Deutsche Bank is bringing to the market the first series of notes to be issued from asset manager State Street Global Advisors - Primoris CDO 2007-1, a long/short structure. Primoris obtained ratings for both seven-year and 10-year transactions to be issued by the entity, which consists of a long portfolio referencing primarily investment grade corporates and a short portfolio that references senior secured bank loans.
The portfolio is revolving and will be fully managed by State Street, according to a Fitch Ratings presale report. The deal is State Street's first public managed synthetic CDO. The short bucket, which can fluctuate between 10% and 15% of the notional amount of the long bucket, uses loan credit default swaps with a cash settlement option. Structural protection for the deal is drawn almost exclusively from subordination. Losses or gains from either the long or short bucket result in diminished or increased tranche credit enhancement.
While long/short CDO structures are at somewhat of a stand-still in the ABS CDO sector, the unclear future of corporate credit performance makes such a structure lucrative. Market players are speculating that a downturn in leveraged loan performance could materialize on the heels of increasingly sour performance in the subprime mortgage sector, as the repercussions of easy liquidity work their way through the financial markets.
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