The Royal Bank of Scotland (RBS) did a comparative analysis of the CMBS 3.0 super senior bonds and CLO 2.0 ‘AAA’ spreads to find where the similarities are in terms of relative value.
In the firm’s Trading Desk Strategy published yesterday, analysts recommended that investors consider both new CLO ‘AAA’ and CMBS 3.0 despite the apparent differences in the two sectors.
RBS examined the variances in spread between CMBS 3.0 super senior bonds and CLO 2.0 ‘AAA’ based upon their liquidity structure, management of the collateral pool, and the underlying assets themselves.
Analysts believe that the difference between the two asset classes may be because of perceived liquidity in the secondary market. For example, BWIC volume reveals there has been more than five times the volume of bid lists in CMBS ($50.3 billion) in comparison to CLOs ($9.3 billion) in the first half of 2012 alone.
Additionally, they explained that CMBS have synthetic indices that present clear benchmarks for specific bonds and, notably, leads to easier and more correlated hedging for market participants.
Analysts said that the common thread between the two asset classes consists of recently issued ‘AAA’ ratings, similar credit risk profiles, and fairly wider spreads given longer durations in contrast to other structured ‘AAA’ products.
RBS analysts said that at fair value to generic ‘AA’ corporate bonds, new-issue CMBS 3.0 fixed and floating rate super senior bonds may price at 120 basis points over swaps and 100 basis points over Libor, while CLO 2.0 ‘AAA’s should price at 130 basis points over Libor.
Therefore, “with the most recent deals for both products pricing 20-30 basis points wider than these levels, we therefore believe the bonds may offer attractive relative value,” wrote analysts.