Primary supply remained light last week with only a couple of deals roadshowing thus far in January. RCI Banque continued marketing the first floorplan securitization and a new CDO of ABS, Renoir I began roadshows last week.
Market sources said that activity on the secondary front fared better with interest across all asset classes driving spreads in. "Spreads hold a tightening bias as increasing redemptions for the year combine with an increasing investor base and some supply concerns," reported analysts at the Royal Bank of Scotland.
The season for CDOs of ABS found an early inauguration with the launch of a 280 million ($367.7 million) deal for Fortis Investments via Fortis Bank, trailing from the difficult spread environment that squeezed out any arbitrage gain. The deal, Renoir I is a fully funded CDO of global mezzanine ABS. Fortis bank began warehousing assets for this deal in 2003 and locked in the wider spreads on mezzanine ABS.
The reference portfolio includes 50% RMBS and a maximum 10% CDO bucket, the remainder split between credit cards, SME loans and CMBS. Renoir features a five-year reinvestment period with a four-year non-call period and is expected to price in March.
Last year, an estimated 335 million of mezzanine euro-denominated floaters priced at a new issue spread inside the tight end of spread targets, according to analysts at JP Morgan Securities. "This means that one: many CDOs of ABS must use a credit barbell' to achieve weighted average spread targets, and two: some CDOs have faced difficulty in sourcing assets," reported analysts.
As a result, CDOs backed by European high-grade ABS and CDO issuance increased last year; a trend likely to continue into 2005. Analysts report that they expected around $107 billion of notional value European high-grade - mostly synthetic - CDO of ABS or CDO^2 supply for 2005, up 60% from 2003. Renoir I is offering 225 million of triple-A rated bonds and 12.5 million of double-A rated paper.
A number of CDO of ABS are expected to begin marketing in the first quarter. Fortis Bank said it had plans to issue a $200 million follow up to its Pyramid CDO of ABS issued last July. Pyramid CDO II would reference a portfolio of synthetic CLOs and ABS with the majority of the notes source rated at the triple-A and double-A levels.
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