The trend toward financing CDO senior tranches in the short-term market has led to classification challenges, especially for this league table-savvy market. The Bond Market Association has been assessing the situation and plans to release guidelines and commentary, sources said.
The dramatic tightening of collateral spreads, which began late last year and continued through the first quarter, is what has driven CDOs to fund in the short-term market.
Traditionally, ABCP/money-market tranches are excluded from league table credit, as they fall under the league table-required 12 to 13 months. But today's CDO market has seen deals with new variations on the money-market tranche, many rolling over in the same fashion as traditional asset-backed commercial paper.
For example, the Millstone Funding 1 CDO, at $935 million in size, priced last month with an $880 million ABCP-issuing tranche with a 7.6-year maturity, via Citigroup Global Markets. As Millstone shows, these short-term pieces can be the bulk of the deal.
Blue Heron Funding IX, a $1 billion CDO that priced last month, contained a $910 million money-market tranche, though the average life was one year. That deal was managed and underwritten by WestLB. And Duke Funding VI, a $949 million CDO which also priced last month, contained a $655 million money-market tranche with a one-year average life. That CDO is managed by Ellington Capital Management and was underwritten by UBS.
"Even if there is a money-market tranche, it's still a CDO - you have all the liabilities," said one banker working with CDOs.
On the other hand, some argue that dealers have been using their ABCP conduits to tuck away assets that couldn't be sold otherwise - and would like to count these as sales for league table purposes. The Bond Market Association's CDO Committee has begun to review criteria in this area. The goal here is not necessarily to change the way things are done but rather "to give better meaning to the statistics already being captured," said one source familiar with that effort.
Using the puzzling ABCP/money-market tranche as an example, sources said the BMA would rather create two separate league tables to solve the problem. One table would include these types of transactions, for agent's credit, while the other simply would exclude these tranches that arguably are not part of the term market.
"The market has evolved. By giving more information... [and] by segmenting the data differently, you can better determine which agents have the expertise you're looking for," said a second source familiar with the situation.
However, one CDO source pointed out all the hoopla may be for nothing.
"Once [collateral] spreads widen again...you won't see these money-market tranches anymore," said another CDO researcher. They are popular but are really driven more by a need than by popularity, he said. "You put them in [deals] to squeeze some juice out of the collateral but after spreads widen, I think they will disappear."