Two noteworthy arbitrage synthetic CDOs entered the market last week: the first managed synthetic investment-grade (IG) CBO from MBIA Capital Management Corp., and a static-pool synthetic high-yield CBO - the first of its kind to reference high-yield bonds - from Goldman Sachs.
Goldman's $400 million synthetic high-yield CBO will be administered by the firm and only has two visible tranches offered to investors. The super-senior portfolio default swap tranche is $256 million (64%) of the deal and references a Goldman high-yield portfolio, said buyside sources. The Moody's-rated triple-A and double-A tranches are not offered, as is the case with the $44 million (11%) in equity. The $20 million (5%) triple-B is said to be offered at Libor plus 350 basis points and the double-B (5%) is offered at Libor plus 750 basis points.
CDO sources commented that one of Goldman's biggest challenges is getting investors comfortable with the thin liquidity in the high-yield credit default swap market.
On the arbitrage managed investment-grade front, MBIA Capital Management Corp (CMC), the investment management arm of the famous monoline insurer, hired Merrill Lynch for its $500 million to $1 billion notional, Managed Investment Trust Securities (MINTS) synthetic IG CBO. The firm is now marketing the Baa1' tranche, European investors report.
This is a three-tranche deal, including the 70% super-senior, but MBIA is only offering the Baa1'-rated $50 million contingent-coupon tranche of MINTS notes to investors. The five-year bullet transaction will purchase credit protection on an investment-grade portfolio of between 75 to 125 credits, with an average rating between Baa1' and Baa2'. The minimum diversity score is expected to be 50.
MBIA will purchase 25% of the $20 million equity piece. MBIA CMC has issued four cashflow CDOs with $1.3 billion outstanding. The firm also manages approximately $8.8 billion in structured credit products.