The newest spin on the ABX index, the ABX tranche indices (TABX), debuted in the market on Valentine's Day, bringing with it hopes of a benchmark for CDO pricing.
Some, however, questioned whether Cupid's arrow misfired when it paired the TABX and CDOs, citing significant differences in underlying collateral and structure. But even though some ABS CDO issuers shuddered at the thought of having their portfolio performance compared with, say, the ABX's 06-2 series, the TABX is the closest thing to a benchmark that exists - and was widely expected last week to eventually widen mezzanine CDO pricing.
The TABX essentially tranches triple-B and triple-B-minus rated securities from the second and third series of the ABX with attachment points designed to emulate triple-A through equity CDO tranches. In contrast to most mezzanine CDOs, the TABX portfolios are of course static, meaning there is no manager available to trade in and out of securities. There are also only 40 reference obligations in each of the triple-B and triple-B-minus TABX portfolios, compared with as many as 200 in a typical mezzanine CDO. Other differences include - but are not limited to - the lack of performance triggers and excess spread, along with the fact that collateral losses are applied, as they happen, from the bottom of the capital structure up.
While the TABX had not priced as of press time, the index was expected to trade at an initial discount to recent mezzanine ABS CDO pricing. That's in large part because of the underlying collateral. TABX tranches consist entirely of 2006 HEL collateral, while even mezzanine CDOs issued in the fourth quarter of 2006 had just a 56% concentration in the vintage, according to a Lehman Brothers report released last week. "This certainly raises some doubts about the fairness of benchmarking 2006 vintage mezzanine transactions to the TABX," Lehman analysts wrote, but added, "We do, however, expect the comparison to become more appropriate for new issue transaction pricing in the coming months." A reduction in counterparties looking to short the 2005 vintage will likely mean new CDOs will need to use a greater proportion of 2006 collateral, the researchers said.
Data compiled last week by JPMorgan Securities indicate the TABX may be more useful as a hedge against a long position on ABS CDOs under the care of a trusted manager. However, many pointed out that there are too many technicals affecting the pricing of both products to make any sort of meaningful arbitrage. JPMorgan last week - looking at a selection of CDO CDS bid lists for deals issued in 2005 and 2006 - found stronger tiering by manager than by individual deal performance. Analysts also found that the average structured finance CDO performance has "significantly" better credit quality than the ABX 06-2 - particularly among mezzanine CDOs. However, JPMorgan's analysis did not include deals issued in the latter half of 2006, which, as previously mentioned, included a higher proportion of 2006 collateral.
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