Following a five-week hiatus and a slight reconfiguration of the deal, Phoenix Investment Partners is testing post-attack CDO waters with its re-launch of the $750 million MISTIC CBO, company sources said. UBS Warburg is underwriter on the transaction.
Marketing for the cashflow CBO was late into its first day in London when the meetings were interrupted by news of the terrorist attacks in America.
"For two weeks after [the attacks] we decided to give the process a breather until we assessed what impact those events would have on the financial markets and how they might affect investor appetite for CBOs," said Nelson Correa, managing director at Phoenix Investment Partners and head of its alternative financial products division. "Now we're ready to rekindle our marketing efforts."
The initially proposed collateral pool was stratified at 70% to 75% investment-grade corporates and 20% to 25% asset-backed securities, with a sub-bucket of up to 20% high-yield bonds.
After digesting the short-term impact and possible long-term ramifications of Sept. 11, Phoenix decided to reconfigure the asset pool to consist mainly of high-grade corporates, with the appetite for ABS shrinking to 5% to 15%.
An allowance for up to 20% of high-yield securities is still on paper, but according to Correa, "We don't have any intention of using that full bucket at all."
The decision to shift the weight of the portfolio toward high-grade corporate issuance came after spreads on these securities widened more substantially than those of ABS issuance.
"Since [investment-grade corporate] collateral got cheaper, it makes the arbitrage work a little better," Correa explained. "Our perspective on all this is that, granted, these are tumultuous and challenging times, but the world will not end. We're buying names within the corporate arena that we feel are good long-term holdings; we've shied away from many of the industries people are shunning right now, such as airlines, leisure, hotels and casinos."
Given the events of Sept. 11 and the so-called "CDO problem" already in place before the attacks, questions have been raised as to investors' wariness of CBO paper. But seasoned CDO players are quick to point out that the timing and selectivity of a quality asset manager during the ramping-up period can outweigh more macro concerns.
"From what we're hearing, the traditional investor base is still there," said Correa. "I think that investors are taking a more critical approach to these offerings and may be a little more conservative in their modeling assumptions, but we think the players that have always been there will continue to be there. Deals have closed [since the attacks]."
According to JPMorgan's Global ABS/CDO Weekly Market Snapshot, there have been no investment-grade CBO issuance since the attacks. But Correa points to Salomon Smith Barney's high-yield bond- and loan-backed SENECA CBO IV, which priced Oct. 12.
That deal's triple-A-rated class A notes priced at 42 basis points over the three-month Libor; its B3-rated class B2 notes priced at 160 basis points over interest rate swaps; the triple-B-rated class B notes priced at 260 basis points over the three-month Libor; and the double-B-rated class C notes priced at 700 basis points over the same benchmark.
"These spreads are pretty good," said Correa, "considering everything that's going on in the world. Salomon has indicated that the market still has a healthy appetite."
Phoenix's team will test that appetite over the next few weeks, as they continue their marketing efforts for the CBO. "We're heading for Tokyo, hitting Germany on the way back, and taking London representations on a need-to basis," Correa said.
"We're trying to market the equity first and then take the balance of the capital structure to the market afterwards. As we have with all of our deals, we will be making an equity contribution into the transaction."
Phoenix's parent company, Phoenix Life Insurance, is putting up $5 million toward the equity tranche of the MISTIC CBO.