Pacific Investment Management Company (PIMCO) set a new benchmark for top-tier CDO managers last Tuesday by issuing an arb cashflow investment-grade (IG) CBO via a 43 basis points over six-month Libor print (A/L nine years) on its unwrapped triple-A class.

The 43 basis-point level is two basis points tighter than guidance and six basis points inside of the last unwrapped cashflow CBO from Atlantic Asset Management that priced in early April, Clearwater Funding CDO 2002-A, via Credit Suisse First Boston. While equity investors are always pleased to see a tight print on the debt, some portfolio managers saw PIMCO's San Miguel CDO, Ltd. as an expensive transaction despite the premier name. "On a relative-value basis, getting paid one extra basis point for an unwrapped triple-A versus the 42-basis-point print on Clearwater's natural triple-A with MBIA behind it made it an easy decision for us to decline participating," noted one potential investor.

Demand for San Miguel is understood to have derived mostly from Europe, with some attention from Asia and a spattering of U.S. accounts in the mix. PIMCO's size and longevity as an institution undoubtedly helped to tighten pricing, sources said. Nevertheless, pricing below the triple-A's was the same for both San Miguel and Atlantic's Clearwater Funding, at 80 basis points over Libor for each (A/L 10-years). Bankers say demand on double-A's is sometimes spotty since this class of debt does not offer the relative safety of a senior note holder position or the yield of a junior mezzanine tranche.

The pricing on San Miguel's triple-B notes was also dramatic. On the triple-B notes San Miguel priced at 250 basis points, 100 basis points inside Clearwater and 75 basis points tighter than Aladdin Capital's IG CBO triple-B print in January (CSFB); all 10y A/L.

According to market participants, several factors account for the tight triple-B pricing on the PIMCO IG CBO: 1) San Miguel had a split Baa1/BBB rating versus Baa2/BBB on Clearwater (+350/L); this is worth up to about 20 basis points and many investors take the lower of two ratings; 2) PIMCO has a loyal following of investors; 3) San Miguel had 5.7% in equity support, providing more cushion for the debt, versus 3.23% equity in Clearwater; 4) PIMCO has the advantage of size and experience versus smaller shops that are not as well known abroad, where most CDO paper is now placed.

"Obviously investors are willing to pay more for a deal from an asset manager that dictates the price of the primary market versus a smaller shop that has less influence and choice in assets they use to ramp up their portfolio - even if that shop demonstrates a solid track record," commented one buyside analyst. Further, a slow primary market, largely due to a thin arbitrage on HY and IG assets, helped stimulate demand on the small $230 million issue.

San Miguel has a vanilla IG CBO structure, and a weighted average rating factor of 610 (Baa3).

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