Almost one year to the date of its first-ever CDO issuance, Maxim Advisory last week brought to the market its first CDO backed by mezzanine-grade RMBS collateral. The deal is the fourth for Maxim, a unit of broker-dealer Maxim Group LLC.
The $503 million deal, named Lexington Capital Funding closed via lead manager Merrill Lynch last Tuesday. The $335 million of triple-A rated A1 paper, maturing May 2042, priced at 27 basis points over 3-month Libor. The $72 million triple-A rated A2 tranche priced at 45 basis points over 3-month Libor, while the $44 million double-A rated B class priced at 60 basis points over 3-month Libor. The deal, maturing January 2041, has a 120-day ramp-up period, a three-year substitution period ending in 2008 and carries a triple-B to triple-B minus weighted average rating factor, according to Fitch Ratings.
About half of Lexington's collateral is expected to consist of prime RMBS, while about 35% will be subprime RMBS. About 48% of the deal's collateral will carry a BBB-' rating, and 30% will carry a rating of BBB' according to a Fitch presale report.
The deal had initially allocated up to a 30% bucket for synthetics, but closed with a 20% bucket, according to Fitch Ratings analyst Nathan Flanders. The portion of synthetics allowed in ABS CDOs is on the way up, according to analysts, as CDO managers look to add flexibility and diversify collateral amid tight spreads and risk concentration.
"I think as the synthetic market grows, [synthetic allocations] will become a more prevalent component. I think it is a continued merging of the two classes," Flanders said.
About 49% of 2005 mezzanine CDO transactions have between a 0.1% to 20% synthetic allocation, according to Lehman Brothers, while 17% have more than a 20% exposure. High-grade CDOs see more than half, or 56%, with between 0.1% and a 20% synthetic allocation, and 19% with more than a 20% exposure.
Maxim's other deals include the $750 million Jupiter High-Grade CDO I, the $1 billion Jupiter High-Grade CDO II, and the $2 billion Jupiter High-Grade CDO III. The Jupiter 1 deal was the Maxim's first, brought to the market in October of last year.
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