The New York Federal Reserve today has started a competitive bid process in response to several strong reverse inquiries for holdings in the two Triaxx CDOs in its Maiden Lane III portfolio (ML III). 

The bank has directed ML III's investment manager BlackRock Solutions to conduct a competitive bid process for the portfolio's entire Triaxx CDO holdings.

The two Triaxx CDOs have current face amounts of $964 million and $1.46 billion and are backed by non-agency collateral.

All-or-none bids will be due for the two CDOs on May 10, at which date the New York Fed will decide whether to sell either or both depending on the strength of the best bids.

The following nine broker-dealers have been invited to submit bids for the Triaxx CDO holdings: Barclays Capital, Citigroup Global Markets, Credit Suisse, Deutsche Bank SecuritiesGoldman Sachs, Merrill Lynch, Pierce, Fenner & Smith, Morgan StanleyNomura Securities and  RBS Securities.

There is no fixed timeframe for the sales and at each stage, the Fed plans to sell an asset only if the best available bid represents good value for the public and without causing market disruption.

In 2010, the Securities and Exchange Commission (SEC) charged the manager of the Triaxx CDOs ICP Asset Management (please see this SEC release).

Back then, the SEC alleged that, at the direction of its owner and president Thomas Priore, ICP defrauded four multi-billion-dollar CDOs by engaging in fraudulent practices and misrepresentations that resulted in the CDOs losing tens of millions of dollars.

The agency also said that the ICP and Priore directed over a billion dollars of trades for the Triaxx CDOs at what they knew were inflated prices. Both repeatedly made the Triaxx CDOs overpay for securities to make money for ICP and protect other ICP clients from realizing losses, the SEC alleged.

Collateral Analysis

Investors will probably not experience any difficulty taking on the supply from these Maiden Lane III CDOs.

In research released today, Bank of America Merrill Lynch analysts said that, after the challenges last year, the market did not have trouble absorbing the higher supply due to this year's Maiden Lane II sales.

Additionally, they said that the collateral behind the Triaxx CDOs are prime and comparatively “clean” Alt-A bonds from the 2005-2007 vintages. They are mainly floaters off of fixed. 

Although there are still questions around the feasibility of collapsing the CDO for restructuring purposes, analysts think that there will be healthy demand for the portfolios. 

Roughly 95% of both portfolios comprise Jumbo and Alt-A collateral focused mostly in the 2006 and 2007 vintages, analysts said. They noted that Triaxx 2006-2 has slightly higher rated collateral versus 2006-1.

Although the CDOs have over eight servicers on the underlying bonds, analysts noted that the advance rates in the Jumbo space averages roughly 95%. This number does not indicate a lot of differentiation between these servicers.

In terms of Alt-A collateral, they said that the advance rates are somewhat less with an average at 83%. However, the portfolios have mostly large banks as servicers that have traditionally advanced at a higher rate versus the sector's specialty servicers, analysts stated. 


They concluded that inspite of the recent disappointing economic data, non-agency prices have not yet shown a sustained period of price weakness this year.

The non-solicited bids to the New York Fed for the Triaxx portfolios "continues the trend of elevated demand for high quality paper that provides yield in the current zero interest rate environment," analysts wrote.

Considering the Triaxx CDOs' favorable underlying collateral, they think that the market will receive deals well.



Despite recent disappointing economic data, non agency prices have yet to show any sustained period of price weakness in 2012. The non-solicited bids to the New York Fed for the Triaxx portfolios continues the trend of elevated demand for high quality paper that provides yield in the current zero interest rate environment. Given the favorable underlying qualities of the Triaxx CDOs, we would expect the deals to be well received by the market. 




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