have priced its mezzanine notes and the balance of the structure ($6.9 billion super senior) will settle this month.
While Horizon is linked to a Moody's IG index, Goldman Sachs recently closed an analogous indexed linked synthetic structured finance deal for Bank of America in the first quarter. BofA hired Goldman to structure the Consumer Credit Reference Index Securities program (CRISP) to transfer risk from its credit card portfolios using a structure frequently found in catastrophe bond securitizations. Similar to motivations behind Horizon, CRISP incorporates a swap that transferred a consumer credit risk associated with a basket of credit card portfolios to investors. Horizon instead transfers the risk of a static pool of synthetic corporate credits reportedly for a third party.
Horizon is also noteworthy in that it demonstrates how portfolio swap arrangers are adapting to a high IG default environment; e.g. Horizon features index replication and diversity.
Meanwhile, there continues to be significant activity on the managed synthetic IG CDO front. According to one investor and issuer, the trend is toward managed or defensively managed deals. The ideal situation "is where the manager's role is primarily to design the initial portfolio and to play defense against deteriorating credit situations," added the source. Lower mezzanine (BBB) synthetic CDO investors are able to exert considerable direction in the composition of a portfolio since dealers are finding this the most difficult tranche to place, added the investor.
There is also a move toward less levered structures, with some built-in features to help deal with any credit issues. These structures look to be much more stable than some of the super-levered structures seen last year.
A particular focus is to make mezzanine bonds that are more attractive to investors. The reduced leverage, additional structural protections, and some upside participation can create bonds with much more compelling risk/return characteristics. The major difference between the equity kickers seen recently in the mezzanine synthetic IG CBO tranches is that the stated coupon is attractive at the start and the investor gets participation in the residual returns if the deal does well. In the high-yield heyday, combo notes reportedly had a low stated coupon and upside returns often never materialized.
